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Out-Law Guide 6 min. read

Effective contract management in construction projects

Effective contract management during the delivery of a project can provide substantial benefits, ranging from cost reduction, risk mitigation and improved outcomes.

However, while the benefits can be obvious, this phase of projects is often underestimated in terms of the impact, with a much greater focus placed on contract negotiation and disputes. Contract management usually concerns the submission and response to contract notices, claims and correspondence, but it also includes the administration of all processes and enforcement of all obligations and entitlements under a contract.

Determining what is required to properly administer any given contract will depend significantly on the terms of the contract, the type of project under construction and whether a party is a service provider or an end user. However, there are a number of strategies that can generally be implemented to improve a party’s contract management.

Understanding the contract

Good contract management starts with a solid understanding of the terms of the contract that a party is dealing with. While this may go without saying, if a party genuinely understands the risk allocation and contractual processes that it must abide by, it is much more likely to be able to take any steps that may become necessary throughout the project.

Understanding a contract also requires an understanding of how it operates in conjunction with any relevant legislation, such as the Security of Payment legislation, the 1991 Queensland Building and Construction Commission Act (QBCC Act) or any applicable occupational health and safety (OHS) legislation. These additional sources of law may impose additional or different obligations with which a party is required to comply.

From a practical perspective, there are a number of tips that can help to improve contract management, including:

  • ensuring that the entire team, including site and technical personnel, have an appropriate understanding of the risk allocation, at least as far as it relates to the work that they perform, to allow the identification of concerns or entitlements;
  • examining the point at which time bars start – not just the number of days they include – which is particularly important for time-related claims;
  • taking note of the way in which contractual documents and notices need to be submitted, such as email or Aconex; and
  • understanding the role each party has under the contract and the extent to which parties may need to act independently – particularly when responding to claims from a downstream party.

Implementing good processes

Effective contract management relies heavily on good organisation and the implementation of processes to ensure that the relevant steps are complied with. At a minimum, parties should maintain up-to-date records of all claims – generally in separate documents for time and variation claims – and all correspondence. These records should be maintained regularly and should contain all the relevant details to allow issues to be understood by others, including others at the organisation and external consultants, in the event that they are brought in.

In addition to ensuring that the high-level organisational framework is in place, it is important to take and retain contemporary records, particularly where an organisation has identified issues that may become contentious. This might include photos, meeting minutes and contemporary records of phone calls that may otherwise go unrecorded. This type of evidence is extremely helpful in circumstances where claims or issues proceed to dispute.

Complying with notice requirements

When broken down to its most basic level, the preparation of a good contractual claim is somewhat formulaic. It requires a proper assessment of the basis of the claim – including if there are multiple grounds or contractual clauses that need to be covered – and a document that complies with the requirements of the contract.

When preparing a contractual claim, a party should consider what requirements are contained in the contract and ensure this information is provided. When preparing the relevant drafting, there is no need to re-word what the contract says. Indeed, often the simplest way to demonstrate compliance is to replicate the words of the contract. For example, if the contract requires a party to provide “the factual and legal basis of the claim”, the claim might then read: “the factual basis of the claim is X…the legal basis of the claim is Y…”.

Whilst it is important to ensure that all details that are required in a notice are provided, it can also be beneficial to consider whether more information is better or may actually have a negative impact. This is a balancing act, because there is an argument to support the provision of extra information, as it adds to the transparency between the parties and the ability for both parties to act together to minimise the negative impacts on the project.  However, there can be negative impacts where the additional information turns out to be incorrect or includes a view on contractual entitlement that may be inconsistent with the ultimate position taken. This is often the case in circumstances where a party making a claim nominates which ‘extension event’ they consider to be relevant – when it may in fact be a different one. 

The most appropriate middle ground can sometimes be to ensure that the language accurately reflects the status of the statement. For example, any comment regarding the type of ‘extension event’ might be framed as: “an extension event, including [insert relevant event]”. Any discussion on preliminary views on the cause on an issue can then explicitly be stated as: “our preliminary views as at the date of this notice”.

Managing commercial concerns

The relationship between parties to a contract and on a project is, arguably, critical to the successful completion of the project and certainly to future deals that may be in the pipeline. The relationship is important both at a company level and also at a personal level, as often the individuals working on the project work very closely together over extended periods of time. These relationships can sometimes lead to a reluctance to submit claims or respond unfavourably to claims due to fear of what those actions could do to what is a positive and collaborative relationship.

While undoubtedly valid, these concerns need to be balanced against the risks that could eventuate if contractual processes are not followed in accordance with the contract, or where the people key to the relationship leave the project. The repercussions vary depending on the circumstances, but can lead to claims being time barred or automatically awarded, the contract being breached or even entitlements under the contract potentially being waived.

It also can set a precedent for how a party will act and whether it will take the appropriate steps to protect its interests. From a relationship perspective, it can also be detrimental, as the gap between the parties’ positions can be even wider if everything has been left unresolved.

It is important to remember that the proper administration of a contract is not an aggressive or unfair action and that if done correctly, all one party is doing is giving effect to the commercially agreed bargain that was reached between the parties and documented in the contract.

From a practical perspective, there are a number of considerations that can help in minimising the impact that these types of actions can have on a commercial relationship, including:

  • pre-empting the submission of any notice or contractual letter with a phone call to the relevant person where time permits, to provide them with advance notice that it is coming; and
  • drafting notices and contractual correspondence in a way that directly reflects the language in the contract and is not inflammatory or unnecessarily aggressive.

Identifying risks or issues early

The identification and escalation of risks and issues is one of the key areas that project and contract teams can improve the likely commercial outcomes on a project. Even if it is unclear what type of issue has arisen, identifying it early puts a party in the optimal position to comply with any contractual requirements – including time bars – that might apply.

Large teams, multiple departments and some degree of staff turnover all increase the extent to which things can go unnoticed. These risks can be reduced through:

  • broad cross-department training to ensure that everyone has some degree of understanding of the contract, legal obligations and contractual entitlements to enable them to better identify issues;
  • regular meetings with all relevant teams in attendance to encourage the sharing of information and status updates; and
  • comprehensive, accurate and up to date records to ensure that issues are tracked and recorded in a methodical manner.

It is difficult to provide absolute guidelines which should be followed in all circumstances, as the requirements and approach to project delivery is dependent on a number of factors, including the nature and status of the project, the terms of the contract and the relationship between the parties. Contract management requires a balance between following the black and white requirements of a contract while also considering alternatives that may assist in achieving desired outcomes in certain circumstances. 

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