KEY OUTPUT 15: Sound Contract Management Principles

In Key Output 15, our multi-disciplinary steering group sought to address critical questions on this topic from a diverse perspective. Firstly, what does good contract management mean? How can best practices in contract management be embedded to reduce the cost assurance requirements? Secondly, what are the requirements for the new NEC4 Supervisor role? How does their responsibility of checking work or defects align with audit and assurance principles in the contract? The insights and answers to these questions are elaborated on in this KO15 report, which is essential reading for the wider industry as complexities and legal challenges of sound contract management intensify.

Sound contract management principles are crucial for effective and efficient contract execution. These principles enhance accountability, transparency and trust, leading to more successful project outcomes for the parties involved. Effective contract management begins with clear and robust contract documentation including early communication of expectations to stakeholders across the supply chain. This includes accurate data and records of contract documentation, including project deliverables. Additional best practice principles include establishing transparent communication, a fair collaborative approach to contract administration and the correct interpretation of contract clauses as intended by the contract from the pre-contract procurement phase to post-contract agreements.

Sound contract management principles entail not attempting to unduly transfer risks and associated costs to other parties to avoid costly disputes or claims. This approach helps foster a collaborative non-adversarial environment where issues can be discussed early, correctly administered and resolved early to minimise risks. Another critical aspect of sound contract management principles is early risk identification, risk management and risk monitoring. This involves identifying project and contract risks early and implementing mitigation strategies to minimise these. Using Key Performance Indicators (KPIs) to monitor and review contract performance regularly is vital for ensuring compliance with contract terms, identifying risks and addressing issues promptly. This proactive approach helps maintain the contract’s integrity and ensures that planned project objectives are met efficiently.

With advances in technology, data and IA, incorporating technology and standardisation is a vital cornerstone of effective contract management. Leveraging contract, project management and audit software to automate and streamline processes significantly enhances consistency and accuracy. The use of technology and training ensures compliance and that staff continuously develop and adhere to best practices. This increased efficiency, reduces errors and ensures correct execution of contract principles.

Cecelia is a qualified accountant of 25+ years, and director of CFBL Consulting, a cost and strategy consultancy specialising in independent cost audits on infrastructure projects and strategy advisory. She has worked across commercial, finance and project control functions. A CIMA fellow and member of AICPAs, sustainability and R&D panel. She is a cost consultant and auditor experienced in the rail, technology, defence, renewable energy, and electrification sectors and has led audits on major programmes. She is chair of the multi-disciplinary steering group. Her career in construction spans 20 years and she has worked on high-profile projects such as HS2, Hinkley Point C, and Crossrail, and as a result, brings a wealth of knowledge and experience in tis space.

What do good contract management principles mean to you? 

Good contract management principles involve establishing a common interpretation of contract clauses and requirements to ensure that all parties comply with their contractual obligations. For example, on construction contracts, the NEC contract specifies detailed requirements, such as deadlines for project milestones and expected standards for using sustainable materials. Alternatively, other contract forms might be less specific but still impose a general duty to perform certain actions with due care. Failure to meet these obligations can result in a breach of contract, leading to increased costs and legal claims for both parties. Therefore, good contract management involves ensuring that the parties to the contract have a common understanding of the interpretation of clauses, time, cost and quality expectations to prevent breaches. For instance, on large-scale infrastructure projects, the project management team should use the contract as a guide throughout the project lifecycle, ensuring compliance from the onset and addressing any issues promptly. Effective contract management principles mean establishing a contract that both parties intend to administer correctly and not merely as a fallback when things go wrong but as a mutual agreement to deliver the project as agreed and apply the terms fairly as intended by the contract, without attempting to transfer risks or costs to the other party unduly. This approach ensures that both parties understand their responsibilities, risks and rewards. This includes the cost of deviations to the plan, who owns risks that arise, and how unforeseen risks or rewards should be dealt with equitably.

How to best embed good practice in contract management to reduce the assurance burden and requirement?

Embedding good practices in contract management to reduce the assurance burden involves planning strategically early on for cost assurance. For example on cost-based or target cost contracts, communicating the necessary assurance requirements early on at the pre-contract procurement phase. For example, NEC cost-based contracts include an audit clause that gives the client full audit rights and access to all cost systems and accounts. In practice, this is not as simplistic so embedding an addendum that specifies the scope of what this entails, including examples of required financial, commercial and project controls. In addition, examples of acceptable supporting documentation for direct and indirect costs. The expected standard of contract reporting, including correct work breakdown, cost and account code classification from the start of the project. Clearly defining the cost audit and assurance procedures early and supporting cost assurance training will ensure a consistent approach throughout the supply chain and company-wide. Regular training ensures all staff, stakeholders, including project managers and the supply chain understand their roles and responsibilities for compliance, minimising the risk of disallowed costs and disputes.

In practice, I have seen that implementing contract management software like CEMAR can automate tasks like document storage, deadline reminders, and compliance tracking, reducing risks from human error and boosting efficiency. Such a centralised contract repository secures contract documents and cost records ensuring easy secured shared access and correct version management. In addition, the benefit of proactive integrated risk management from the pre-contract planning phase to post-contract through to project completion identifies risks early and establishes mitigation strategies for minimising their cost impact. For example, agreeing on cost audit principles at the start can help prevent future disputes over disallowed or defined costs. These best practices if applied consistently, along with company-wide training and independent pre-audit reviews are good contract management principles that will help lower costs, the assurance burden and requirements.

Imran is an experienced chartered accountant (ACA) providing Cost and Commercial Assurance services to a variety of major infrastructure clients with prior experience in external and statutory audits from working at the U.K National Audit Office. He is currently the UK lead and global SME for Cost Assurance service development and delivery within Turner & Townsend global provider of consultancy services within the construction industry.

What does good contract management principles mean to you? How to best embed good practice in contract management to reduce the assurance burden and requirement?

For me good contract management encompasses the following key elements;

• Structure: Clear guidance should be put in place to provide structure to the contract management and administration process that is grounded in the contracts requirements but also how that applies to the organisations own internal processes, governance and authority requirements.
• Capability and training: A suitable level of capability, capacity and training needs to be in place to ensure that all people can fully deliver on their roles and responsibilities. An organisation should embed an assurance framework around commercial and contract compliance, performed by an independent party to assess performance over a period of time to help configure this.
• Systems: Good quality, efficient and connected systems should be put in place to help facilitate contract management and administration rather than block it. If poor quality systems are in place, people will be less likely to use them resulting in lack of consistency, quality and increased risk back to the business.

Embedding these key elements will naturally help streamline the assurance and audit requirement however it is also recommended that a system of assurance is developed that incorporates self-assurance and independent assurance. With respect to auditing of Defined Cost, the principles above should provide a level of risk-based assurance however the involvement of independent specialists will still play a key role to satisfying a broader system of assurance that has been developed and is often required by more strategic stakeholders.

Claire is a lawyer specialising in construction and engineering disputes with experience in litigation, adjudication, mediation, and domestic and international arbitration. Claire acts for employers, contractors, and subcontractors across a wide range of projects including large-scale infrastructure projects, energy, utility, oil, and gas supply projects. Our global teams operate seamlessly to deliver the commercial know-how and strategic alignment that clients need from their advisers to help further their business interests. We shape our advice to the unique circumstances and challenges of each project and ensure the right people are in the right places to offer insight and certainty every time – from the day-to-day to complex, multi-jurisdictional transactions.

What does good contract management principles mean to you?

The starting point for good contract administration and management is having a solid understanding of your contract. Knowing the risk profile of your contract, whether it contains notice provisions, time bars and/or condition precedents is absolutely key to being able to manage the payment process and any claims for additional time or money.

It is also fundamentally important that you understand the roles and responsibilities of the parties and that you understand the work scope that is being carried out under the contract, including the timing and sequence of those works.

Strong organisation skills are also a necessity, and the ability to keep good and comprehensive records is a must.

However, one of the most crucial requirements is the personality of a supervisor or project manager. It is very difficult to balance driving a contract and project forward, whilst trying to adhere to the correct contractual provisions and procedures, particularly where relationships between the parties are breaking down.

It takes real skill, effective communication and decisiveness to know when to insist on something or when to row back or propose an alternative solution, which may very well keep a project on track and the parties working collaboratively again.

What are the requirements for the new NEC4 Supervisor role?

The Supervisor under NEC is responsible for co-ordinating the quality management of a project. This will include undertaking or accepting the results of any tests or inspections to check that works have been carried out in accordance with the scope of the contract.

The Supervisor therefore takes on a more “hands-on” role in the contract works compared with the Project Manager, and an active role in relation to managing the quality of the works. The Supervisor is also obliged to act impartially (which speaks to the underlying ethos of the NEC), and this factor, alongside its obligations in regard to defects and its ability to be implicit in compensation events under the contract, means the role is a burdensome one that requires diligence and proactivity throughout the operation of the contract.

The skills and attributes noted above, are all important for the role of the Supervisor under NEC, but particularly with NEC there is a requirement to be able to follow the very process driven contractual mechanisms at the same time as managing all parties to work together collaboratively for a successful outcome.

The NEC therefore requires a considerable amount of proactivity and pre-empting issues before they escalate. The balancing act referred to above, is therefore all the more important when dealing with NEC. A Supervisor must also trust their judgment and not be afraid to give uncomfortable or difficult instructions to the parties for the good of the project – communication and great interpersonal skills are therefore fundamental to this role.

Gary is a Director at Blake Newport, an experienced construction commercial, contract and disputes consultant and Expert Witness. His specialisms include quantum analysis, contract administration, construction law, cost control, payment assessments and change management.

What does good contract management principles mean to you?

Good contract management principles involve setting a plan in place for you, as one of the parties of a contract, to comply with your obligations set out in the contract. Sometimes the contract is very prescriptive and sets out who should do what and by when. Some contracts are not so specific in terms of what is required but there is a duty to do something. Either way, failure to comply with an obligation will result in a breach of contract and sometimes those breaches have negative consequences for both parties which can result in delays and/or additional cost. Having good contract management principles in place means setting out the quantity and quality of resources and expectations to comply and not breach the terms of the contract. Some teams will aim to deliver the project and use the contract if things go wrong. For me, “contracting” involves setting up a contract which is intended by both parties to be used to regulate and deliver the project in a way that was agreed in order to be equitable to both parties. If things change or go wrong, both parties have a framework in which to work and understand the consequences when that happens. That is the principle of good contract management.

How to best embed good practice in contract management to reduce the assurance burden and requirement?

It starts with the contract drafting. What do one or both parties need, as a minimum, as an output to satisfy its requirements? What is a “nice to have” but is ultimately a waste of time and effort. The parties should work this out at the tender stage before it becomes a contractual obligation and be exceptionally clear about what is required. Putting unnecessary obligations into a contract adds to the cost of delivering the project. Then, during the currency of the contract when it comes to cost auditing, the parties should know what is required, under the terms of the contract, and not ask for or be forced to provide information that is not required. Where a negative and adversarial culture in assurance develops, individuals should be reminded of the rules of engagement set out in the deal struck by the parties. If more resource is required to provide what is explicitly set out, then that is what is required – people not having enough time is not the right answer and can lead to bad practices developing.

Tom is the Head of Commercial Management at Southern Water. He is a chartered surveyor and manager of commercial, contract, and audit teams for large infrastructure clients and contractors. Specialising in the commercial management of construction contracts, claims, and disputes, He demonstrates a solid track record in infrastructure markets with experience in major energy, water, aviation, transport, and communications networks.

What do good contract management principles mean to you?

Contract management/administration can be improved in many Client organisations bringing greater benefit and returns. When it comes to Contract Management, I often see Clients have well intentioned processes and controls. However, it is common for a lack of ownership to occur once contracts have been let. The downside being a dip in performance and therefore return on any investment. Good contract management is illustrated by clear ownership of the contract (business owner), consistent management of performance / KPI measures, collaboration and mutually beneficial outcomes.

Good contract administration includes many of the above principle. In addition, and specifically in so far as the construction industry is concerned, a higher level of understanding is required. Ability in the basics of contract obligations, technical understanding, impartiality, valuation and dispute avoidance will be desirable.

Construction contracts are more complicated than the average services and good contracts. There will be well-trodden conventions and common law principles that sit behind the history of the standard forms. It is advisable that Clients invest in their people to meet thresholds of capability and experience. For example, accreditation alongside institutions such as the NEC will provide a good baseline of competence.

Katy is an experienced Quantity Surveyor with a demonstrated history of working in construction/contractor/client-held roles within the construction industry. Skilled in negotiation, tender optioneering, value engineering, contract drafting and administration (NEC & JCT), change control, dispute resolution, auditing cost and commercial Compliance, and other aspects of commercial management. She is a chartered surveyor working towards an LLM in Construction Law from the University of Strathclyde to reinforce existing experience and knowledge.

What does good contract management principles mean to you? 

Good contract management requires clarity in the contract, understanding the obligations, responsibilities, roles and risk allocation within the contract and staff/management having a strong foundation in contract management. These should also provide clarity of expectations and highlight any issues early which can then be addressed through early communication and negotiation. Assurance which focuses on getting these behaviours correct would likely lead to a reduction in costs being identified as disallowed which benefits all stakeholders. It also allows for a wider assurance piece such as peer reviews, training and sharing best practice.

Chris is the Business Unit Finance Director for Rail Systems, overseeing a portfolio of £200m across seven Delivery Units. As a key member of the Leadership team, he is responsible for strategic direction, performance, and maximizing cash and profit. Chris leads a financial team of up to 10 direct reports and a wider team of 50, managing infrastructure projects ranging from small to large under various contract types.

What does good contract management principles mean to you?

Setting out clear guidelines on how the contract is going to be run from the start. Making it clear for both sides, what is expected and what the contractual requirements are for both parties (not making assumptions!). What I have seen work well is creating a regular contract ‘heartbeat’ that enables the project to gain a good rhythm and that will embed itself into the processes and diaries. This needs strong leadership from both Client and Contractor and regular communication to prevent key issues from floundering – costing both parties time and money.

How to best embed good practice in contract management to reduce the assurance burden and requirement?

Cost assurance is part of large cost plus and target cost contracts. Having clearly defined processes understood by both parties (communication again!). Setting out clearly how the project is going to be run at the start of the project is really important so that both parties understand how costs are agreed upon and authorised for the work. Risk areas that are not clearly defined in the contract need to be agreed upon early to enable the parties to understand where they sit on ‘grey’ areas to minimise conflict and ambiguity between both parties.

Charlotte is a Commercial Manager at Atkins SNC Lavalin with 15 years of industry experience on complex major civil projects, working for contractor organisations such as Costain, Bam, Kier, Mace, and Atkins. She has worked as both an estimator and a commercial manager and brings with her experience significant contributions to the steering group. She is currently working on the East-West Rail Alliance as the Atkins commercial lead.

What does good contract management principles mean to you? How to embed good practice in contract management to reduce the assurance burden and requirement?

When asked the question, “what does good contract management principles mean to me?”, my first reaction is, “doing what the contract says”. However, the contract is a framework to operate under and it relies on people to adopt an open collaborative approach, with clear objectives, strategies and processes. Importantly, there should be a strong awareness of risks and the management of them.

The lack of honesty and a non-collaborative approach makes commercial management frustrating. It normally results in Quantity Surveyors (QSs) emailing clauses and arguments to one another and a stream of compensation claims. Starting a contract incorrectly is where things normally start to go wrong. When either party does not fully understand the scope, contractual requirements, or obligations. Good teamwork and ‘best for project’ discussions will generally always get better results.

Processes and procedures are a must. These set a clear operating relationship between the parties. Robust cost management and assurance rely almost entirely on process discipline. The agreed structure also allows more effective auditing which is essential for continuous improvement. The commercial procedures will cover the signature/authority matrix, the process for change management, the procurement process and the strategy for the commercial management of the project. On top of the project-based commercial strategy, most companies have a best practice guide or a gate system where requirements for commercial processes are prescribed. This governance provides a ‘how to’ for the commercial team to follow, guaranteeing best practices and how obligations are achieved.

Management of time effectively and proactively is a personal focus. I have found using time management strategies and planning make me more efficient and able to manage my workload effectively. On a project level, a good programme with clear milestones focusses the whole team and drives them towards the same end goal. My Current project has has a very clear integrated vision of what success looks like and this is supported by regular briefings and visuals to ensure all parties are aligned.

Risk management is also critical to a good project. At tender stage it is important to identify what the risks are and who owns them. Regular monitoring of risk mitigation progress will ensure efficient management should they be realised. Forecasting risks, budgets, regular risk meetings and having a risk or contingency release plan are excellent methods to keep on top of uncertainty.

Using the contract as an instruction manual is onerous and at times laborious but contracts such as NEC have been put together using years of experience to manage project works in a fair and open way.

Elliot has over 30 years of experience providing specialist pre- and post-contract commercial and project management services in the built environment across multiple sectors that include: infrastructure, residential, office, leisure, and mixed-use development projects. His pre-contract areas of specialism include development due diligence and feasibility assessment, value engineering, cost planning, procurement strategy development, contract form selection, and contract drafting. Post Contract: proven in-depth experience in leading large project and commercial management teams to deliver high-value, key complex programmes.

What does good contract management principles mean to you? 

The definition of contract management can be described as the end-to-end process applied to create, operate, control and conclude legal agreements used to deliver construction projects.

In my experience and from a client perspective, the activities below conform with good contract management principles.

• Understanding the contract is a key aspect of good contract management. The parties involved in the contract must fully grasp the key and salient features of the contract. I would recommend arranging a kick-off session for all parties who will be involved in the contract to agree and set out how the contract is to be administered to ensure alignment and to optimise operation efficiencies, by having systems and processes that are all aligned and communicate seamlessly. This should be followed with re-fresher annual joint workshops as staff are constantly turning over.
• Creating a robust contract management plan outlining how the contract operates, with clear roles and responsibilities of the contract administrators. The plan should outline the contracting strategy including the who, what, when, where and how, as well as setting up communication channels.
• Establish a management hierarchy responsible for delivering the project in line with corporate governance and providing strategic oversight. These will comprise at least three levels with the delivery team at the bottom reporting to the management team, who report to the sponsors’ board level and to the ultimate client. The lines of communication and level of authority delegated to each level must be clearly defined and understood by all the parties.
• Encourage collaborative working practices and behaviours between contracting parties. Set up routine monthly programme/change and risk meetings to discuss and agree before formal submission dates, otherwise risk a ping-pong war outbreak.
• Establish realistic and measurable key performance indicators to track performance and improve service levels.
• Manage change effectively by setting up a robust change management approach, engage with both senior management teams to agree on how change is going to be managed. Arrange and agree on formal change procedures. Set up an integrated team that manages change. Arrange monthly meetings that deal with change.
• Have a detailed programme prepared from the project’s outset. Have an ‘Accepted programme’ in place at the commencement stage. Focus on all parties to apply all efforts to get a programme in place.
• Ensure the contractors’ design requirements are clearly specified in the contract, complete with dates. Also specify the required method statements, even for temporary works.
• At the commencement of the project, the Project Manager (PM) should ensure the appropriate insurance cover is in place. Where necessary consult with an insurance specialist. Ensure valid certificates from contractor and employer are in place Set up an insurance log that is reviewed regularly to ensure insurance cover is valid.

The above initiatives are not an exhaustive list but should provide a solid base, for setting up what can be considered as good contract management principles. For the principles to be effective they should be underpinned by a coherent clear communication line between the contract parties. Communication is what drives best practices and keeps the parties working as a single unit with a joint purpose.

Martin Perks is a highly accomplished professional with a diverse range of skills in the construction and business sectors. As a visiting professor at Birmingham City University and a Chartered Surveyor (FRICS), he possesses expertise in quantity surveying and project commercial management. Martin serves as a Board Director of Lean Construction Institute UK and is a member of the Institute of Collaborative Working (MICW). Additionally, he chairs the VOX Datavista Group as a NED. With a PgCert in Research Practice, Martin is a business performance coach and is currently training to become a life coach. His specialties include sustainable procurement, lean construction thinking, and asset management.

What do good contract management principles mean to you?

Parties doing what they contracted to do, in an organised, structured and controlled way.

If Contract Management is done by the Parties and Contract Administration by the Project Manager, is this differential understood widely enough?

No: Clients step into the Administration role and act with bias. PMs acting as agents often follow corporate agenda based on commercial return, and Clients acting as administrators can sometimes compromise their own outcomes by re-prioritising workflow without adequate planning and often insufficient thought towards effective compensation.

How to best embed industry practice in contract management to reduce the assurance burden and requirement?

NEC contracts are written to hold clause 10 as a condition precedent “act in accordance with the contract”; “act in a spirit of mutual trust and cooperation”. That means that each party MUST act with integrity. This is so often not considered when failing to perform the contract as written. Contract management must hold clause 10 at the heart of what it is, and each party must be held to account, and not coerced into cognitive dissonance.

Do those contracting to be Supervisors understand how pivotal to contract performance the requirements for the NEC4 Supervisor role is?

No: This is vastly under-managed by Clients and service providers in my experience. This is a significant professional indemnity risk to service providers and commercial risk to Clients. If the Supervisor does not perform and one of the other functions (PM or QS) steps in to provide data for assessments by the PM, the supplier has the potential for decisions to be inequitable and provided by persons without the requisite competence.

Dr Anywhere is currently the Rail Division Commercial Manager at BAM Nuttall Ltd in West Sussex, UK a position he has held since November 2006. Before this, he was the Managing Quantity Surveyor at Faithful and Gould in London for a year, and before that, he worked as a Senior Project Surveyor at Davis Langdon & Everest in London for almost three years. He has over 30 years of experience In the construction Industry, having served as the Chief Quantity Surveyor at Costain Zimbabwe for over 12 years.

What do good contract management principles mean to you?

They mean embedding good practices in managing construction projects which involve following the notification and communication requirements in the contract to ensure that key players (client, contractor and supply chain) are all managing the projects at a minimum in line with the contract requirements. This is premised on the principle that the project is at the centre of the process and that time, cost and quality considerations are all managed and communicated as required under the contract with no surprises leading to the completion of the project in time and in line with the costs recognised under the contract. In simple terms, it is as a minimum complying with the contract requirements in all respects so that all stakeholders involved are always in the know and are in control of project cost, time, quality, health & safety status of the project at any given time.

How to best embed good practice in contract management to reduce the assurance burden and requirement.?

To include all the required assurance regimes in the contract explicitly so that it is clear to all parties what their contractual obligations are and if any party does not adhere to the obligations, then it is a breach of contract providing the aggrieved party with remedies under the contract. Regular training and briefings to key parties involved can also help the project team to embed good practices in contract management. Long term it may be a good idea to engage with the academia of all Built Environment curricula so that this is included as a course module in their training.

What are the requirements for the new NEC4 Supervisor role?

Although I have not got a working knowledge of the NEC4 form of contract I would have thought that the Supervisor is responsible for checking the works carried out by the contractor to ensure that the works are in accordance with the Works Information.

How does their responsibility of checking that works or defects are in accordance with the contract link into audit and assurance?

I would say that it links well because the client is only obliged to pay for works that have been undertaken in accordance with the contract requirements so if the Supervisor believes that the work is not in accordance with the contract and is defective the client is not obliged to pay for it and the cost incurred by the contractor in undertaking such defective work is treated as Disallowed cost.