Understanding the risks associated with contract

Project and contract management are paramount to the implementation of projects within the budget, timelines and specified quality.

PURCHASING & SUPPLY NYASHA CHIZU

Project management involves the control of the physical activities on the project, whereas contract management is the administrative control of the project.

Both work hand-in-glove in that the project manager certifies work done for the contract manager to establish the rights and obligations of parties under the arrangements.

Many institutions value project management, since it delivers tangible results at the peril of contract management that allocates obligations of parties.

Contracts have warranty and conditions that need to be managed. Conditions are pledges or promises that go to the root of a contract. They are terms that if they are not complied with, the contract cannot proceed.

On the other hand, warrantees are terms that will not materially affect the performance of the contract, but attract some form of penalties in the event of a breach.

The role of the contract manager is to ensure that parties adhere to all terms and conditions of the contract and apply appropriate penalties when there is breach of a warranty.

Conditions of a contract include issues such as performance security, which the winning supplier is expected to furnish the procuring entity within a specified period.

Performance security is normally 10% of the contract value that will be discharged by the purchaser and returned to the supplier not later than 90 days following the date of arrival of final instalment of goods or services as agreed in the contract.

If a contractor fails to furnish the performance bond, which will be a condition of the contract, the contract becomes invalid.


Some contracts require advance payment and some specify a requirement of advance payment guarantee issued by credible financial institutions.

An advance payment guarantee is normally equivalent to the pro-forma invoice amount issued by the supplier and does not have to be the total contract value where part payments are being executed.

Failure to furnish an advance payment guarantee under the conditions specified by the purchasers may stall the release of the payment until such time the condition is met.

This may also lead to cancellation of a contract if the conditions are not met within the agreed timelines.

Inspection and testing requirements on projects is another condition of a contract that need to be effectively managed since it has implications on the quality of the project.

The contract must be specific as to the means by which the suppliers notify the contractor on the availability of the goods or the project for inspection.

The inspections could be factory acceptance tests or other physical tests that can be conducted at the contracting parties’ premises by arrangement.

Failure to comply with such requirements may lead a deadlock in the contract.

Insurance requirements could be a condition of the contract if it is the obligation of the seller or contractor to provide.

This is important to ensure that value is not unnecessarily lost in transit due to some anticipated mishaps during shipments.

Goods and works must be fully insured in a freely convertible currency against loss or damage incidental to manufacture, acquisition, transportation, storage or delivery in the manner specified in the contract.

Delays in delivery attract liquidated damages calculated as a percentage of the value of that late delivery for the specified time determined in the contract.

Liquidated damages are a warranty in a contract where the agreed sum is deducted from the invoice value at the time of payment. A similar condition applies to the purchaser, where interest on late payments is charged as a warranty to a contract.

Given the implication on the project of ineffective contract management, procurement staff require contract management skills training.

Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com Skype: nyasha.chizu

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