Introduction
A contract can be defined as an agreement that legally binds parties which are mentioned in the agreement. It requires that the parties in the agreement comply with its terms. The agreement can be either written or oral. However, most contracts are written to avoid disputes between parties in future transactions. Contracts assist organizations in the provision of quality services to their clients. A contract has to be managed systematically to make sure that the maximum value of an organization is achieved from any business deal (Lall, 2000). The pressure experienced by private and public organizations in minimizing losses and upgrading their operational and monetary performance is on the increase.
This pressure has been brought about by the changes in the sector of trade and technology in the years following the World War II. These changes have simultaneously affected the United States’ production and employment sectors as shown in the work of Kenneth Dau-Schmidt titled, “Employment in the new age of trade and technology: Implications of labor and employment law”. The emergence of globalization and technological advancements has changed the labor model from long-term to short term (Dau-Schmidt, 2001). The short-term model is administered by the international labor market while the internal labor market administers the long term one.
The change in employment relationships brings about alterations in the policies of labor and the laws of employment (Reading, 2005). The new economic “environment” has reduced the popularity of long term employment. The threat of fixed investments like “on-the-job trainings” continues because of increased competitiveness of organizations. Organizations have been compelled to shift their attention to key interest areas. Most of them prefer retaining their “core” employees who may be in the top management. These employees may probably be the most skilled in their organizations (Wit & Meyer, 2010).
Contract management in the international spot labor market
The international spot market advocates that labor should be viewed as a commodity. This aspect may mean that employers should only hire the needed skills at a given time. The constant changes in employees’ incomes can bring about a rise in the expenditure of evaluation and monitoring. The changes may pose a risk to the human investment by employers (John, 2010). Schmidt argues that employers may be unwilling to pay for their employees’ training because the latter may not stay long enough for the employer to recover his “investment”. Contract management solves this problem by binding the trained employee to the employer for a given period of time.
During this time, the employer gets the opportunity to “regain” his investment and offer the employee a chance to improve his productivity. The spot market poses a threat to an organization’s corporate “secrets” as one employee may move from one organization to another. Contract management has developed to ensure that the employees of a given company do not divulge the company’s secrets to another. This fact ensures that the employees’ freedom of movement is not violated and that the company’s secrets are protected. The new economic “environment” may not encourage employers to offer benefits to short term employment in a similar manner as the long term one.
Schmidt concedes that the employees may be in a position to negotiate for preferred benefits and promotions only when their skills are in high demand. Negotiations during the contract management offer the employees a chance to bargain and settle on a mutual deal. The threat of litigation on the basis of defamation discourages employers who give their employees references on the international market labor. Many employers fear providing their employees with a lot of information about themselves lest the workers use the information against their employers especially in court cases. As a result, potential employers have turned to other means of evaluating and monitoring prospective employees.
However, certain methods of evaluation have been viewed as violating the privacy of the employees.
A new method of managing contracts
It is usually the responsibility of an organization to ensure that the contracts it makes with its employees, clients and suppliers are managed effectively. Contract management involves activities like contract terms’ negotiation, compliance assurance and consenting and recording of all changes that may occur in the execution process. In other words, it is the effective and methodical practice of administering a contract from its conception, implementation and review to ensure the minimization of operational and monetary risks. Contract management limits these risks through the official recording of agreements, disagreements, changes, additions, omissions and contract termination grounds. It also offers a framework that supports an organization and maintenance of a positive work relationship with its contract parties.
Contract management includes requirements for accomplishment of contract goals, its control and time framework and compensation plans for compliance or non-compliance situations. An important element of contract management is the regulation of risks and their mitigation. The owner of a business can choose between taking responsibility of managing contracts and using the services of contract management firms.
This aspect is advantageous because it ensures reliability and professionalism as opposed to internal employees who may leave at any time. The continuity of the business is assured because even when the third party undergoes internal changes, it can still provide the services as required. The disadvantage of using a third party is that one’s privacy can be compromised because it can gain access to agreements that the business has made with other parties. The third party may also gain access to the records of employees and the owner’s financial records. This loss of privacy increases the chances of public “exposure”, ethical violations and other crimes.
Contract management has in the past proved to be “problematic” because it usually lacks transparent processes. Organizations can now implement the use of the contract management software for the administration of the life cycle of a contract. Certain organizations also issue contract management handbooks which give details on contract management procedures. A contract management handbook can be brief or extensive depending on the size and nature of the organization. These manuals can be issued externally or internally for the benefit of potential contractors (Purchase and procurement center, 2013). Contract management handbook essentials include:
The executive summary
This section outlines what the handbook contains. It can be in a single page or two. It is usually useful for those at the top of the administration who may not have adequate time to read the entire document.
- The introduction
- This aspect includes the organization’s details, the process’ outline and a list of individuals in charge of the process.
- The aims
- Here, the objectives of the division of contract management are stated.
- The contract strategy
- This fact includes the work plan that the organization ought to follow.
- The service delivery management
- This aspect explains how the organization can make sure that the parties comply with the terms and conditions of the contract.
- The contract administration
- This section describes the control actions of the contract.
- The relationship management
- This section shows the management of the organization-contractor relationship to ensure an open and productive environment.
- Managing change
- This aspect describes the management of any changes that might occur in the implementation of a contract like a default or under performance by one of the parties.
- Addition of contracts
- Here, the creation of a new contract is explained.
- Appendices
- This section includes acknowledgements and the description of certain terms used in the manual. The success of a contract management depends on the willingness and satisfaction of both parties in the agreement, the achievement of the anticipated benefits and the worth of money among other factors. The activities involved in a contract management cycle include planning, contract creation, negotiation, acceptance, amendment, measurement, auditing and renewal as discussed below.
Orientation
The department in charge of contract management should hold a meeting and prepare a business case after getting the approval of the top management. The business case must reflect the strategies of the company and ascertain that the contract will be of benefit to the organization. It should define the plan, contract and the organization’s purpose. It should include the anticipated contract results, the extent of potential risks, the operation timeframe and other factors. After the implementation of the contract, the business case can be used to review or to confirm if the contract results are achieved as anticipated. A top management representative should be present in the meeting if possible.
Personnel
The organization should establish the complexity, level, importance of the implementation of the contract and then allocate the contract management duties. The identified person or team should have the necessary skills and expertise in the field of contract management. They can be chosen from various departments of the organization including legal, finance and quality control. The organization can undertake to train these members if it feels the need to do so. An internal or external “end user” and supplier representative can also be among the personnel.
Planning
The responsible team should develop a comprehensive plan that can facilitate the contract management implementation. This plan ought to ensure that the implementation is cost-effective, achievable and timely. It should include the person responsible for each duty and the task completion timeframe. The formal documentation of the contract management process should ensure accountability. A contract plan facilitates the creation of the contract and its authentication. It also establishes the management approach and form that the organization can implement in the management of the contract and relationships and delivery of service.
An evaluation policy should be included in the contract strategy for the purpose of the supplier evaluation. This evaluation policy should include requirement priority, communication plans, assessment process and methodology, in addition to the evaluation personnel. The plan should state whether service level agreements (SLAs) may be used in the management of the contract. The SLAs are agreements that may be usually discussed to develop a mutual understanding of the duties, services and priorities of the contract. They facilitate the client’s supervision and control of the supplier’s performance against the standards established by the contracting parties.
The planning process also includes the risk management strategy which entails identifying potential risks and creating measures to deal with risks. These risks pose a threat to the success of the contract and may include financial problems, changes in demand, lack of capability on the supplier’s part and others. After the risks have been identified, the measures put into place should serve to mitigate their impact or remove them completely. The purpose of risk management is to minimize litigation, ensure none of the parties are unduly rewarded and compliance by both parties. The risk management team should conduct a risk analysis to identify all matters that might possibly go wrong and their probability of happening. A risk assessment should then be carried out to evaluate the probable “impact” that the risk may have on the business.
Certain risks like the high probability ones usually have low impacts and hence they do not necessitate control actions. However, the low probability threats tend to have considerable impacts and should be properly managed. Finally, after the assessment, a risk mitigation strategy should be developed to control those threats that require “action”. The plan should include a contract exit policy which identifies situations in which an early contract termination may be necessary (Jerome & Carimentrand, 2010). An example of the situation might be a default by either of the parties in the contract. The exit strategy should include each party’s accountabilities and rights and how the “damages” might be reduced and compensation policies.
Contract authorship
The creation of the contract begins when the organization is prepared to receive both products and services’ “offers” or appoint new employees. This fact means that the organization should be ready to “enter” into new contracts. The organization usually formulates the contract founded on the most appropriate terms of the agreement. The conditions might be in accordance with the law like minimum wage or particulars of the agreement. It is usually advisable to seek legal advice when drafting contracts to certify their language validity and accuracy.
Negotiation
Negotiations are conducted to ensure that the deal concluded is the best for both parties. They might be carried out together with the formulation of the contract or afterwards. During the negotiation stage, each party provides the other with an offer that may benefit it like a service for payment. One party may get professional services while the other may acquire capital. The terms and conditions should be discussed by the two parties. The parties should agree based on mutual understanding.
The “bargain” between contract parties is a requirement of the law of contract. It is at this stage that the concerns of both parties are addressed. At times, this stage can be “frustrating” if one party or both are not satisfied with the agreement.
Acceptance
After the negotiations, the parties can decide to accept the contract or reject it. If they choose to accept and are awarded the contract, they can then perform what is known as an execution. In a written contract, the execution is the signing of the contract which is usually done in the presence of a “witness”. The execution of a verbal contract is signified by the issuance of payment for either the service or the product (Cowell, 2006).
Acceptance means that the agreement has met all the requirements of both parties.
Ensuring compliance
The organization should ensure that the conditions agreed upon in the contract are fulfilled by all the parties. In the event of a breach of contract which means failure to comply by one party, the other can take legal action. This aspect is a very important part of contract management as it can determine the success or failure of the contract implementation (Bradley, 2013). The organization should establish the standards of the contract management like accuracy in the documentation of the contract from its formation to implementation in addition to the changes. These standards facilitate the evaluation of the contract management’s “efficiency” in a business.
An organization should make sure that both the standards and methodology are communicated to all the parties. The parts of the performance measures should include the service level agreements. However, these measures should be used as performance improvement methods instead of control methods.
Change management in the contracts
Alterations in contracts are almost unavoidable. Occasions might arise that require changes to be made in the agreements stated in the contract. The implications of the changes should be understood by all parties because they may affect the viability of the contract. It is the responsibility of the organization to ensure that the “value of money” is maintained in case any changes are experienced (Boardman, 2006). These changes should be seen as “opportunities” for the organization to improve the performance of the contract rather than as obstacles. Certain changes may be caused by technological advancements, economical developments and market dynamics.
In the event that only one of the parties may need the change, it should give the other a notice period. This notice period is not only the other party’s right but also shows “fairness”. The changes undertaken without a notice period may be viewed as a breach of contract (Begg, Fischer & Dornbusch, 2000). They may then be used as a basis for the termination of a contract by the other party and litigation. The organization has to document any alteration made to the contract.
Auditing
Contract management requires the periodic auditing of contracts. The audits can be performed yearly, semi-annually or quarterly. During an audit, an organization should evaluate the benefits and losses acquired from the contract against the expected outcomes. The audit should also check for the compliance of the parties against standards set in the organization’s contract audit. Organizations can then use the information gathered during the process to prepare a report which can “account” for the contract’s budget. Lessons can be gathered from the “post contract” review on how to minimize losses and increase the benefits in future (Armson & Ison, 2003).
Contract renewal
Contracts are concluded after each of the parties has fulfilled its “duties”. The conclusion can be evidenced by the signatures of both parties. The organization can decide to renew or extend the contract after its termination if it needs to retain the supplier. The contract life-cycle management should be repeated to ensure that all the agreements are clear to all the parties involved (Alberts, Audrey& Lisa, 2008). Terms should be set during the planning stage to include a “negotiation” timeframe for the new agreements in the renewal or extension of a contract. The timeframe serves to ensure continuity of the business. A time limit should be set for the negotiations so that in the event that the parties fail to agree, the organization can have time to source for new contractors.
Conclusion
Organizations in the US are influenced by the changes in the market. The companies adapt to a spot market so that they do not have to retain employees when their skills are no longer needed (Dau-Schmidt, 2001). The increase of outsourcing in the US has brought about a lot of changes in the economic environment but very few people realize its impact on the non-core skills.In the recent past, many “turn-key” suppliers have emerged (Akhikshwar, 2008).
These suppliers have expanded their activities and increased their competence to meet the high outsourcing demands of organizations. The expansions facilitate their services’ provision without the help of established suppliers. The high demand and increased competition have ensured that the suppliers improve on their performance. High outsourcing demands that are caused by globalization have increased the quantity of contracts and complicated them.
This fact has raised the value of efficient management of contracts in addition to the acknowledgment of their benefits. Technological advancements have not only led to the emergence of a “global” economy but also changes in management techniques (Akerlof, 2003). New requirements in regulations have emerged as a result of the evolution in the information and communication sectors. Ineffective management of a contract can have serious impacts on the organization including lawsuits, loss of revenue and lack of visibility. Contract management should be used as a method of securing the best “value for money” for an organization and not as a means of transferring risks to suppliers.
It has also been noted that despite the advancements in the information and communication sector, a number of organizations still rely on manual methods of contract management. These methods contribute to the poor assessment and monitoring of the parties’ compliance. The solution to this challenge lies in the use of contract management software programs that can facilitate the administration of contracts and the management of the relationships.
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