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Requirement
Question: Commercial and Contract Management
Solution
Delegate in Work Role
The involvement of the suppliers in the businesses is the usual activities and can be witnessed on a daily basis. These suppliers support the businesses with various material requirements and other products and services. The company that has been selected for the assessment in this paper is in which I worked for few months and my job profile was indirectly related with the management of the various contractual activities. The company was involved in energy business and, therefore, the risk factors within the business were high and it required the contractors to perform their duty with complete responsibility. The proper contract management for most part of the activities was a necessity. The company was involved in the production of the hydrocarbons from the various diverse geographies and, therefore, it was almost a mandatory call for all the involved individuals to act on proper time and in proper safety to support the company’s activity.
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There has been a predefined understanding that the companies in energy business keep contract management processes embedded in their various activities and the case of this company was no different (Australian National Audit Office, 2012). The contractual obligations were almost straight forward which mainly asked the parties to act in complete conscience and bring out the quality that are of high standard (Chuah et al, 2010). However, despite the presence of all the various contract management processes within the organizations, there was numerous instances that led to the incidents and accidents. The investigations within the organization helped reach the conclusion that the most common cause of such incidents is the unappreciable contract management. The contract management was poor within the organization and which was the usual cause of the failed performance of the contractors in most of the cases. Such incidences gave rise to the need of establishing the effective contract management which is likely to improve the contractor’s performance.
The energy business has always been termed as the high risk business in terms of operation and, therefore, the proponents of the safety procedures have always tried to ensure that the industry regularly follows the safety procedures that have been placed (Bautista and Ward, 2009). This has also brought the operators and the contractors together in most of the instances to ensure that they follow the obligations as defined in the contract with the desired industry standard rather than just performing the duty. It can be stated at this point that just placing the documentation of the contract in the place cannot be the guarantee that everything will act as per the rules and policies (Breedon, 2013). There are three major factors that play the vital role in the effective execution of the contract, namely, the people who are working with the organization, the existing management system of the firm, and the contractors (Bhardwaj, 2011). The organization, about which I am writing here, has almost appropriate contract documentation procedures. However, there are some contractors who have continuously failed to perform as per the required level within the organization. They have delivered poor quality projects and rarely taken enough care about health and safety. Moreover, the late completion of the tasks became day to day situation.
Along with the aforementioned situation, there were some other issues. The members who were on the receiving end of the contract results from the suppliers were also less careful. Despite of them being in the contract management team, they also failed to perform up to the mark. The members continuously failed to take the proper ownership of the contract which eventually used to result in failed cost controlling mechanisms, and invoice delivery and receipt always after the deadline. These activities led to the cost overrun and, the number of complaints from both the sides was rampant.
Moreover, it has been observed that the contract management of the various resources was not up to the desired level within the organization. There were some of the resources whose contract was made with the suppliers that pressed the company to incur more cost. On the other hand, the company could have achieved right cost effectiveness if the same contract could have been done through the selection of the contractual parties – that is the suppliers.
Programme Concepts and Principles
This section discusses the various commercial and contracts management concepts that are likely to prove helpful in resolving the challenge stated above for the company. There are certain terms that require attention prior to delving into the concepts. The terms that have been discussed here are contractor’s performance and contract management.
The term performance, in general, refers to accomplishing the activities in consideration to the standards that have been pre-defined in that particular area and then comparing the actual activities to that of the set standard (CIPS, 2012). Some of the areas that consider performance are accuracy with which the activity has been completed, the overall completion of the activity, cost incurred in conducting the activity, and the pace with which the overall tasks had been completed (Ketchn and Hult, 2006). The performance level equals the terms that are defined in the contract between the two parties. The contractors or the suppliers involving in the activities should be conforming to the activities they are required to do and it should be ensured that the suppliers clearly understand the contract. As per the BG Group (2014), there are certain elements that should be present in the contractor agreement. These are health and security statements, quality of the activities to be delivered, time of the delivery, the amount to be paid before and after the activities, the receiving paper of the task initiation and completion, provision for expedition and inspection (Costa et al, 2009).
The contractor’s performance refers to the definition similar to that of the definition given above of performance; the only involvement is of the contractors (Elsey, 2007). The performance of the contractors should be assessed as per the various terms and conditions that have been defined in the contract to ensure that all the activities are being done properly.
The contract should have the presence of Key Performance Indicators to assess the performance of the contractor from beginning till the end (Beijer, 2012). The performance criteria should be legible and clearly interpreted by both the parties in a similar manner to eliminate the chance of any confusion. The selection of the suppliers for the contract should be done only when the previous performance of that particular supplier has been assessed (Green Point Global, 2013). The assessment of the past performance will help the organization in understanding the trend – either deterioration or improvement – that are the followed by the suppliers. The third step should be to assess the performance of the other suppliers delivering the same project to the other clients and then setting the standard based on the same (King and Elliot, 2009). From the discussion till now, it can be clearly stated that there must be a system in place that measures the performance of the suppliers. The performance indicators that will be defined by the organization must be based on the SMART so that it can be easily followed by all the parties involved in the contract.
The contract management is concerned with managing the various stakeholders who are involved in the particular contract. The contract management is concerned with the conduction of the negotiations with the suppliers to define the terms and contractors on which the second party will deliver the result to the first party. The process is also concerned with the documentation and agreement on the changes that might take place when the activities are being conducted in the later phase. The negotiation is the important aspect in defining the project terms and conditions as it will be the only thing that will ensure the effective project completion in the later phase (Aberdeen, cited by Bhardwaj, 2011). During the negotiation process it should be ensured by both the parties that the need of both the parties are being taken care of while reaching any conclusion. It is obvious that both the party will be working for longer period of time together and, therefore, the terms and condition that takes care of both the parties’ need and creates win-win situation are considered as strong and can stand for the longer period (Kumar and Mareset, 2007).
Apart from negotiation as the important aspect of the contract management, particularly the negotiation that focuses on the risk and uncertainty, and performance management, there are also some other areas of the contract management that has been substantially discussed by the researchers. One of the important aspects is the service termination that should not be ignored in case of the project completion or the poor service delivery. The utilization of the service termination should not be done only when the project has been delivered, but also in the situations when the first party reaches the conclusion that the project being developed by the contractor does not meet the pre-defined or pre-negotiated terms and conditions. Moreover, the first must be in the position that it proactively takes part in the project activities to indirectly monitor all the activities periodically.
One of the theories in the contract management, Principal-Agency theory, states that one of the parties must understand – clearly – the need of the other parties. The proper understanding of the project requirements and the need of the first party (called as principal), allows the second party (called as agent) to effectively fulfill those needs. Moreover, it should be ensured that the principal is periodically monitoring the project processes and implement the reward structures for the agent or the suppliers.
The parties involving in contracts can clearly utilize the Pareto principle (the famous 80-20 rule). The principle states that the 80% of the benefit or outcome comes from only 20% of any activity. The applicability of this theory is very much in the project contracts as it helps the first party consider that the 80% of the project outcome is going to come from the 20% major activities conducted by the suppliers, thus pushes the first party to identify those 20% and stay focused. The use of Kraljic matrix in the supplier decision making and contract management becomes the important aspect. The matrix allows the business to identify the materials and activities that are strategic to the business sustenance and the activities or the materials that can be taken lightly. The matrix effectively helps in decision making process in reference to the suppliers.
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Australian National Audit Office, (2012). Developing and managing contracts, getting the right outcome, achieving value for money, better practice guide, available at [http://www.anao.gov.au/html/Files/BPG%20HTML/Developing%20and%20Managin g%20Contracts/5_9.html]
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Bautista, R.O & Ward, C.R. (2009). Analysis of Contract Management Processes at Fleet & Industrial Supply Centers (FISC) Worldwide, MBA, Naval Postgraduate School, Monterey,California.
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Beijer, T.A (2012). Design of a supplier performance measurement & evaluation system for DSM’s petrochemical & energy group, Graduate project, University of Twente.
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BG Group, (2014). Contracts and Procurement standard; Category Planning, Sourcing and Post Award Contract Management. Available at [http://bgportal.ad.bgep.co.uk/irj/portal/?NavigationTarget=navurl://ac5676ec240d919 0365d4778fd5a3def]
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Bhardwaj, M. K., (2011). “Procurement and contract management”. 1st ed. Durban: Excel Learning Pty. Ltd.
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King, B. & Elliot, P. (2009). Developing contracts in purchasing and supply, Level 4.
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Limberakis, C. G. (2012). Drilling for success in contract management, addressing CLM in upstream Oil & Gas. Aberdeen Group. Available at www.aberdeen.com accessed on 19/06/2014
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