” Contract Administration in Construction” – Why is it Important?
Imagine having to spend a great deal of time, effort and resources to resolve an otherwise avoidable project related dispute that arises from a contractor’s inability to complete your project within schedule and budget. What more, consider having to expend money to resolve a misunderstanding on the parties’ obligations simply because you failed to monitor and ensure that your project objectives were met. The expense, both financially and time, for the resolution of such avoidable disputes especially in relation to construction contracts can lead to financial loss, project cost overruns and delays with attendant opportunity costs. This and many other reasons are why it is vital that upon the execution of contract for any project or works, steps are taken to manage and monitor performance of the contractual obligations of the parties.
The construction sector is one of the most active sectors in Ghana with activities cutting across all forms of infrastructure. The construction sector is ranked as one of the highest contributors to Ghana’s GDP and ranked as one of the fastest growing sectors of the economy. The sector witnessed a positive growth of 14.2% in the first quarter of 2021 according to figures from the Ghana Statistical Services. As a capital intensive activity, the costs usually associated with the construction of any infrastructure should warrant that its execution must be without disputes or minimal disputes. A major factor in avoiding (or at least minimizing) such disputes and attendant implication is effective contract administration. The focus of this article is to discuss the importance and requirements of administering contracts. It makes a case for the need for prudent contract management or administration and provides a guide for entities and individuals already implementing projects so as to improve their contract administration practices to achieve excellent results.
The scope and practice of contract administration
In our day to day activities, administration of contracts is evident in one way or the other, when we strive to ensure we get what we pay for from service providers. From the customer who requests the carpenter to produce an item or the one who commissions another professional to build a physical infrastructure. The constant monitoring of a project delivery to ensure that one is satisfied with the product or services being obtained under a contract is administering the contract. This is done to ensure that we obtain an end product that is of the requisite quality, on time and within budget. In fact, the failure to monitor the progress of one’s “order” from a service provider can result in having to deal with all manner of misunderstandings.
From the above, contract administration simply refers to the effective management of contracts between an employer or client and a contractor in order to ensure the successful realization of the contract objectives. The administration of any contract is not limited to any identifiable group of professionals or specialized practice or industry. If one would monitor the progress of “personal projects”, then it is undeniable that for major construction projects in which huge resources are invested, the omission of a diligent and professional administration of the contract would come with unfavourable outcomes.
Thus, it is important that project sponsors or financiers, contractors and in some cases regulators ensure that prudent administration of contract is made a part of any project to help the parties effectively measure the performance of contractors. Instituting this as part of any project also helps to achieve a clear understanding of the contract requirements in order to maximize contractual benefits and avoid all manner of challenges. Even if challenges should exist, the contract being administered will ensure early detection and resolution of challenges thereby reducing bigger or complex problems in the future.
The initiation or commencement of any project or works will require that the parties (client and the supplier) agree on the scope of the required services, the obligations of each party, the reporting requirements and agreements on how potential disputes will be resolved, and other matters. These details will usually be outlined in a written contract after negotiation of the key terms. An important aspect of the entire contract execution cycle is the contract administration process. The process is all inclusive and often begins from when the contract is awarded through to when:
- The works/project is completed and accepted by the owner or;
- When the contract is terminated in accordance with the contract terms;
- Payment has been made;
- All defects have been rectified; or
- Where disputes have been completely resolved.
The administration of any contract may vary from project to project depending on the project type and size. However, the management or administration of the contract requires the contract administrator to possess a high level of accountability and responsibility. The individual must have the knowledge and skill to understand the relevant contractual provisions, obligations and rights of the parties, understand the nature of each contractual party’s objectives and ensure that the agreed terms are complied with to ensure those objectives are met. The individual appointed to undertake this role could be an employee or representative of the project owner whose responsibility is to monitor the contract implementation.
Technically, the role of the administrator will commence when the contract is in place, although practically, the responsibilities will have commenced before the contract comes into existence. It is therefore important to ensure that, a contract administrator is involved at each stage of the contract process until finalization. At the early stages of the contractual cycle for a typical construction project, some of the contract administrator’s role would generally include, advice on the appropriate procurement method to deploy, the selection of the contractor, and the appropriate contract form to use for the project, etc.
In managing the day-to-day activities of any project, the contract administrator must keep a keen eye on any potential issues that may give rise to future disputes and ensure these are addressed at an early stage. In order to successfully administer the contract, the contract administrator will have to put in place the relevant steps to be adopted to achieve specific outcomes. The steps should clearly identify the specific tasks to be undertaken, break down the tasks into activities, indicate the timelines for performing each activity, and the precise steps involved with carrying out each activity.
The Process of Contract Administration
In order to have an efficient administration process, it is recommended to set out in a practical manner activities to be undertaken at each stage of the project. That is at the contract preparation stage, the implementation and completion stages.
The following activities or actions are recommended at each stage:
- Preparation of a Contract Administration Matrix
It is crucial to develop a schedule that outlines or break down all the key deliverables or work structure. It must also incorporate dates or milestones in the contract for achieving specific phases or output of the work. The matrix or schedule must have the following:
- A breakdown of obligations – the obligations of each party to the contract (including subcontract) must be clearly identified with a list of the specific people who will perform each task.
- Timelines with inbuilt buffer or lead time for performance – the timelines for the performance of each obligation identified must also be noted. The schedule must ensure adequate lead times in order to avoid delays.
- Risks or dangers – issues that may lead to project delays, cost overruns and inability of service provider to perform, etc. must be flagged in the matrix and steps that must be taken to address them.
- Risk prevention or mitigation measures – having identified those potential issues that may pose a risk in one way or the other, the specific actions that must be undertaken to address or reduce the impact of the risks should be outlined.
- Checklist – it is key to develop a list of all the actions that must be undertaken as part of implementation. Specific documents such as permits, licenses, guarantees that must be submitted, notices to be issued, reports to be submitted, etc. must be included in the check list as appropriate.
- Alerts – reminders for required activities and reports including the formats of the reports and the mode of delivery must be included in the schedule.
- Notices – ensure that a good communication process is established to help both parties achieve a clear understanding of issues. For example, setting up a project specific email for all persons involved with different aspects of the project implementation is essential for regular updates.
- Meetings – periodical meetings (including site meetings) must be held between all the stakeholders to help facilitate better communication and manage the project successfully. Records of such meetings must be properly kept.
- Use of payment tied deliverables – adopting a system where payments are tied to successful execution of various aspects of the project (which are measureable) will aid in effective administration.
- Proactive engagement – it is important to plan ahead, be in control and manage all the stakeholders and aspects of the project for timely execution.
- Fall back mechanism – to help counter risks that have a higher impact, the development of a contingency measure is necessary in managing risks so that alternative options can be readily deployed where necessary.
- Testing and handover – clearly identify the persons who will engage in quality control and testing and also establish clear criteria or protocols to be followed for testing, inspection and handover of the project.
- Defect period monitoring – there should be periodic review of the completion of all defects and any outstanding works. A final inspection with all relevant parties must be carried out ahead of the expiration of the defect period.
An effective contract administration is beneficial to all parties involved in any contract in one way or the other. The need for project sponsors or owners, contractors and financiers to ensure that the project in which resources are invested are executed within budget and time cannot be overemphasized. Project sponsors will find that an efficient contract administration will afford them the opportunity to make some real time decisions, review and understand all relevant details of the project during implementation. The opportunity to monitor costs, promote transparency in project cost variations as well as enhanced engagement with relevant stakeholders are some of the numerous advantages that come with contract administration.
It is not, therefore, enough to simply execute a contract and hope that the contractor and all other professionals involved will deliver a good project. Attaining quality services that meet the specifications of the contract, timely completion of project within budget and problem free close out do not happen by chance. It requires thorough management and supervision by a professional who is dedicated to ensure that your objectives are met. So the next time a project is being developed, remember to put in place an efficient administration process