Contract Management At SME Based With The EEC

When outsourcing work is started, the loss of control increases hence this calls to many risks. When in-house work is done, the SME can have the complete control over its services including durability, consistency and quality. However, while outsourcing is being done, it becomes quite challenging to handle the work and its related aspects. Therefore, contract management has to be done in an effective manner that there is no issue throughout the negotiation process. with the help of effective pre-negotiation, negotiation, post negotiation and business planning, SMEs can manage the contract with any client. For this, contract management is the appropriate technique which involves all of these aspects of the contract (Klimas, 2011). The purpose of this essay is to critically evaluate the contract management process which is applicable to a Small to Medium Sized Company based with the EEC (Engineering and Construction Contract). This company sources and enters into contracts with companies outside the EEC. According to Forward (2002), EEC is a formalised system which is developed by the Institution of Civil Engineers. This contract aims to provide guidance to daft their contracts for construction or civil engineering projects. This is specifically used for obtaining tenders, awarding and administrating contracts. In this contract, duties of employers and contractors are defined in a detail manner. There are two main parts of this contract. The first one is about the employers which specifies their roles and responsibilities, while the second part is for contractors specifying their duties and roles. Mainly it is used in the UK but other countries like Australia, South Africa and New Zealand has also accepted this contract for engineering and construction contractors (Johnson et al., 2011). The focus of this essay is on pre-negotiation, negotiation and post-negotiation stages of ECC with an IT based company. In these stages, legal issues, health and safety, financial considerations are discussed. At the end, recommendations are also made.

Main Body

Contract management is complex issue for every small or medium organisation. Contracting has increased with the rise of non-permanent labor. As the trend of using temporary workers and self-employment is increasing, there has been observed a large rise in growth of employment opportunities at SMEs. SMEs usually do not have adequate and sophisticated systems for risk management. So when a contract is done by these SMEs, it often limits the ability of contractors to do significant investments in issues like health and safety and other legal issues. Usually, the workers of SMEs are not paid well, they are not provided with adequate training opportunities hence they often have low level of knowledge and awareness. This results in the increase in issues when SMEs enter into a contract with any outsourced company. therefore, the process of entering into contract must be managed in an appropriate way.

There is a practice which is known as standardised prequalification form (PQF). It is recommended to this small to medium sized organisation that it should use this PQF. This form assesses whether or not the contractor qualifies for starting the contract. Before the process of bidding or quoting, this form should be filled out. The essential dynamics of PQF allows to assess financial stability, safety and health statistics, regulatory citation history, background check, environmental protection programs, social responsibility check, site specific requirements, experience of contractor, insurance coverage and limits, major projects performed and many other aspects. This prequalification form will help this small to medium sized company to verify whether the respective contractor will be able to perform as per requirements or not.

Before selecting any contract, it is important to evaluate the profile of the client who will take the services of engineering and construction. The skills, competencies experience and qualifications must be evaluated. A proper job description is needed for pre-negotiation phase. This job description must set out the duties and responsibilities of the contracting party. In pre-negotiation phase, it must be assessed that what arrangement the contractor has for managing the assigned work and who is currently responsible for this work. how everything will be supervised and what checks could be made one equipment and materials. before selecting any party as the contractor, the cultural barriers should also be assessed. It must be analysed that how the inter-organisational cultural barriers will be managed.  The previous performance of the company with whom the contract is to be started must be assessed. For example, this SME can ask for recent performance rating for health and safety management and it could also have a look at the database including the cases of ill health and accidents in past 4-6 years. Basically, the risk assessment strategy could be adopted. Before starting the contract, all relevant risks should be assessed before the start of contract.

Once this prequalification form has been completed, the contractor can be monitored for its compliance through the auditing. The audit practice usually aims to analyse the services which will be performed by the contractor. Moreover, the associated risks are also analysed. when the contract has to be started for a higher risk trade, this audit is an essential part and it allows to review the contractors’ safety programs. It allows to be avoid the consequences of getting involved into life threating situations. Hence, through auditing, it could be analysed what are the risks and how these could be managed if the contract will be started. The auditing process might revolve around the safety program function of contractor. It also analyses whether or not contractor has the written safety program and critical equipment to perform the work in a risk free manner. Moreover, Job Hazard Analysis and job-site inspections could be performed. On the basis of such performance indicators, SME could decide whether or not it should enter into contract with the respective company. this audit and prequalification could be performed by third parties as well.

According to Dingsdag, Biggs and Sheahan (2008), when contractors has to perform the jobs at the facilities of the client, therefore, they are exposed to unknown hazards involving noise, biological agents, asbestos and chemical products. Likewise, the workers of the client company may also be exposed to hazardous situations due to the work performed by the contractors. Before entering into a contract with any organisation, this SME must consider the importance of occupational safety and health issues. As per recommendation of Shen and Walker (2001), it must have a look at what laws says about contractors. EU-OSHA report says that occupational safety and health is considered critical when the contractors are within the European OSH legislative framework. As this SME is a ECC based company which enters into contract with companies outside the ECC, therefore, the companies come under the European OSH legislative framework, therefore, legislative framework of OSH must be considered. As per the Council Directive 89/391/EEC of 12 June 1989 of the European Union Framework Directive, it is important for employers to provide the safety and health protection to its workers (Murray and Dainty, 2013). Moreover, necessary measures for occupation risk prevention should also be done. Therefore, before entering into the contract, it must be ensured that contactors provide the OSH safety to its employees. The employees who will be working at the facilities of clients for providing the services should not be deprived of any aspect of OSH safety management (Saurin, Formoso and Cambraia, 2008).

According to Lin and Mills (2001), there must be an agreement of the cooperation between client and contractor for avoiding to put the workers on any hazardous situation. Both client and contactors should be aware of the aspects which could proved risky to health and safety of the employed workers. Therefore, appropriate business planning should be done and both parties should do the risk assessment for health and safety and this should be coordinated with each other. Hence, it must be ensured that both parties set out necessary terms and conditions for health and safety of their workers. This is provided in the Article 6 of Framework Directive of OSH. As Bluff (2003) stated that before entering into the contract, at pre-negotiation phase this SME must take the appropriate and adequate information regarding health and safety practices in their organisation. Then, it must provide the appropriate instructions to them regarding safety and health measures for its employees who will be working at the facilities of their clients (§2 Article 10 and §2 Article 12). So at the pre-contract stage, it is of utmost importance for this SME to do the assessment of the competence of clients. It should only select those clients which are safe for health and safety of its workers.

During the negotiation stage, the health and safety protection should not be ignored. There is a need of close cooperation of all parties which are involved in the contract. The appropriate level of supervisor is also needed for occupation health and safety of employed workers.  Once the contract ends which is the post negotiation stage, this SME must review and record the OSH performance of the contractors. This record should be used for next contract management processes. The process of contractor evaluation is important, therefore, evaluation must be done in an accurate and effective manner (Huang and Hinze, 2006).

Gerrard (2005) stated that there are various approaches which could be used for ensuring the safer and healthier workplaces for the employees who will be working at the facilities of clients. The adoption of such approaches ultimately contributes in the diminished work related diseases and work accidents. Therefore, through out the negotiation process it is important to clearly define the responsibilities of both parties for health and safety of employees (Chan, Cheng and Li, 2001). With the appropriate business planning like coordination, communication, cooperation and training, this issue of health and safety management can be handled well in all stages involving pre-negotiation, negotiation and post negotiation stages. Moreover, as per suggestion of Rowlinson (2011), another important aspect of business planning could be to create a partnering culture throughout the project, so long term relationship could be developed. both parties must work together as one unified team where there must be agreed common goals.

For keeping check on performance during the negotiation process, there are certain tools which could be used during the negotiation process for keeping the track of the performance of the other party(Post, 2010). For example, there is a recent trend to integrate the gate access control system to a contractor management software. Similar approaches could be adopted for this SME. Through this, this small to medium sized company could become able to keep a check on the performance of its workers at the sites of its clients (Saunders and Mosey, 2005).

According to Gerard (1995), for payment, there are six options which could are viable for this SME. The first option is of priced contract with activity schedule. In this option, a lump sum amount is paid for completed activities. The second option is of priced contract with bill of quantities. This is based on entitlement for payment when certain quantity of work is completed. The third option is of target contract with activity schedule which involves pain/gain share where other than the cost (based on schedule), profit or loss is shared. The forth option is of target contract with bill of quantities which again shares the pain/gain other than the cost which is based on the bill of quantities. The fifth option is known as cost reimbursable contract which involve cost and contract. The six option is of management contract where payment is done to a contractor considering that it will pay to subcontractors. The feed for contractor is also involved in the management contract option. It is recommended to this SME that it should go with the first option where the payment should be made once the milestone is achieved. This is a risk free payment method, moreover, its management is also easy. Therefore, small to medium sized ECC company should select this option (Wright and Fergusson, 2009).

As recommended by Akintola, Suresh and Hamish (2011), the process of payment must be decided before the start of contract. By this, it means that pre-negotiation stage should decide the terms and conditions of payment process. Under ECC, project or contract manager is entitle to certify the payment or assessment dates. This assessment dates should be selected with the mutual consensus of both parties. As per milestones or assessment intervals, it is recommended to select the first and subsequent dates of payments. Payment must involve the assessment results. For example, it must be based on the gross assessment less sums previously certified by the contract manager. Moreover, as Perlberg (2009) recommended the due amount should be calculated on the basis of work done or milestone achieved. Moreover, other due amounts like VAT should also be added in the payment bill. This could also include the liquidated damages that become payable.

Forward (2002) stated that the process of managing payment is crucial for contract management. Every contract manager has certain responsibilities on him/her, hence these responsibilities must be fulfilled by him/her. The contract management must review the invoice to make sure that these are developed on the basis of agreed method of payment. It must be checked that all required back-up documentation is completed to support the payment invoice. Klimas (2011) stated that it must also be reviewed that those rates are used which were agreed upon. Moreover, date for submission of invoice must also be correct and all requirements of invoice should be complied with. If there is any retainage, then invoice should be accounted for the agreed amount of retainage only. The contract manager must check that if invoice is prepared on the bases of pay-when-paid term, then the corresponding payment has been received (Broome and Hayes, 1997). For all reimbursable expenses or costs, contract manager must check that limits or guidelines are not exceeded. The contract manager must have to review the invoices such that the invoices are correct, accurate and complete. (Manu et al., 2012). These all conditions must be checked by the contract manager whenever (during or after negotiation stage) the payment invoice is processed. If any of the above mentioned condition is not met, then, the invoice should not be processed.

Conclusion

In this essay, contract management process for an engineering and construction based small to medium sized company is critically analysed. As time is passing, the role of contracts is increasing. Now, many companies are working on contract basis where they outsource the projects. The contract based work is quite common for engineering and construction sector. In this essay, it is analysed that how the client party should be evaluated. Moreover, it is analysed that what measures should be taken for assessing health and safety management issues. Further to this, performance management during the project is critical hence it is discussed how it could be managed. Moreover, aspects related to pricing and payments are also part of this essay. In the end, it could be concluded that process of contract management is critical, it must be managed with a great care. The subsequent section provides few recommendations for the respective SME.

Recommendations

  • When outsourcing the project, it should be notice that there must exist a strong relationship between this SME and its clients. This must be facilitated by information and communication (Gerrard, 2005).
  • Those clients should be selected which are safe for this SME. The client of engineering and construction services must be selected on the basis of sound procurement strategy. Instead of focusing on lowest price, the SME must focus on best value for money (Dancaster, 2008).
  • This SME, its contractors and its workers must work collaboratively to find out the best possible solutions such that the projects could give the best performance.
  • The contract must have the information regarding the potential hazards and appropriate measures for these hazards.
  • With regard to OSH, there are are certain third party certifications. These third party certifications evaluate, certify and ensure that contractors has the necessary measures for OSH. Hence, this SME should select the one which is certified by any third party. This will ensure that there are no harms for health of workers. Moreover, it will save time of this SME which it will have to spent on evaluation of the contractors (Johnson, Sitzabee, and Feng, 2011).
  • SME must implement the control procedures for managing the performance of clients throughout the negotiation process (Racky and der Projektorganisationsform, 2003).
  • Another recommendation is to look at the alternative of Finnish initiative which is known as ‘shared work places’. This is a new idea where employees of different organisations could work at the shared premises. Hence, the issues related to potential health and safety risks could be managed in a standardised manner (Racky and der Projektorganisationsform, 2003).
  • Every term and condition of the contract should be decided on mutual basis. One part should never suffer. Both parties should be provided with their due rights (Gerrard, 2005).

 

 

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