Contract Management Fundamentals: The Value for Every Project Manager

This guest post is by Rick Graham, an instructor at ESI International.
Ford Motor Corporation built the largest industrial complex in the world along the banks of Rouge River in Dearborn (Michigan) between the late 1910s to early 1920s. Henry Ford’s vision for mass production included the creation of the first production lines and the centralization of the entire production chain. Great Lakes steamers and railroads brought iron ore and coal in, and iron ore was melted to make iron. Steel was then made. Forges, rolling mills, and assembly workshops transformed the steel into springs and axles. Foundries poured molten metal to make engine blocks and heads. The windscreens were made by a huge glass factory. The most basic raw materials were brought in, cars were rolled out. Ford owned the entire lot and had no suppliers or contracts.
Now, we are in the 21st century. A French company has been awarded a contract to build a tram system in a major Australian city. A subcontractor in France will produce the 2D drawings, while a contractor in Brazil will create the 3D drawings. Production will be contracted to four companies in the EU and UK. The software will be customized by a Chinese company.
Companies cannot do everything themselves or can’t afford to do so. Most major companies rely on a wide variety of suppliers for materials and services. BP is an example of a large company in the UK, with a turnover of $239 billion in 2008. More than 80% of their total spending was on contracted goods, and services in the same year. Rolls-Royce is in a similar situation, with more than 60 suppliers of pre-assembled module from Spain to Japan providing components for the Trent series jet engines. They are assembled in Derby, UK.
What has changed over the past 100 years? Technology is becoming more complex with many components, greater specialization beyond the economic competence any one company can afford, ever decreasing competition, a shrinking global market in terms of suppliers and customers, and tighter timeframes and margins. User requirements have become more complex and harder to define, especially in software-based systems.
It is common belief that contract management is only of interest to lawyers and commercial departments. The lawyers must protect the company’s rights, while the commercial specialists must ensure compliance with competition and/or procurement laws.
Not necessarily! This is a common misconception about the fundamental importance contract management and formation. Companies that contract for the provision of goods or services run the risk of being sued. Fundamentally, risk increases because it is more difficult to communicate with the supplier what the customer requires. It is easy to tell the supplier that the contract is for digging a hole, but it is much more difficult if the requirement is for a new customer relationship management software.
The goal of any contract development is to have clear understandings on both sides of what they will do and a fair balance of risk and opportunity. Contract management has a similar objective: to ensure compliance with the contract.
It’s easy to do, but it can be difficult. If you want to achieve your business and project objectives in a competitive environment, contract management skills are essential.
What does this all mean for project managers and business managers today? Managers must be familiar with procurement and contracts. The manager of today must be familiar with procurement and contracts.