Wednesday, November 9, 2011

The Importance of Managing a Project According to the Contract

One of the keys to a successful project is to manage it according to the terms of the contract.  While that may sound like an obvious statement, it doesn't always happen.  

Purpose of Contracts:  Instead, once the contract is signed, it is often put on the shelf never to be referred to again - unless there are claims and disputes.  But the contract and referenced provisions represent the agreement between the parties for performance and payment.  It serves as the basis for bidding or negotiation of costs.  It allocates the risk between the parties.  And it serves as the guide for both parties in making decisions and managing disagreements.

Why Contracts Aren't Enforced:  Over the years, I've observed that some public agency project managers are hesitant to enforce contract terms.  I think this happens for a couple of reasons:

Knowing the Contract:  Project managers sometimes don't manage according to the terms of the contract because they don't have a good understanding of the contract.  An agency's legal and procurement/contracting personnel may have developed a strong contract, but if the project manager doesn't know the contract's provisions and the protections it affords the agency, the agency looses a major tool for ensuring a successful project.  Public agencies should:
  • Update:  Regularly review and update their standard contracts.  This process should involve attorneys, procurement/contracting personnel, and project managers - those who will be responsible for actually managing projects based on the contract provisions.
  • Train:  Establish a regular and systematic training program for those who interact with contractors, consultants, and vendors to ensure they fully understand the terms of the standard contract.  
Managing according to the contract is an important part of managing the project.  They go hand in hand.

Keeping the Relationship Professional:  Project managers are sometimes hesitant to enforce contractual terms because of their desire to maintain an effective working relationship with the contractor.  There is a misguided concern that an adversarial relationship will be created with the contractor if the agency enforces the terms of the contract.  So a project manager may not review pay requests before approval, may approve payments that are inconsistent with the rates or terms of the contract, may not require documentation of proposed change order costs, may accept change order costs without review and negotiation, or may approve work that doesn't meet the standards described in the contract.  

The following are some of the consequences of not managing according to the contract:
  • Cost:  The agency may pay more than what was bid, or more than what is authorized by the contract.
  • Performance:  The contractor's performance may not be consistent with the agency's needs as described in the contract.
  • Risk:  The allocation of risk between the contractor and the agency may be shifted by decisions made outside of the contract - something that undermines the integrity of the competitive bidding process and ultimately affects costs to an agency.
  • Audits:  The agency may receive audit findings for not managing the project according to the contract, and not controlling costs.
Risks of Shifting Allegiances:  Establishing a cooperative working relationship with the contractor is important.  But the nature of the relationship is that it should be based on business and contractual terms, not personal or professional friendship.  When public employees begin to shift their allegiance from their agency and the mandates of the contract to the contractor because of a desire to be friends with the contractor, or a hesitancy to confront business disagreements - a dangerous line is crossed.  

Working for a public agency is different than working for a private business.  As steward's of the public's money, public employees have a higher standard for ensuring that the terms of the contract are met. 

Cooperation and Compliance:  It is possible to both cooperate with the contractor and ensure that the terms of the contract are met.  But it takes an understanding of the contract, an understanding of the proper role of the project manager, and a willingness to agreeably disagree with the contractor in order to protect the public's interests.
Mike Purdy's Public Contracting Blog 
© 2011 by Michael E. Purdy Associates, LLC

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