Tips for Contracting Businesses: Contract Management
In my last blog I looked at how to tender effectively for a contract. So now that you’ve won the contract, what things do you need to consider?
Not understanding the contract requirements can negatively impact profitability. Let’s look at an example.
Brent was the Owner Director of a non-listed contracting business with revenue of $25M. Brent’s company was struggling to get paid for significant additional works on a contract for a large listed mining company.
When Vantage Performance reviewed the contract for Brent, it was clear that Brent’s claim had not been made in accordance with the contract.
The contract stated that measures that varied +/- 20% from those in the Bill of Quantities must be agreed in writing and subject to re-pricing.
Brent’s claim had not been agreed in writing, nor re-priced. Not conforming to these two requirements enabled the client to reject the claim.
Brent discussed the matter with his client, and they have now agreed the steps Brent needs to take, to have his claim approved.
To avoid a similar situation, here are 8 tips for clients who have entered a contract:
- Hold a pre-contract meeting – Ensure it is cross-functional and that all aspects of the new contract are understood. Ensure reporting lines and responsibilities are well-documented. Establish correct procedures early, and hold people accountable to those responsibilities.
- Review and update risk analysis – Analyse and mitigate aspects of the contract that can affect your ability to complete the work profitably.
- Set a job budget – Ensure your job costing system accurately records costs against the budget. Understand and tackle immediately any variances, before your contract costs run over budget.
- Make document control water-tight – Errors caused by employees or sub-contractors working off superseded drawings can be very costly and will erode your margin. Equally, failure to track correspondence regarding potential variations may limit your ability to claim variations later.
- Get payment applications in on time – Strictly adhere to the schedules and procedures set out in the contract. If you are a day late, or submit incomplete information, your client may withhold your payments until the next application date – which in most circumstances will be a month away.
- Only accept variations in writing – Ensure all client variations are made in writing before work is undertaken. Don’t accept verbal requests. Work quickly to ensure variations are documented and agreed quickly.
- Manage sub-contractors effectively – Match their payment schedules to yours. Remember, they will be looking to variations to extract more revenue and profit from their contract with you. Work collaboratively with them but always ensure that any variations they want from you are passed on to the client.
- Invest in supervision – If your contract is under-supervised you may fail to complete the project, and you will almost certainly fail to monitor the project adequately, resulting in margin erosion. Put simply it is false economy.
By implementing the above tips, you’ll ensure your contracts are profitable.
Feel free to share additional tips in the comment section below.
David Bilclough, a Client Director with Vantage Performance, uses his experience as a Director of construction and contracting companies to improve business performance.