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Attitudes to contracting

March 3, 2014

What is the purpose of contracts and to what extent does a good contracting process contribute to business results and outcomes?

According to a recent IACCM survey, weaknesses in contract terms and negotiation have a major impact.

  • 63% report that they are frequently a cause of cost overruns
  • 59% report that they are frequently a cause of project delay
  • 28% report that they are frequently a cause of reduced future business opportunities

So what should you be doing differently? The IACCM ‘Attitudes to Contracting’ study provides a useful contribution in answering this question, as well as indicating what purpose contracts should be serving.

  • It confirms that the quality of contracting – both process and document – has a material impact on project outcomes.
  • It highlights the practices that frequently contribute to avoidable project failures and under-performance.
  • It offers insight to the areas and approaches that, if improved, would generate better business results.

The study is unusual in that it combines views from a variety of functions, industries and geographies, offering perhaps the most objective view of the role of contracting yet undertaken. There are clear messages for industry and public sector bodies, especially with regard to project contracting. Among them are:

  • Failure to establish and / or communicate clear objectives is a major issue in subsequent contract negotiation and contract management.
  • This issue, together with late engagement of commercial resources or the imposition of industry standards, frequently contributes to use of risk-averse contract terms that distract from establishing key performance criteria and processes.
  • Problems with defining project scope cause subsequent disputes and disagreements over change management, charges and payment.
  • The use of traditional, legally-driven forms and documents renders most contracts of little practical use to delivery teams and project managers, thereby undermining their primary value as instruments of communication and understanding.
  • Few organizations appear to make effective use of past contracts as a source of learning. Procurement contracting is especially weak in this regard.
  • Only 16% of respondents feel that their contracting process ‘always’ achieves a positive impact on the relationship between the parties – suggesting there is major opportunity for improvement.

Can projects succeed in spite of poor contracting? The answer is yes, of course they may. But the study confirms there are many ways that the likelihood of success is undermined in the absence of an effective process.

The IACCM study ‘Attitudes to Contracting’ is available in the member library at http://www.iaccm.com

7 Comments
  1. Steve Deeley permalink

    Tim,

    I take issue very slightly with the headline comments here. I’m not disputing the survey outcomes, but how they are being represented.

    No contract in the world (as opposed to its negotiation!) ever caused a delay. Nor did it ever cause a cost overrun. Those things are tangible outcomes caused by the delivery mechanism and I can’t cause them by a contract any more than I can speed up the manufacturing process with one. If we sell a line that [paraphrased] says “weak contract terms caused a cost overrun in 65% of cases”, then the logical response is sure not to have any contract terms at all…

    • Not at all! The answer is to have different contract terms – for example, those that drive better structured exchange of data, those that define improved problem solving or escalation forums and procedures, those that contain incentives to collaborate. It is clear that contract terms do have a substantial impact on who you will attract as a trading partner and then will affect the way they behave, the approaches to governance, performance management etc. If the only terms in the contract are those associated with penalizing the other side if / when things go wrong, then the chances of failure are significantly increased.

      Tim

  2. Agree! All too often people thing of negotiating as a set of tactics and the contract as the end game. Our work at the University of Tennessee and latest book (Getting to We: Negotiating Agreements for Highly Collaborative Relationships) approaches negotiating/contracting from a mindset and process perspective. Happy to share a guest blog on our work if there is interest.

  3. I see the “contract” as the way the parties agree to work. In that context, I can see how weak contract terms (ones that incorporates poor and ineffective approaches) can certainly cause cost and time overruns. As Kate’s work shows us, “negotiating” a contract is about agreeing how we will work together, not just finalising details, adding boilerplate, or talking about price.

    I have some worry about the word “weak” though. This implies we should have “strong” terms. In many people’s eyes this means “tie the supplier up so that any variation, from whatever cause, is down to them”. This aggressive approach is not necessarily the answer either.

    There is also an academic problem in extrapolating good practice from the view of the majority. As Henry Ford said – If I had asked people what they wanted, they would have said ‘faster horses’. That said I can recognise many of your headline messages – especially managing changes and force-fitting of standard model contracts.

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