Contract killer

A good contract can make or break a project but, as Dr Jon Broome of Leading Edge Projects Consulting reveals, many project managers neglect this aspect of the delivery process.

In order to be successfully delivered, many projects have to contract out most of the deliverables to another party, as the client does not have the capability, capacity or technology rights to deliver it themselves. As a project manager, doesnt it therefore make sense to have the ability to project manage this outsourced work?

Take two high profile examples:

• Wembley Stadium was let on a lump sum hands off basis with the majority of risk, in theory, transferred to the contractor. How successful was that approach?
• Heathrows Terminal 5 adopted the alternative approach with a hands on, but not interfering client. Ignoring the handover fiasco, how many 2.5bn projects do you know of that come in to their time and cost objectives (and within a couple of months, their performance objectives as well)?

Risk

Many traditional conditions focus on administrating what has happened, with good project management being something you do over and above that of the contract requirements. This contrasts with managing what may happen. To illustrate the difference, when a clients risk occurs:

• Good administration might be where you note it and agree that it is clients risk, record extra resources used and then retrospectively work out and agree the time and cost entitlement based on those records.
• Good management could mean that you had already identified it as a risk with some outline mitigating actions allocated to both you and the supplier (be they contractor, consultant, outsourcing / term service provider or manufacturer). When it appears that it is likely to happen, you have early warning of this change, you develop the specifics of how you will manage it to minimise the impact on your objectives, and ideally pre-assess and agree any additional time and cost entitlement.

Contract features that promote good project management could include:

• A named individual who is empowered under the contract to manage the sub-project/ contract on the clients behalf. Consequently, he or she can be held more accountable for delivery.
• A much more detailed and regularly updated programme, which shows the contributions of each party. 
• An active and updated risk register, with actions against each risk.
• An early warning procedure where both parties have an obligation to notify the other of emerging threats.
• Clearer Yes or No definitions of client risks, so that the parties can much more rapidly agree whos risk it is in order for the party who owns the risk to then lead the management of it (as opposed to fighting over ownership).
• More explicit, less subjective criteria for the evaluation of these client risks based upon the current contractual programme.
• Explicit maximum timescales for all actions, as opposed to the typical within a reasonable time of traditional contracts.

In order for the contractor to do these things, it would be good if there were meaningful sanctions or incentives within the contract. For instance, you could write in that until the supplier provides a programme which contains the information required, a quarter of money owed can be withheld.

Clarity

Part of the reason why contractual disputes occur is because the doers engineers, project managers, technicians etc find the legal conditions of the contract so daunting. Consequently, they put them in the drawer and attempt to resolve problems amicably between themselves without reference to the contract.

In my experience this works up to a point. However, when serious big issues occur, the contract conditions are taken out of the drawer too late and the parties use it to retrospectively whack each other over the head with it saying you didnt do this to which the other responds well, you didnt do that. Ultimately, it is only the lawyers (who often wrote or amended the original contract) who benefit. Why is this?

I would argue that it is because traditional standard conditions of contract are to varying degrees: long winded, poorly structured and poorly written in verbose legalese, which creates ambiguity and inconsistency in interpretation.

Consequently, the contract conditions are a project risk in themselves!

Wouldnt it be good, therefore, if the standard conditions of the contract were shorter in length (say about a third of the length of traditional contracts) well structured and written in plain English? And wouldnt it be good if there was a family of contracts that applied across all disciplines, useful for project managers working in any industry sector, from engineering and construction through to IT?

A flexible contract form

The New Engineering Contract NEC was first published in 1993 as a single, but very flexible form of contract for engineering and construction projects. It has been used widely and is now the dominant form of contract in the UK for highway transportation and water, as well as being used widely in the power, nuclear and building sectors. While it is not perfect and has its detractors mainly those with a very traditional legalistic mindset it is a proven form.

Now, in its third edition, the NEC3 is a family of contracts which can be used, with little modification, in virtually all sectors for virtually all types of procurement, ranging from that of simple commodities to major projects and outsourcing arrangements. These include:

• A Professional Services Contract (PSC) for the management of contracted-out professional services.
• A Term Services Contract (TSC) for the outsourcing of any services including IT outsourcing (although it does need a little amending for performance specifications).
• A Supply Contract for the provision of manufactured goods made specifically for your project, regardless of whether it is the client or manufacturer doing the design.
• A Framework Contract for both project based packages of works and services or for call-off type arrangements for commodities. It provides the over-arching framework for a commercial relationship over a period of time, with each package or arrangement being contracted under one of the other members of the family.

All these contracts have the same project management features embedded into them and are written to the same principles of clarity. Consequently, if there is not a specific back-to-back sub-contract, then with very little amending, the supplier be they contractor, consultant, outsourcing/term service provider or manufacturer can gain the same advantages with their supply chain.

From a project managers perspective the main advantage of NEC3 is the Stimulus to Good Management. This allows project managers to really project manage contracts, as opposed to just administrate them and hope everything turns out alright. Consequently, it significantly enhances (but does not guarantee) the likelihood of projects being delivered to their time, cost and performance objectives.

Wouldnt you, as a project manager in any discipline, like to be in this position?

• Dr Jon Broome, MAPM, is managing consultant for Leading Edge Projects Consulting Ltd and chair of the APMs Contracts & Procurement SIG. For more information, including a fuller version of this article, contact Jon on +44 7970 429 929 on jon@leadingedgeprojects.co.uk
• Note : Over the next year, the Contracts & Procurement SIG will be running three evening sessions to raise awareness of the potential benefits (and drawbacks) of the NEC3 family of contracts.