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PROJECT CONTRACT MANAGEMENT, PRINCIPLES AND
PRACTICES
(PM 316) FOR PPM&CD 2024/2025
1ST LECTURE GUIDE, DAY ONE
Date: Thursday,14st November, 2024
Dr. Mujwahuzi, L. , Institute of Development Studies (ids) The
University of Dodoma (UDOM),IDS ROOM 220
0768-589327, mujwaleonce@[Link]
Overview
As a potential project manager, this course is aiming at capacitating a
student to be able to work effectively with contracting managers, purchasing
professionals and subcontractors to accomplish key objectives.
Because contracts are developed in an increasingly complex environment,
including the rising use of contracted supplies and services throughout
government and industry, a solid understanding of the contracting process is
critical, and can give a student an advantage whether they are on the buyer’s
or seller’s side/ Project manager’s side or service provider’s side.
This course will further explore vital issues from the project manager’s
perspective, highlighting their roles and responsibilities so as to achieve a
greater influence over how work is performed.
The candidate will also discuss actions that can be taken to help ensure that
contractors or subcontractors perform as required under the contract.
The definitions of some key terms will be done as well.
Description of the Key words
Contract: A written or spoken agreement, especially one concerning
employment, sales, or tenancy, that is intended to be enforceable by law
It is a legally binding agreement that defines and governs the rights and
duties between or among its parties. A contract is legally enforceable when it
meets the requirements of applicable law. A contract typically involves the
exchange of goods, services, money, or a promise of any of those
The basic elements required for the agreement to be a legally enforceable
contract are:
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Most people assume that once one party has made an offer and the other party has
accepted, a contract has been formed. However, there is more to a valid contract
than this, and it has nothing to do with how formal the agreement is. A contract can
be formal or informal, written or even oral.
A contract is valid and legally binding if the following 6 essential elements are
present:
i. Offer
ii. Acceptance
iii. Consideration
iv. Intention to create legal relations
v. Legality and capacity
vi. Certainty
1. Offer
Offer and acceptance analysis form the basis of contract law and the formation of a
valid contract. Developed in the 19th century, the offer and acceptance formula
identifies the point of formation, where the parties are of 'one mind'. An offer is a
proposal constituting specific terms for one party to enter into an agreement with
another party, which is essential to the formation of an enforceable contract.
What is the difference between an 'Offer' and an 'Invitation to Treat'? It is
important to distinguish between an offer and an invitation to treat. A valid
contract requires an offer to be accepted, whereas an invitation to treat is not an
essential element of a contract.
Whilst an offer can be accepted, an invitation to treat is merely an invitation or
willingness to negotiate that one party makes to the other. This is not an offer as it
does not show a willingness to be bound on specific terms once accepted. An
invitation to treat gives the party who issues the invitation control over whether the
contract should be made or when it should be made. An invitation to treat only
constitutes an offer when the wordings are clear, definite and explicit, which leaves
nothing open for further negotiation. Examples of an 'Offer' and an 'Invitation to
Treat' In general, an invitation to tender is an invitation to treat. However, if the
invitation is addressed to everyone known to the inviter and the invitation contains
an agreement to accept the most competitive bid or states that at least one of the
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tenders will be considered, then that invitation can be regarded as an offer.
Another example of an invitation to treat would be a restaurant menu that displays
prices. Below is an example of an internship opportunity offer:
[Link]
offer-letter
2. Acceptance
Acceptance is an agreement to the specific terms of an offer. Mario Iveljic, a
partner at Mag Mile Law, LLC explains that there is not one way of validly
accepting a contract - generally, an offeree can accept an offer in any reasonable
medium as long as the country or state does not require any specific form. Offers
do not have to be accepted through words; they can be accepted through conduct.
If someone purports to accept an offer but accepts on different terms than that of
the original offer, that will constitute a counteroffer rather than an acceptance.
The acceptance must normally be communicated to the offeror – silence cannot be
treated as an acceptance. In exceptional circumstances (for example, where the
offeree has been given terms of dealing and proceeds with the dealing without
formally communicating acceptance), silence may be treated as acceptance.
Below is an example of a letter to accept an employment offer:
[Link]
accept-offer
Intention to Create Legal Relations
An agreement does not need to be worked out in meticulous detail to become a
contract. However, an agreement may be incomplete where the parties have agreed
on essential matters of detail but have not agreed on other important points. The
question of whether the parties have reached an agreement is normally tested by
asking whether a party has made an offer which the other party has accepted.
Agreements may not give rise to a binding contract if they are incomplete or not
sufficiently certain. There will usually be no contract if the parties agree ‘subject to
contract’ but never quite agree on the terms of the contract. If the agreement is a
stepping stone for a future contract or is an agreement to agree, then the agreement
might be void for a lack of intention to create legal relations. Moreover, a domestic
contract is presumed not to be legally binding in common law jurisdictions. For
an example of a memorandum of understanding (MOU) concerning a joint venture,
please see the link below: [Link]
understanding-mou-joint-venture-neutral
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3. Consideration
As Nelson Johnson, an attorney at Griffith, Lowry & Meherg, LLC puts it: if there
is no consideration, there is no contract. Without consideration, the contract is both
unenforceable at equity and in law.
Consideration constitutes something of benefit to the person who has the
obligation or who makes a promise to do something (the promisor). It can also be
something detrimental to the person who wants to enforce the obligation, or who
has the benefit of the promise (the promisee). There is no need for an 'adequate'
value: if some value is given for the promise, it would be sufficient consideration.
Where the consideration of one party is not absolutely clear, the agreement will
generally include language such as ‘FOR GOOD AND VALUABLE
CONSIDERATION, the receipt of which is hereby acknowledged’ in the recital.
Alternatively, one can make the document in a deed without the need for
consideration.
What is a deed?
If there is a promise to do something but the agreement lacks any consideration,
then the agreement must be made in a deed. A deed is a document under seal that
either (i) transfers an interest, right or property or (ii) creates an obligation which is
binding on someone or some persons or (iii) confirms an act that transferred an
interest, right or property. Read 'What is a Deed? Understanding Home Ownership
Legal Jargon' for more information.
Not all documents under seal are deeds. There are special requirements for the
execution and delivery of deeds. For instance, a contract under seal is a deed. A
contract contained in a deed does not require considerations. A person identified in
the deed as someone to benefit from a promise can enforce a promise to pay money
or can seek damages if the promise is not performed.
However, equitable remedies (e.g. specific performance of obligations other than
to pay money) are not available if there is no consideration.
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For example, where a party would like to join an existing agreement without clear
consideration, the party would enter a deed of adherence:
[Link]
4. Legality and Capacity
What would render a contract illegal? A contract is illegal if the agreement relates
to an illegal purpose. For instance, a contract for murder or a contract to defraud
the Inland Revenue Department is both illegal and would therefore void contracts
that are unenforceable. Certain contracts may also be unenforceable because they
are immoral and against public policy. For example, contracts for sexual services
may be unenforceable or even illegal contracts in certain jurisdictions
6. Certainty
A valid contract requires reasonable certainty for the essential terms. If the parties
fail to reach an agreement on the essential terms with reasonable certainty, then it
may be contract void even if all other essential elements are present.
What is an essential term? The definition of essential terms depends on what the
parties have set out to achieve. In general, under common law, there are two
essential terms: (i) consideration or price of a bargain, and (ii) price to be paid for
the promised obligation.
Contract Administration:
The professionals responsible for a company’s contract administration focus their
work on the planning and execution of contracts.
• The planning process often includes sourcing potential contracting partners, for
example via sending out requests for proposal.
• In addition, contract administrators help with ironing out the details of the
contract arrangement, working with prospective partners to negotiate on contract
matters such as price, delivery schedules, and performance expectations.
Five best practices when preparing a contract administration plan:
1. Define the Scope and Deliverables
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Clearly defining the project's scope and deliverables at the outset is important for
two reasons:
First, it helps you avoid scope creep, in which requirements gradually and
insidiously expand during the project, putting the contract's success at risk.
Second, it lets both parties know exactly what to expect at the end of the
project.
In addition to defining the deliverables, you should include clear standards for the
acceptance of each deliverable, in order to minimize the chances of disputes.
2. Include a Detailed Timeline
Every contract has a given time period during which it is in effect. Your contract
administration plan should include start and end dates for the project, as well as the
deadlines for each of the deliverables. In addition, you should include the
frequency with which the contractor will send periodic updates about progress on
the project and on each deliverable.
3. Sort Out Finances
At this stage, you should already know the pricing structure for the contract: how
much the contractor will be paid, in what format and at what intervals. This should
be formalized in the contract administration plan, along with a mechanism for
additional expenses in the event the contractor requires more funds.
4. Plan the Work
The contract administration plan should include detailed work plans that assign
employees and funds to each part of the project. If you need to make use of third-
party personnel such as temp workers or outsourcing firms, you need to mention it
at this stage so that you can make plans well in advance. You should also include
descriptions of how you will measure performance throughout the project so that
corrective action can be taken if necessary.
5. Anticipate the Risks
Even the best-laid plans can go wrong through no fault of your own: natural
disaster can strike, employees can quit and economic and financial conditions can
change rapidly. As such, contract administration plans should identify some of the
most likely risks to befall the project, and include provisions for what to do in the
event they occur. The work plan that you create should include some leeway and
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flexibility in terms of time and budget so that you can recover from these events
without endangering the success of the project.
Conclusion
Winning the bid and signing the contract are important first steps, but drafting a
contract administration plan ensures that you have a strategy for the success of the
contract. In order to have greater control, visibility and security and to streamline
your processes throughout the contract lifecycle, consider using a
dedicated contract lifecycle management software solution.
Types of Contracts in Project Management
In project management, different contract types formalize agreements between
project parties, each with unique characteristics, benefits, and considerations.
Project managers must carefully select the most suitable contract type based on
project requirements and characteristics. Common contract types include:
1. Fixed-Price Contracts
Fixed-price contracts are a type of contract commonly used in project management
where the agreed-upon price for the project remains constant regardless of the
actual costs incurred by the contractor. It is also known as lump-sum or firm-fixed-
price contracts. In this type of contract, the scope of work, deliverables, and price
are typically defined upfront, providing clarity and predictability for both parties
involved.
Fixed-price contracts are often preferred when the project requirements are well-
defined and there is little uncertainty regarding the scope and duration of the
project. They offer the advantage of budget predictability for the client, as they
know the exact cost of the project from the outset, mitigating the risk of cost
overruns.
For contractors, fixed-price contracts offer the opportunity to manage their
resources efficiently and control costs to ensure profitability. However, they also
carry the risk of underestimating the scope of work or encountering unforeseen
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challenges during the project, which can lead to financial losses if not properly
managed.
To mitigate these risks, contractors may include contingency allowances in their
pricing or negotiate change orders for additional work outside the original scope.
Despite the potential challenges, fixed-price contracts promote a clear
understanding of project requirements and expectations, fostering accountability
and alignment between the client and the contractor throughout the project
lifecycle.
2. Cost-Reimbursable Contracts
Cost-reimbursable contracts, also known as cost-plus contracts, are a type of
contract used in project management where the contractor is reimbursed for all
eligible costs incurred during the project, along with an additional fee or profit
margin. Unlike fixed-price contracts, where the price is predetermined, cost-
reimbursable contracts allow for flexibility in project scope and costs.
These contracts are commonly used when the scope of work is uncertain, and it is
difficult to accurately estimate project costs upfront. Cost-reimbursable contracts
provide an incentive for contractors to control costs and manage resources
efficiently, as they are directly responsible for the project expenses.
One of the key advantages of cost-reimbursable contracts is their flexibility, as
they allow for adjustments to the project scope and requirements as needed
throughout the project lifecycle. This flexibility is particularly beneficial in
complex or evolving projects where changes are likely to occur. Cost-reimbursable
contracts also provide transparency, as clients have visibility into the actual costs
incurred during the project and can monitor progress more effectively.
However, these contracts also carry inherent risks, such as the potential for cost
overruns if expenses are not carefully managed, as well as challenges related to
defining and controlling project scope. To mitigate these risks, clear
communication, proper documentation, and effective project management
processes are essential when executing cost-reimbursable contracts.
3. Time and Materials Contracts
Time and materials contracts are another type of contract commonly used in
project management, particularly when the scope of work is difficult to define
upfront or when the project involves ongoing maintenance or support activities.
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In time and materials contracts, the client pays the contractor based on the time
spent and the materials used to complete the project. This type of contract provides
flexibility for both parties, as it allows for adjustments to the project scope and
requirements as the project progresses.
One of the main advantages of time and materials contracts is their flexibility, as
they accommodate changes to the project scope and requirements more easily than
fixed-price contracts. This makes them particularly suitable for projects with
evolving or uncertain requirements.
Additionally, time and materials contracts provide transparency, as clients have
visibility into the actual hours worked and materials used during the project, which
can help ensure accountability and manage costs effectively.
However, time and materials contracts also come with some challenges. Since the
final project cost is not fixed upfront, there is a risk of cost overruns if the project
scope expands significantly or if there are inefficiencies in resource utilization. To
mitigate these risks, it is important to establish clear guidelines and controls around
project scope, budget, and deliverables. Effective communication and regular
monitoring of project progress are also essential to ensure that the project stays on
track and within budget.
4. Unit Price Contracts
Unit price contracts, also known as rate contracts or labor-hour contracts, are a
type of contract in project management where the client pays the contractor based
on a predetermined unit rate for each unit of work completed or for each hour of
labor expended. This type of contract is commonly used in construction projects,
where the scope of work may vary, and the quantity of work cannot be precisely
determined in advance.
In a unit price contract, the contractor submits unit prices for various items or
services specified in the contract, such as labor, materials, or equipment. The client
then pays the contractor based on the actual quantity of work performed or hours
worked, multiplied by the agreed-upon unit prices. Unit price contracts provide
flexibility for both parties, as they allow for adjustments to the project scope and
quantities of work without renegotiating the entire contract.
One of the key benefits of unit price contracts is their flexibility and transparency.
Clients have visibility into the unit prices for different items or services, which
allows them to control costs and make informed decisions about project expenses.
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Additionally, unit price contracts incentivize contractors to be efficient and
productive, as they are paid based on the actual work completed. However, unit
price contracts also require careful monitoring and management to ensure accurate
measurement of work quantities and adherence to unit prices to avoid disputes or
misunderstandings.
5. Incentive Contracts
Incentive contracts are a type of contract in project management that incentivize
contractors to meet or exceed project objectives by offering rewards or penalties
based on performance metrics. Unlike traditional fixed-price or cost-reimbursable
contracts, incentive contracts include additional provisions designed to motivate
contractors to achieve specific goals, such as cost savings, schedule adherence, or
quality improvements.
There are various types of incentive contracts, including incentive fee contracts,
award fee contracts, and incentive bonus contracts. In an incentive fee contract, the
contractor receives a base fee plus an additional incentive fee based on predefined
performance criteria, such as completing the project ahead of schedule or under
budget.
Award fee contracts involve periodic evaluations by the client, who awards or
withholds a predetermined fee based on the contractor's performance. Incentive
bonus contracts offer bonuses to contractors for achieving specific performance
targets, such as meeting quality standards or exceeding customer satisfaction goals.
The use of incentive contracts can align the interests of the client and the
contractor, as both parties share in the project's success or failure. By tying
compensation to performance, incentive contracts encourage contractors to focus
on delivering high-quality results while controlling costs and adhering to project
schedules.
However, incentive contracts require clear and measurable performance metrics, as
well as effective monitoring and evaluation processes, to ensure fairness and
transparency in determining incentive payments. Additionally, incentive contracts
may introduce complexity and administrative overhead, as they involve negotiating
and managing incentive structures and performance criteria.
Players in Contract Management
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1. Legal Team: There is no doubt that the legal team plays a major role in
contracts as they are the individuals drafting, reviewing,
and negotiating the obligations by which we abide. The legal team itself can be
made up of several players, including attorneys, paralegals, legal assistants, file
clerks, and analysts.
It is their goal in the contract lifecycle to get contracts drafted quickly to the
correct parties while ensuring contracts encapsulate the regulatory concerns and
operational requirements.
2. Compliance Team: Contract management compliance teams is the regulatory
powerhouse within the organization and all compliance teams differ in
organizational structure. Often operational leaders, regulatory leaders, analysts,
and members of general counsel come together to ensure that the organization is
meeting regulatory obligations such as safety and governance concerns.
They must ensure that the contracts created by the legal team abide by company
standards and regulatory requirements. It is their goal to have a proactive approach
to compliance, mitigate risk, and apply action where necessary to stay in
compliance.
3. Audit Team: The audit team provides a check and balance to the organization
to ensure that all contracts and policies are evaluated and fall in line with the
internal constraints placed within the organization. It is their goal to make sure all
contracts are accounted for, all documentation is present, and the information is a
fair representation of what is occurring within the process. Through detailed
evaluations, the Contract Management Audit Team helps
organizations maintain the integrity of their contracts, fostering trust with
stakeholders and minimizing legal and financial risks.
While auditing is a major component of finance, it is still important to
internally audit contracts for risks within the system.
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4. Sales: Sales are a major force in the contract lifecycle because they are the
value-creating body within the organization that is selling the legal obligations of
your organization.
It is important these team members are trained properly to provide a consistent
message to your clients that is in line with your contract terms and negotiations.
Often this group negotiates on behalf of the organization
and requests contracts from the legal team.
5. Procurement: On the flip side of sales, procurement is the agents going on your
organization’s behalf to purchase services and goods from other organizations—for
example, technology or software. Like sales, procurement often negotiates on
behalf of an organization to get better contract terms or added services.
It is key for this group to make sure they abide by your organization’s standards in
business dealings and processes. They need to ensure they have received the proper
contract approvals when creating contracts with third parties while also
facilitating a quick buy process.
6. Council and Analysts: These are the major decision-makers, and their make-up
slightly varies from one organization to another. They are the group the legal
team is trying to appease in their negotiations, as they often have the final say in
business decisions.
Their signatures are typically the ones on the contractual obligations so it is
key that they are part of the contract approval process. Capturing their
discussions and approvals on contracts is necessary to ensure a full record of
contracts to provide accountability and direction later in the contract's life.
7. Project Managers: Project managers do sometimes fall under procurement
based on their role within the organization. Regardless, whenever a project
manager is assigned a project, there is a contractual obligation to achieve a
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deliverable. Often these deliverables are scale-based while also having specific
timelines that are outlined in the contracts your organization negotiates.
It is important that contracts are clear and achievable for project managers, as
they represent the organization’s commitment to their obligations.
8. Other Parties: The other parties you choose to do business with are also
important to consider because they often have dates and deliverables that must too
be achieved. They can be either side of the coin — they could be the ones
providing services or the ones that you are providing services to.
Nonetheless, it is still important to consider who you are going into contracts with.
Often companies' reputations are formed by the way they meet their contractual
obligations. It is the goal of the other party to meet the terms of the contract while
you abide by yours.
9. Other vendors: A major movement seen in the last few decades is outsourcing.
Your contractual obligations with these vendors become very important because
are providing services and goods on your behalf. There must be defined goals
and contractual obligations before going into agreement with third-party
organizations that ensure they work under your operating standards and
regulations.
These vendors provide a higher risk than most players in the contract lifecycle, so
it is important that their contracts be monitored to ensure their obligations are met.
10. Constituents: This last group is the most important of all; constituents are the
employee base that represents your organization. Often management teams
create contractual obligations but the constituents are carrying out the
commitments.
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It is important they clearly understand the terms and conditions in which they must
abide, and have access to contracts when they need to reference information. It is
the goal of the organization to make sure this group is actively working within
regulatory boundaries, operational standards, and corporate culture.