Farsighted Contract management

1. FARSIGHTED PROJECT
CONTRACT MANAGEMENT
EMCM5103 TOPIC 3

2. THEORY OF CONTRACTS : Incentivisation and
Governance
Theory of contracts consist of 2 schemas : INCENTIVISATION & GOVERNANCE
It is the prediction of an event before it actually happens, and the actual outcome is uncertain. By
making the prediction of the outcome, the obtained ex-ante value can then be compared to the
actual performance when it happens.
Ex-ante Incentivisation
Meaning ex-ante : before the contract binding.
Show interrelation between reward, risk and safeguard.
Can be described via three parameters, namely:
(i) The reward it provides the contractor to share the client’s or owner’s
objectives and performance;
(ii) The associated risks; and
(iii) The safeguard provided by the owner through the contract to shield
the contractor from the risks.

3. THEORY OF CONTRACTS : Incentivisation and
Governance
REWARD
REWARD
• No risk involved – no need any safeguard / low reward
• Risk involved - without safeguard --- required high reward (due to contractor buys the risk off the owner)
- with safeguard --- lower incentive (due to owner underwrites the contractor’s risk)
• Deals with foreseen risks.

4. THEORY OF CONTRACTS : Incentivisation and
Governance
Ex-post Governance
Meaning ex-post : after contract formation, related to contract administration
Required to deal with unforeseen circumstances.
Can be described via four parameters, namely:
(i) Incentive intensity;
(ii) Ease of making uncontested; bilateral adaptations; (adaptiveness)
(iii) Reliance on monitoring and the related administrative controls (transaction costs) ;
and
iv) Reliance on court ordering in term of any dispute or claim management

5. CONTRACT TYPES
THE FORMS OF PAYMENT ARE :
A. COST-PLUS CONTRACTS (Cost reimbursable)
B. REMEASUREMENT CONTRACTS (BILL OF
Quantities)
C. FIXED-PRICE CONTRACTS
D. OTHERS
• Form of payment is determined by the selection of contract
structures

6. TYPES OF CONTRACT STRUCTURES AND
PAYMENT FORMS

7. Target Cost
Remeasurement
• Schedule of Rates
(SOR)
• Bill of Quantities
(BOQ)
• Bill of Materials
• (BOM)
ALLIANCE/
GAIN
SHARE

8. COST REIMBURSABLE / COST PLUS CONTRACT
ALLIANCE
/COST
PLUS
GAIN
SHARE

9. COST REIMBURSABLE / COST PLUS CONTRACT

10. COST REIMBURSABLE / COST PLUS CONTRACT
Incentivisation
The profiles of this form show that high risk contracts need high levels of
safeguard as well. With C+FF, there is a small incentive for the contractor to complete
the project at cost because the higher the cost, the lower is its percentage profit.
With C+IF, there is a medium level of incentive to achieve whatever success criteria
that the incentive is linked to.
Governance
These contracts are very adaptable but have high costs of monitoring and control.
Because of their flexibility, there should be little reliance on court ordering. However,
mistrust can be high. It is appropriate to use this form of contract when there is very
high risk and uncertainty, and when the contractor cannot reduce the risk.

11. REMEASUREMENT CONTRACTS
In remeasurement contracts, the contractor is rewarded for the amount of work done according to a pre-agreed
formula. Table shows the comparison of the various remeasurement contracts.

12. REMEASUREMENT CONTRACT
(a) Remeasurement Based on Schedule of Rates
The amount of labour and materials used is measured and the contractor Is paid
according to agreed hourly and unit rates. There is no motivation on the contractor to
control productivity levels. It suffers from all the problems of cost-plus contract. Even
though there is high safeguard, the reward is not aligned to the client’s performance
criteria.
(b) Remeasurement Based on Bill of Quantities
This is appropriate where the project consists of clearly identifiable work elements but
the exact number is uncertain at the outset.
(c) Remeasurement Based on Bill of Materials
Standard, larger work packages are identified and the contractor is rewarded according
to the number of work packages completed.

13. FIXED-PRICE CONTRACTS

14. FIXED-PRICE CONTRACTS
The contractor is paid a fixed-price lump sum for the entire job. The client needs to specify in
advance, for example, the exact number of rooms with dimensions of either one, two or three
windows wide. If the client underestimates the ratio of one-window to three-window offices, the
contractor will benefit. On the other hand, if the client overestimates, the contractor will claim for
additional costs.
Table 3.4 shows the comparison of fixed-price contracts.
(a) Incentivisation
The contractor’s risk is high but there are suitable rewards.
(b) Governance
This form is very adaptive. The contractor is left to work on its own to find the best solution
and, therefore, the transaction costs are low. Moreover, if the extreme risks are properly
underwritten, there is no need to make any claims.

16. OTHER CONTRACT STRUCTURES

17. OTHER CONTRACT STRUCTURES :
TIME AND MATERIALS
TARGET COST
a) Guaranteed Maximum Price Contract (Time and materials)
The contractor takes on all the downside risks but shares none of
the upside opportunities.
b) Target Cost Contract
A target cost contract provides a fixed price for an agreed range of out-turn
costs around the target price, where the client and contractor share the result
of any underspend or overspend. There is a potential for the contractor to
achieve higher rewards but at greater risks. It forms a strong collaboration
between the client and the contractor as both want to save cost.

18. OTHER CONTRACT STRUCTURE : TIME AND
MATERIALS/GUARANTEED MAXIMUM PRICE

19. OTHER CONTRACT STRUCTURES :
TIME AND MATERIALS
TARGET COST
c) Incentivisation
The contractor has no incentive to achieve the client’s objectives.
The rewards are low but the risks are high and there is no safeguard.
d) Governance
This form has all the disadvantages of cost-plus and fixed-price but
none of the advantages.
The incentive intensity is low.

20. CHOOSING CONTRACT PAYMENT TYPES
The characteristics of choosing for the type of contract is based on the following:
(a) Remeasurement contracts are used in low-risk projects, specifically where
the contractor can make no contribution to the improvement of the design
through construction knowledge. They tend to be solely construction
contracts.
(b) Fixed-price contracts are used when the client can make no contribution to
the delivery of the project and the management of risks. They tend to be
design- and-build type or turnkey contracts.
(c) Cost-plus contracts are used when both the client and contractor can work
together to reduce the risks, specifically on alliance contract. The client and
contractor (or contractors) will work together to find
the best solution for the project.

21. CHOOSING
CONTRACT
PAYMENT
TYPES
Remeasurement contracts are used in
low-risk projects, specifically where the
contractor can make no contribution to
the improvement of the design through
construction knowledge. They tend to be
solely construction
contracts.
Fixed-price contracts are used when the client can make no
contribution to the delivery of the project and the management of risks.
They tend to be design- and-build type or turnkey contracts.
Cost-plus contracts are used when
both the client and contractor can
work together to reduce the risks,
specifically on alliance contract. The
client and contractor (or contractors)
will work together to find the best
solution for the project.
Target Cost Contract
A target cost contract provides a fixed price for an
agreed range of out-turn costs around the target
price, where the client and contractor share the
result of any underspend or overspend. There is a
potential for the contractor to achieve higher
rewards but at greater risks. It forms a strong
collaboration between the client and the contractor
as both want to save cost.
Guaranteed Maximum Price Contract (Time and
materials)
The contract is cost-plus to target price and then
beyond fixed-price. The contractor takes on all the
downside risks but shares none of the upside
opportunities.
Incentivisation - The contractor has no
incentive to achieve the client’s objectives.
The rewards are low but the risks are high
and there is no safeguard.
Governance -This form has all the
disadvantages of cost-plus and fixed-price
but none of the advantages. The incentive
intensity is low.

22. PROJECT CONTRACT SELECTION STRATEGY
Project contract selection is based on the need to provide the contractor with an incentive to achieve the client’s objectives
and to provide flexible, farsighted governance to deal with incompleteness at minimum transaction costs. The
methodology depends on :
A. WHO CONTROL THE RISKS
(i) Client;
(ii) Contractor; and
(iii) Both.
If the client (or their consultant) controls the risk, then the appropriate types of contract are cost-plus incentive fee or
remeasurement, depending on the complexity.
If the contractor controls the risk, the type of contract depends on where the risk is found, that is:
• In the process - The appropriate form is fixed-price design and build with the product defined by cardinal points;
• In the product and process - A common approach in this case is prime contracting with a target price contract; and
If the risk is shared, the strategy would depend on whether the complexity is high or low.

23. B. NATURE OF PROJECT
• Is it a simple, large, complex or multistage project?
C. THE LOCATION OF UNCERTAINTY
• (i) In the project’s product;
• (ii) In the method of delivery; or
• (iii) Both.
• If the contractor controls the risk, then it depends on where the risk is. There are various situational
conditions of risk if the control of risk is under the contractor.
D. Is the Risk Found in the Process?
• If it is, then the most appropriate type of contract should be fixed-price design and build with the product
defined by cardinal points. The incentivisation schema of this situation is derived from finding the
optimum solution to the delivery of the project. The governance aspect contradicts the provision of
incentive based on the reasoning that the cost for incentivisation is very high. Thus, functional
specification should be well defined in order to avoid any penalties.
E. Is the Risk Found in the Process and Product?
• In this case, the client has a well-defined functional specification but has no skills to deliver it. The
uncertainty is reflected both in the product as well as in the process. A common approach will be the target
price contract. From the incentivisation aspect, if the project achieved the target cost it will be profitable. If
the risk is very low, then the fixed-price or remeasurement contract can be used.

25. CONTRACT LIFE CYCLE
Contract life cycle is the process of systematically and efficiently managing
contract creation, execution and analysis for maximising operational and financial performance and minimising
risks.

27. PLANNING
This stage refers to planning and
budgeting activities. Budgets and
operational plans will have sufficient
details to identify the needs for the
contracts to carry out the approved
operations.
CREATION
During the creation stage, the contract will
ensure the use of appropriate wordings
to give effect to the intended outputs and
outcomes. This step involves the
preparation of the first draft of the
contract documentation
COLLABORATION
This stage where drafting and
negotiating process which includes
internal and external reviews to ensure
that the contract will give legal effect to
the requirements of all parties to the
contract.
Internal review may include the legal,
finance and risk management aspects.
External review will include one or
more rounds of negotiation to arrive at
a mutually agreeable set of terms and
conditions that will give effect to the
requirements of all parties.
CLOSEOUT/RENEWAL
The contract closeout or
renewal is a very
important stage and one
that often receives the
least amount of
attention. It is
intrinsically linked to
the
equivalent of a project
implementation review
conducted for projects.
ADMINISTRATION
The administration of the contract means to
monitor the delivery of the
contract to ensure that it achieves its
original objectives. It includes tracking
and auditing contract terms such as:
(i) Pricing and discounts;
(ii) Timelines of payments and/or receipts;
(iii) Performance in delivering the agreed
service level or specifications of
goods and services; and
(iv) Any amendments made.
EXECUTION
Execution is the act of signing
the contract, making it legally
enforceable and formalising
the agreed terms and
conditions.

28. REVIEW PROCESS IN CONTRACT LIFE CYCLE
A review process should be undertaken at various levels depending on the
classification of the contract. This review will focus on contract performance and
consider, at least, the following:
(a) Actual versus budgeted quantities, prices and total values;
(b) Actual timelines of delivery under the contract versus contracted time
frames;
(c) Actual versus contracted service levels or specifications of goods and
services;
(d) Review of procurement and sales methods; and
(e) Future budgets.

29. ENTERPRISE CONTRACT MANAGEMENT (ECM)
• Different types of contracts will require different levels of management
intervention. Systems (manual or computerised) are necessary to ensure
proper management control and monitoring of contracts. Enterprise
contract management (ECM) involves managing every contract in the
institution throughout the contract life cycle.
• Contract management information systems range from simple
spreadsheets to comprehensive ECM software solutions. It is essential to
document all current systems and processes, and embark on a systematic
progression towards improving processes and implementing ECM
solutions.

30. ENTERPRISE CONTRACT MANAGEMENT (ECM)
• Enterprise contact management is an approach to contract management that
brings all of a company’s commitments into a single system for seamless,
holistic management.
• With enterprise contract management, automated systems replace the
inefficient methods of manual contract management systems and streamline
the process.
• It is a computerized system in place where the involved parties can organize a
collection of contracts, clauses and standardization templates.

31. AIM OF ECM
AIM OF ECM:
Maximising value
for money
through :
Identifying and
maximising
opportunities
Monitoring and
evaluating
performance of
parties to the
contract
Maximising
revenues
Minimising costs
through efficient
operations
Minimising risks
Ensuring compliance with
policies, procedures,
regulations as well as
terms and conditions

32. ECMsolutionsfocusoncontractlifecyclemanagement.Theobjectiveistoautomateandstreamlineall aspects
ofcontractmanagementthroughoutthelifeofthecontract.Thisisdonethroughintroducingandenabling:
(a)Consistentandefficientcontractingprocessesandcontrols;
(b) Clear identification of risks and opportunities in the context of the Institution’s enterprise risk management
andgovernancestructures;
(c)Compliancewithregulatoryrequirements;and
(d)Compliancewithfinancialaccountabilityrequirements.
Government institutions with a large number of contracts ranging from standard to complex terms and
specifications stand to gain significantly from the implementation of ECM solutions. Furthermore, there are
substantial benefits to be gained by the government when implementing a standardised system across its
multiple institutions. ECM solutions would provide significant benefits around the treatment of contracts and
mayalsoassistindevelopingintelligenceonsuppliersandcontractsforgoodsandservices.

35. 1. Contract Creation and Approval
Enterprise contract management apply smart contract initiation features that integrate with the
business applications to make no-touch contracting possible.
With a self-service contracting feature, it can improve cycle times, increase revenue and reduce
legal operating expenses by allowing users to generate contracts in self-service mode.
Administrators can include templates, business rules and clauses to govern user’s contract
creation, thus, users can easily and safely create their contracts without having to rely on
administrative oversight. By placing this information in the user’s hands, it will accelerate the
contract creation process significantly.
Initiate contract creation by connecting buy-side and sell-side processes to auto-build contracts.
With defined business rules, the system can automate much of the contract creation process.
Benefits of Enterprise Contract Management

36. 2. Procurement and Supply
A contract management system will assist your procurement operations by helping you control
spending. By being able to collect data on every commercial relationship your company has, contract
management monitor cash flowing in and out of the business at any level of the supply chain.
With any procurement contract, you will not want to waste time with slow contract creation or
approval. All of the benefits of contract authoring and approval mentioned previously apply here,
significantly speeding up procurement.
Another feature of this type of system is in supply chain tracking. With ECM, a contract’s terms and
conditions throughout its entire timeline can be tracked. From the data, can view any inefficiencies or
areas of improvement in the supply chain to make changes. A global view of your supply chain will
help your contracts become more profitable and more beneficial to the company.
Any healthy supply chain needs tools that assist workflow and streamline purchasing without hurting
quality can be achieved through supplier validation automation, multilingual support for
international supply chains, customizable variations in workflow and contract efficiency and speed
monitoring.

37. 3. Maximizing Value
Enterprise contract management delivers value by accelerating, protecting and optimizing the
contract process.
ECM can measure the success of your contracts with much more accuracy. As contracts move
through their lifecycles, while monitoring them to make sure they perform to expectations,
Management can use this analysis to make informed and timely decisions.
While reviewing the contracts, ECM might help to see that a step in the contract workflow is
consistently taking longer than it should. This knowledge could prompt into investigate the issue
and make adjustments that help accelerate the process.
The contract creation and approval features can significantly reduce the labour costs associated with
processing and creating contracts, providing significant financial value to business and will also
benefit your company by reducing the company’s exposure to financial and reputational risk.
Any delays to deals based on contract issues can cause to lose business, hinder negotiations and
increase the costs. With an automated system, it ensure that your contracts are not the reason for the
delay, as it is an easy-to-use contract authoring and editing at your disposal, as well as collaboration
tools to bring in necessary stakeholders and can reduce the lead-to-contracting cycle time for your
sales professionals by 60%. ECM will also help technology professionals establish a cloud-based
solution in weeks rather than months, secure cloud-based capabilities reduce support issues and
lower the training cost and integrates into other enterprise systems including sourcing, ERP,
procurement, and CRM. All of these features enable a much smoother and faster contract
management process

38. 4. Mitigating Risk
Risk management is key to surviving in today’s business environment. Without an enterprise
contract management system in place, companies open themselves up to a great deal of risk.
An enterprise contract management system will help to standardize the process that contracts
go through during their entire lifecycle to minimize risk. Instead of having to process the
contract or pull from multiple applications manually, contract is placed in a single platform,
making contract risk easy to measure and manage.
Contract software provide alerts when a contract is set to expire , avoid missing out on
deadlines that could cost money. For instance, you might need to provide a service by a
specific date, but in a manual system, the deadline could be lost, causing to miss out on
revenue. Additionally, it avoid contract to expire unintentionally or renew automatically
without review. With alert system in ECM , it will avoid renewing a contract that isn’t
providing value or letting a lucrative contract expire.
Audit well preparation , saving from any mistakes that could put the company in legal
jeopardy or diverge from internal policy compliance. The centralized system should feature
audit trails that allow company to view the history of the contract within seconds. With this
sort of information readily available , it can track and document an accurate contract history.
This documentation will help to establish a complete audit trail for internal compliance or
governmental regulation.

40. THANK YOU