Home > Knowledge > Contract Management Cycle

Contract Management Cycle

Contract Management is a continuous procurement process that ensures suppliers - and buyers - adhere to their agreed contractual obligations, along with negotiating any future changes that need to take place.

Watch the video below to find out how to get the most from CIPS Knowledge:

 

Hover and click on the procurement cycle to review the topic summary with links to the practical knowledge and resources to support your day to day activities whether studying or operating in an organisation.

Tap the contract management cycle to review the topic summary with links to the practical knowledge and resources to support your day to day activities whether studying or operating in an organisation.

Plan and Scope

"He who fails to plan is planning to fail". (Sir Winston Churchill)

 

Planning and scoping simply means that you are preparing to work smartly, focussing on priorities, resources, risk, considering the success factors, KPI's, defining what the contract will cover and achieve (and possibly what it won't), how, and by when, what performance criteria will be used to ensure that the contractor, as well as your own organisation, meet their obligations.

 

You will consider the specification, and the whole life - and cost - of the asset you're acquiring including disposal, or maintenance, as well as the transition required to move from contract to contract smoothly at either end of the process. 

Stakeholders

It's important that good working relationships exists between all internal, as well as external stakeholders. Depending on the size of the contract, the external relationship could be quite simple and transactional, or it could be much more involved as you try to ensure a cultural fit and a collaborative working relationship. It's important to realise that stakeholders for each contract should be considered and managed appropriately.

 

In different organisations, different job titles will exist, but broadly the contract holder, project manager and finance manager should work together internally. If any of these stakeholders are in contact with the contractor, it's very important to ensure that their actions don't inadvertently relieve a contractor of an obligation, or create additional commitments for your organisation, so good communication and sharing a clear understanding of the main contract points is key.

Administration

Good contract administration is absolutely fundemental to the success or otherwise of a contract.

 

Dates for decision-making, reporting, activity, and notices of termination or exit must all be monitored via clear and well-defined processes, utilising an appropriate level of technology.  

 

Any amendments to the contract should be logged and communicated on a timely basis.

 

Once a contract has been agreed and signed, the work commences in earnest, as is it a schedule of activities and responsibilities which must be adhered to.

Relationship Management

It is important that the contract manager clearly understands their role and the role of others involved, as they are responsible for maintaining effective relationships that enable delivery.  Internal and supplier-side roles should also be clear to those responsible, which should be reinforced through regular structured (as well as less formal) communication.

 

Dispute resolution processes and remedies should be unambiguously defined and used to ensure problems are dealt with effectively at the earliest opportunity, and there should be a mechanism for feedback from the supplier on the client performance to aid early recognition of potential issues that can then be resolved.

 

It should be realised that the skills needed to manage the relationship might be different to those needed to perform or deliver the contract, so if necessary, be prepared to train existing staff.

Performance Management

Performance Management needs to be structured.

 

At the outset of the contract, a framework should be in place that includes details of all Service Level Agreements (SLAs), Key Performance Indicators (KPIs), the metrics or criteria that will be used, the reporting (reports on what, when, responsibility for production of, delivery of), processes for problem resolution, escalation, all contact points, the invoicing and payment process, a full explanation of how Liquidated Damages are set against contract breaches or service failure, how improved efficiencies and improvements are assessed and rewarded, and formal performance reviews; a comprehensive, objective outline of the contract milestones, showing how your suppliers performance will be measured against them.

Payment and Incentives

Payment and Incentive terms will of course be negotiated as part of the contract, and failure to pay on time - as with any other term in the contract that is not fulfilled - is a breach of contract.

 

Particularly with high value contracts, if time is of the essence with payments, e.g. staged payments in a construction project, and the client is late, this could be considered a material breach of contract. This is where one party fails to perform a major part of the contract, which means the non-breaching party is no longer obligated to fulfil the contract.

 

The legal position is the same when incentives are built into contracts, e.g. for improvements in performance, but furthermore, non-payment in these circumstances could have the opposite effect with a supplier, and dis-incentivise them to improve.

 

If you do not have the authority to ensure payments are on time, do not negotiate payment terms - involve someone with authority to do so in the contract process (see Stakeholders).

Risk and Resilience

The CIPS Resilience Tool asks general questions designed to stimulate thinking around the resilience of your organisation - access the tool here, and on completion, consider what additional responsibilities you might wish to share with your suppliers, and include in contract negotiations.

 

Generally, this means considering what obligations and remedies you can share with your supplier to mitigate risk in order to ensure resilience in the areas of legal compliance, Government-level disruption in the market, corporate ethics, geographical risk, functional risk, performance risk, and technical risk, particularly cyber interactions between your two organisations.

Contract Development

During the course of any contract, things will change.

 

Perhaps something in the external environment will affect you, a change at governmental or legislative level, or perhaps a new disruptive technology or process suddenly becomes widespread, or a change in your project dependencies mean you have to suddenly adapt to new or altered criteria.

 

Whether the change is outside your control or not, all changes require proper and effective handling. This means regularly reviewing the contract from start to finish, to identify, and ensure, that the ripple effect of any change is understood throughout the contract (e.g. the effect on staged, or performance-related payments).

 

Change in project scope will require sign-off at the appropriate authority level, and will need communicating to stakeholders; changes are not something to keep under wraps.

Supplier Development

As a minimum, the supplier should deliver the contract you have agreed, but ideally, as they're doing so, you would like the supplier to develop efficiencies that will bring additional benefit to the contract, such as time and cost savings, or improvements in quality, 

 

To this end, on an ongoing basis, you should be collaborating with your supplier on Continuous Improvement activities, such as looking for cheaper or more sustainable materials with the same or better properties as the ones you currently use, or looking at manufacturing flow to identify potential bottlenecks, and working on plans to remove them.

Supplier Relationship Management (SRM)

SRM helps to create the right relationship and environment in which to work on new developments and evaluate the option of streamlining processes. The ultimate goal is to realise efficiencies which will add value and increase the organisations profitability. Having the right relationship with a supplier may be the difference between being first to market with a new concept or in a difficult supply market ensuring you have continuity of supply and reducing your risk.

Exit and Termination

You cannot think about your exit from a contract too soon in the overall process; in many ways, this is the 'vision' for what you wish to achieve at the end of the project.  

 

Of course, the project should complete on-time, to budget, and all stakeholders satisfied, but how do you recognise this state? You need a sign-off procedure agreed in advance, with clear criteria, including e.g. assignment of goods, which may be tied to a final payment.  You need stakeholder acceptance, which should be formalised if necessary, and a dispute resolution process in place.  

 

And if one of the goals of project-success is continuity to a second phase with the same supplier, dependencies, and outline agreement should be reached at the beginning of the first phase, not left until the end of a project; a succesful exit is well-planned.

Asset Management

Over time assessments will be carried out on whether the business requirements have changed, and whether the agreement is still required and fit for purpose. Lessons learnt from the process and how these can be incorporated to improve the process next time, should be captured.

 

This cycle then begins again.

 

End of life costs should also be calculated to consider decommissioning, removal or disposal processes. See tools – whole life costing model.

 

(This is stage 13 in the Procurement Cycle)

Procurement Environment

As an organisation, procurement structures vary depending on the culture and structure of the organisation.

 

The structure of the team whether this be centralised, decentralised or hybrid structure on a local and/or global level, should be aligned to deliver both the procurement and organisation strategy. This structure will enable the procurement process to run effectively.

External Environment

A business does not exist in isolation and can be influenced by other factors outside of their control; this is typically referred to as their ‘external environment’.

 

The external environment consists of competitors, the economic, social, monetary system and the political/legal system and affects all parts of the procurement cycle.

Risk Assessment/Mitigation

During various stages of the procurement cycle you should understand the risks that can impact an organisation and implement strategies to mitigate and manage those risks effectively.

Sustainability/CSR/ Ethics

In addition to traditional economic criteria such as price and quality items such as social, economic and environmental factors should be considered to ensure a sustainable solution when procuring products and services.

 

Sustainable procurement helps organisations to eliminate waste, become more energy efficient, ensure security of supply, and often results in long-term savings. Corporate Social Responsibility is a way of ensuring that the business monitors its compliance with the law and industry standards and how business processes can be managed to provide a positive impact on society.

Procurement Cycle

The Procurement cycle is the cyclical process of key steps when procuring goods or services.

 

CIPS developed this interactive tool to guide members through the procurement process with links to relevant knowledge to support you through the procurement journey.  You will need to be a member to access all Knowledge links.

Category Management

Category Management is a strategic approach which organises procurement resources to focus on specific areas of spends. This enables category managers to focus their time and conduct in depth market analysis to fully leverage their procurement decisions on behalf of the whole organisation. The results can be significantly greater than traditional transactional based purchasing methods.

eSystems and Processes

eCommerce systems including E-Sourcing and E-Procurement are widely used by organisations to buy and sell products, and can utilise technologies such as mobile commerce, electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems and automated data collection systems.

Strategy and Policy

A procurement policy refers to a statement or set of guiding rules or principles covering how procurement should be managed within an organisation.

 

A procurement strategy is an action plan from which the direction of resources will be organised and utilised to implement that policy and achieve the desired objectives.

 

There are a number of related topics, best practice guides and white papers surrounding strategy and policy that can be accessed via the link below.