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Viewpoint - Poor focus leads to bad contracts

AGENDA - Inadequate contract management is costing millions, writes Greg Russell

WHETHER it's your mortgage or an insurance policy would you enter into a contract without fully understanding the clauses or having a specialist review them for you? So why does the construction industry continue to do just that?

Every year the industry loses millions because of poor contract management. The figure is estimated to be over £500 million. But why is this happening?

The story is depressingly familiar. A contractor competitively bids for a contract, paying particular attention to time and costs. The contract itself concentrates on the terms and scope of the project but fails to provide clarity as to how the parties will manage and adm inister the scheme during const ruct ion.

This results in misunderstandings, ambiguities, miscommunications and failure to meet the contract requirements ? a fatal error in an industry where profit margins are tight.

Back in the real world the contractor is delayed, notices for time extensions and associated costs may be submitted in accordance with the contractual requirements but the real reasons for delays and necessary mitigation measures are subsumed by arguments, leaving contractors to face the contractual consequences of late delivery and cost overrun.

With such huge figures at stake, why has there been a reluctance to change the way the industry conducts itself? The answer is clear ? a failure to understand the contract, its mechanisms and the defined obligations and liabilities.

As one of the largest specialist consultancies in the field of contract management and procurement, we see the results of this at first hand.

The situation is compounded by the fact that few contractors focus the necessary attention, processes and resources on anticipating and preventing such problems.

This is about actual results at grassroots level. One client with which we work invested £100,000 on contract management and consultancy. This was spread over 20 contracts and identified a staggering £5 million of additional revenue.

Far from reverting to a focus on cost-cutting, stringent contract management releases funds for future investment and ensures that disputes do not hamper the delivery of an essential project.

With the London Olympics looming, the issue of contract management will become all too poignant.

Immovable deadlines and tight budget restrictions will see the industry under pressure to deliver. And pressure often result in disputes ? disputes that could be easily solved or avoided if the liabilities, obligations and contract management requirements are fully understood from the outset.

Contract implementation problems usually have their genesis in the tender stage and the challenge lies with contractors to ensure they understand how the contract conditions are to be practically applied. An early and informed understanding of liabilities and responsibilities and the implementation of effective contract management processes is the best and only way forward from this.

As an industry, construction has made significant steps forward over recent years, with greater focus on whole-life value, partnering and supply chain management. It is disappointing at best that something as basic as poor contract management continues to hamper these efforts.