In one of the project management training I was doing, I found that most of the candidates were not knowledgeable about the contract management essentials. While the Project Management Book of Knowledge gives some basic types of contracts (T&M, Fixed Fee (FF), Cost Reimbursable (CR) and the variations for incentive fee, award fee, and economic price adjustments), I found that the essential six building block of a contract were not known to many. Furthermore, about one year back, I delivered a corporate training on contracting and procurement management for an organization. The training was for both members of the project management group and procurement management group.
Six Elements of a Contract
Contract, by definition, is a legally binding agreement between two or more parties that is enforceable by law. Similar to Project Management Book of Knowledge issued by the Project Management Institute, there is also a Contract Management Book of Knowledge (CMBOK) issued by the National Contract Management Association (NCMA). According CMBOK, Contract Management is a specialized competency within the procurement profession with broad perspective in terms of the responsibilities assigned to contract manager. In order for contracts to be enforceable by law, there are six elements that need to be in place. These include the following.
- Mutual Agreement: This means there is an offer that is clear and unambiguous and there is an acceptance.
- Considerations: For the contract to be fair and equitable, both parties are agreeing to a fair exchange of value in terms of price paid and the work to be delivered.
- Legal Capacity for the Parties to Act: The parties represented in the contract should be legally able to represent and act in their capacity on behalf of the company. So, anyone who doesn't have the right to execute a contract (role, age) or frame of mind (not under the influence of drug, alcohol, or emotionally unstable state) to represent themselves in a contract can't execute a contract.
- Intention to Create Legal Relations: The parties to the contract must have a honest, serious, and real intent to engage themselves through the contract. This means no other untoward, immoral, unethical, and illegal side motives can apply.
- Communication: All the parties represented in the companies from all the companies should follow their own company policies honoring and be consistent with the pricing and delivery (SOP, for instance). Acceptance of appropriate contracting parties also extends to agencies and other suppliers mentioned in the contract.
- Legality of the Contract: Under no circumstances, the intention behind the contract should be to make the contract illegal that it can not be enforced by law.
- Know who you are doing business with — Their power, influence, and interests in the contracting process so that you can limit liability and avoid any litigation.
- Contracts must be plain English ensuring that they are concise, clear, and comprehensive. When using boilerplates, ensure you understand the terms used so that each party’s rights, responsibilities, and obligations are unambiguously understood from the view of the court of law.
- Define important terms relevant to conducting the business without assuming everyone working on the contractual deliverables understand these terms.
- Incorporate the party’s obligations and the impact of non-delivery and non-conformance when including all agreed-upon schedules, pricing, and delivery requirements.
- When conflicts arise, put a process in place to require either party to provide written notice of breach with the expectations of resolving the problem and considerations for alternative remedial actions before escalating to legal counsel.
- Incorporate risk into the contracts by including provisions for liability, indemnity, and hold harmless provisions to shift certain identified risks to the appropriate party.
- When insurance is required by either party as risk mitigation, discuss the required amount of insurance and the confirm who should be named as the additional insured.
- Ensure pages in the contract and even numbering schemes for the paragraphs.
- Agree upon the applicable law governing the contract and the location where disputes will be resolved.
- Specify that the contract represents the entire agreement to prevent any claims against oral agreements.
- Incorporate regularly audits of the standard agreements to ensure lessons learned are reflected and the agreements are amended to reflect any recent changes.
- Before signing any written contract actually, read and understand the contract not only individually but also in a group. Seek help if needed.
Contract Management Book of Knowledge (n.d.) National Contract Management Association. https://ncmahq.org/
