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‘Best for Project’ Contracts must be accompanied by Best for Project Contracting Practices

October 4, 2011

In the lead-up to the Contracting Excellence Summit in Australia, I was asked to comment on a paper that suggested we must have ‘absolute certainty that contract selection is ‘best for project’.

I agree that a contract must be ‘fit for purpose’, but of course this also means that organizational capabilities within both buyer and seller must match the commitments and obligations contained in that ‘best for project’ contract.

There is no question that the role of the contract is becoming more important in business to business relationships and major projects. There are numerous factors behind this, but among the most significant are the impacts of globalisation (many relationships cross borders, languages and are quite simply more remote); economic volatility; technology innovation; and the speed of change. Overall, these combine to create increased levels of risk and increased probability of misalignment between the contracting parties.

As a result, the role of the contract is shifting from being primarily an instrument for risk allocation, to becoming an instrument for relationship governance, communication and performance management – including, of course, managing the dynamics of change.

So the hypothesis of the paper is correct in highlighting the importance of ensuring that the contract structure and terms are ‘fit for purpose’ relative to the specific project or sub-project. Indeed, as we look at the causes for project failures or overruns, it is increasingly clear that these are rarely due to technical problems, but primarily to commercial or relationship issues.

There are a number of key principles which the contract owner should ensure are followed, because these appear to be among the most frequent causes of poor performance.

  1. Don’t expect the supplier to subsidise or suffer from your inefficiencies. Reducing cost is important to all businesses. But the up-front price negotiation is only one source of reduction. The costs and risks for both are substantially affected by the efficiency of the contract owner and their application of resources and procedures that are focused on outcome delivery. Without these, not only are true costs increased for both parties, but the supplier must build a buffer into their price to allow for this expense (or will engage in post-award pricing actions to protect margin).
  2. Change is inevitable and increasingly frequent. Having the right change provisions in the contract is important. But it is also essential to have the systems in place to manage and negotiate change. The old game of suppliers trying to charge for everything and the customer claiming that everything is in scope are unproductive and must be addressed if the outcome is to be successful.
  3. Contracts must be considered in the context of relationships. A relationship may offer leverage which an individual contract lacks, yet in many projects, it is forgotten that there may in fact be a much wider context to resolve issues and problems. This interconnection should be a key aspect of supplier selection and contracting strategy.
  4. Agility is about more than flexibility. Often these two characteristics are confused – and it si common for the contract owner to see them as a supplier responsibility. Agility is key to managing performance – by both parties. It is about both speed and flexibility, a readiness to review and reengineer the contract as needed by shifting conditions or needs. It must be mutual or it will not happen.
  5. Ambiguity and uncertainty are sometimes unavoidable. Many contract specialists rightly complain that requirements are often vague or imprecise. They are right – and this is a common source of dispute. However, the answer is not to demand greater precision as a pre-condition to contract. There are times when the contract must be designed around the uncertainty – and that calls for a different structure, appropriate milestones and perhaps phased releases of budget.
  6. Improve analysis and learn from experience. Discrete projects rarely lend themselves to collective learning – and that is a bad mistake and results in regular repetition of the same problems. As a simple example, the causes of claim and dispute remain remarkably similar across a portfolio of projects. If we really care about risk reduction, we must consolidate information and take remedial steps. And the top causes of claims and disputes are virtually all connected with commercial and contracting issues.
So in this brief summary I have outlined my agreement with the hypothesis that we must have ‘absolute certainty that contract selection is ‘best for project’ – and highlighted some of the steps that are needed to put this into practice.
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