What is contract management?

Simply put, contract management is the process of administration and management of project or work agreements between parties. It is about managing the risks and relationships between the contracting individuals or organisations. When a sole trader or organisation signs a contract, they agree to complete detailed work for a certain number of hours for the designated party in exchange for resources. Managing these contracts means assessing the risk and who takes responsibility if something goes wrong. In the modern construction industry, procuring contractors can be a lengthy process, so how can you be sure that every contractor follows strict health and safety standards to ensure a smooth project completion?

Whether you’re working on a large-scale or smaller project, you most likely have many different contractors and subcontractors from whom you receive supplies and labour. Thoroughly vetting each contractor would take weeks or even months and would drastically slow down your project, not to mention the time and effort that goes into that process. The more contractors a construction business has, the more complex procurement gets. This is where contractor management comes in.

What is contract management in construction?

Construction projects unfold in phases: conception, design, pre-construction, contract procurement, building, and delivery. Securing materials, equipment, and designating work teams during the procurement process involves numerous contracts, and in complex projects, there will likely be many adjustments throughout the project’s timeline. This process needs to be thoroughly managed by contract management teams to mitigate supply chain disruption risks and ensure every party is adequately taken care of and held accountable.

Managing these contracts can make or break a construction project. When contracts are carefully managed and projects successfully executed, businesses see higher financial returns, maintain superb reputations, and have satisfied parties without harsh disputes or lengthy lawsuits. Effective contract management is crucial for the success of your business and construction projects. Mitigating risk involves a prequalification process for all contractors or suppliers involved, including a detailed assessment of health and safety regulations, environmental certifications and anti-bribery legislation compliance.

Stages of the contract management process

Contract management, or the contract lifecycle process, is usually divided into the pre-signature and post-signature phases. These phases outline the necessary steps and precautions that a business must take and maintain when managing contracts.

Pre-signature

1. Contract initiation

In a construction project’s conception, new vendors, suppliers, and contractors are identified, and the contract lifecycle begins. This is the beginning of the business relationship between the designated parties with specifications laid out by contracts.

2. Drafting

The rough draft of the contract is written by the builder or contract management team and sent to the contractor.

3. Negotiating

After carefully reviewing the contract, both parties negotiate the terms and make necessary changes until each side is satisfied.

4. Editing

The rough draft is edited according to the adjustments made in the negotiation phase. It’s essential to keep all original drafts of the contract so your team can easily compare what has been modified and make adjustments in the future if you spot trends or discrepancies.

5. Approval

Both parties agree to the negotiated terms and sign the contract. Work on the designated project can begin after the approval phase.

Post-signature

1. Execution

The construction project is underway, and suppliers and contractors do the agreed-upon work.

2. Tracking

This is an ongoing process and should be carefully monitored by contract management teams to ensure complete compliance by both parties within the stated agreements. This phase can also determine whether or not the business relationship should continue.

3. Auditing

Reviewing and auditing all open contracts will help you and your team understand where improvements can be made within contract drafting and help inform the next steps for the project.

4. Renewal or termination

After the contract lifecycle is complete and the project is completed, you can report on your data from the audits and determine whether you want to renew, renegotiate, or terminate the contract.

Construction Contracts

Construction projects and contracts can be incredibly diverse. Different types of contracts depend on the scope of work needed and the number of supplies necessary to complete the project. Time and materials contracts mean the buyer pays for the construction materials and all the time it takes for a builder and their contractors to deliver the work. Since buyers are at risk for time extensions and material inflation costs, many time and materials contracts contain maximum price clauses to avoid unwanted surprises.

Fixed-price contracts involve a non-negotiable price that the buyer agrees to pay. The contractor agrees to complete the project within that set price and with the necessary materials. This can create more stability for the buyer and more risk for the builder because material inflation costs may need to be covered.

Unit rate, or unit cost contracts, requires contractors to quote rates for individual work units or supplies. They write a detailed list of each item, estimate the cost and time, and express that number in the contract.

Common challenges of contract management

Many challenges lie within each stage of the contract lifecycle, especially with large and complex construction projects that involve numerous contractors and sub-contractors and which operate on a global level with multiple dependents. Without proper management, files can be lost or misplaced, approvals take longer, and the project is delayed.

Tracking and auditing become challenging when documents are passed along to staff members who may not know the correct procedures for effectively monitoring contract details. Communication gets skewed between teams, and important details and meeting notes get lost. Every time this happens, your company loses revenue and credibility.

The most important and serious contract management challenge in the construction industry is compliance. Contract details regarding regulation and health and safety compliance are non-negotiable and must be carefully monitored. Legally, your company is obligated to ensure compliance with all construction-related regulations at every level of your supply chain. Failure to do so creates legal ramifications detrimental to your finances and business’s reputation.

Benefits of contract management

Every pound that enters and exits your organisation depends on contracts, so effective contract management is crucial for the success and survival of your business. Having an air-tight contract management system in place reduces risks and ensures compliance with all necessary regulations from each party. Understanding and managing the complexities of modern construction projects, and every contractor involved, mitigate supply chain disruptions to keep your projects and organisation running smoothly. It sets clear priorities and ensures everything is completed on time and within budget.

Implementing a contract management system helps accelerate your review and renewal process with easily-accessible audit data. You can reduce the time it takes your team to prepare and track the progress of contracts and reduce human error. Find the information you need when you need it with advanced filing systems and documentation searches, and improve your efficiency while streamlining processes.

Contract management improves communication, response time, transparency and accountability for your organisation. When you efficiently manage your contracts, you create lasting relationships with subcontractors and suppliers for future projects.

Key takeaways