The importance of construction contract management

The importance of construction contract management

Construction contract management is an increasingly common practice worldwide where a contract is in place to maintain the relationship of the parties throughout a project. It aids in communicating the negotiated agreements between project stakeholders and ensures each gets the desired outcome. But why is this important; and how is it changing?

Before considering the significance of contract management, it is worthwhile focusing on why we need a contract for construction in the first place. The main goal of a construction contract is to clearly outline the responsibilities of all parties, setting out their obligations and allocating risks appropriate to the Client’s strategy. It is worth noting that historically, Clients have endeavoured to pass the majority of risk and obligations onto the Contractor. In more recent times however, Clients have realised that the ultimate risk of the contract always sits with themselves, where there is often far greater impact (cost, time, reputation) than on the failure of the Supplier to deliver.

There a numerous standard contract forms published across the world for different regions and types of work. Two of the more widely used forms are the NEC Suite of Contracts and the FIDIC Rainbow Suite. These offer standard forms to provide consistent, transferable knowledge and recognised case law.

Regardless of the details of each construction contract, there is a commonality across the processes that they manage such as:

  • Time (Programme/Schedule), Completion dates, Key Dates, Sectional Completion dates, etc.
  • Contractor’s Obligations – What the Contractor must do
  • Employer’s Obligations – What the Employer must do
  • Change Management – Variations/Claims/Compensation Event/Extension of Time
  • Quality – Testing/Searches/Defects
  • Payment – When, how and what the Employer pays the Contractor
  • Performance Securities - Bonds, Warranties, Parent Company Guarantees
  • Suspension & Termination

Contract management is underpinned by each of these processes. In its simplest form, it ensures the deliverables defined in the contract are delivered on time, within budget and to the required quality. As contracts get more complex and the volume and type of deliverables increase, the fundamental principles of managing timely delivery to budget and of sufficient quality is still paramount. The discipline of construction contract management maintains the legal commitments and ensures both parties fulfil their respective obligations as set out by the contract, regardless of its size and scope.

Following the Latham and Egan Reports in the 1990s, Clients have moved away from adversarial contracts to more collaborative models which require active participation from both parties. The practice of contract management to maintain the relationship between these parties has never been more significant. Research conducted by the International Association for Contract and Commercial Management (IACCM) suggests that the cost of poor contract management can be as much as 9% of the Client’s annual revenue.

It is therefore not surprising that Contract Management has been elevated and the advent of NEC Contracts is breeding a new culture within the industry. Clients and Contractors now see the value of dealing with issues and compensation events in a timely manner rather than leaving until the end of project to ensure greater control of both cost and time.

Similarly, with more rigorous timescales and processes to comply with many organisations have turned to contract management solutions to ensure compliance, auditable records and collaboration are at the forefront of managing a modern-day construction project.

Interested in finding out more? Watch our webinar on demand ‘The fundamentals of contract management’ where our experts Bruce Gordon and Adam Lamping discuss the essentials of contract management and the benefits of consistent cost management to the success of construction project delivery.

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