Best Practices for Effective Contract Management

Best Practices for an Effective Contract-Management Strategy

Introduction

Contract management is the process of actively monitoring and controlling the contract between a procuring entity and the contractor to ensure delivery of a reliable and cost-effective service (Muhwezi & Ahimibisibwe, 2015). Effective contract management helps to lower the factor of risk and uncertainty, and to enhance both financial optimization and operational efficiency (Muhammad et al., 2019).

Poor contracting management could result in huge losses for the procuring entity. According to a survey by the Global Contract Management Association (IACCM), the average cost of poor contracting, as evidenced by missed milestones and slow negotiations, is 9 percent of an organization’s annual income and up to 15 percent of the contract value for large capital projects (IACCM, 2019). Most of these revenue losses can be avoided through improved contract management (IACCM, 2019).

Background to the Study

In April 2000, Congress began to take steps to address service contracting challenges by lobbying for the increased use of performance-based service contracts for all government contracts (Cooper, 2001). A performance-based contract describes the government’s requirements in terms of measurable outcomes and desired results for contracted work (Cooper, 2001). Consequently, the Procurement Executive Council, a senior coordinating body comprised of officials drawn from over 20 federal agencies, established a goal that by 2005, more than 50 percent of service contracts will be performance-based (Cooper, 2001). In May 2001, Congress passed the Federal Acquisition Regulation, which established a preference for using performance-based contracting when acquiring services. These changes marked the beginning of a growing interest in contract-management practices in both the public and private sectors.

Literature Review

Researchers have conducted multiple studies to determine the best practices for effective contract-management. Muhammad et al. (2019), for instance, sought to examine the relationship between contract management and performance characteristics using a sample of 100 professionals drawn from the fields of project management, architecture, engineering, and quantity surveying, among others. The study findings showed that contract length had a significant, but negative effect on project quality (Muhammad et al., 2019). The study also found effective dispute resolution between the contracting parties and mutual acceptance for the product or service to be significant influencers of project quality in contracted works (Muhammad et al., 2019).

These findings were replicated in another study by Muhwezi & Ahimibisibwe (2015), which found that the quality of a project depends on the nature of interactions between contract management teams and contractors of the disposing and procuring agencies. For this reason, the study concluded that one way to improve contractual engagement in public procurement is by adjusting laws to allow reasonable interaction between the disposing and procuring entities (Muhwezi & Ahimibisibwe, 2015). A similar finding was reported in yet another study by Komakech (2021), which sought to examine the relationship between contract management and service delivery at a local jurisdiction in Uganda, East Africa. The study found that contract management was more effective when there was good communication between the contracting entities, prompt resolution of disputes, and regular reviews to ensure continuous improvement (Komakech, 2021).

Findings

The review of literature identifies several factors that could have a significant influence on the effectiveness of an entity’s contract-management strategy. These include contract length, the degree of acceptability of the product/service by both parties, the effectiveness of the dispute-resolution mechanism, the nature of communication/interaction between the contract parties, and frequency of compliance reviews. Contract-management is likely to be more effective if the contract is awarded an optimum timeframe that is not unnecessarily long, if the product/service is acceptable to both parties, if disputes among parties are resolved promptly, and if there is constant, positive interaction and communication between the parties. Of these, regular interaction or communication emerges as the salient theme and the most significant determinant of the success or failure of an entity’s contract-management strategy.