Chapter 5 - Project Charter

Part 3

Contract administration - what is that?

Contract administration allows contracts to be

  • designed,
  • concluded and
  • executed in such a way that the project objective is
  • attained or
  • surpassed.

In project contracts, the objective is usually the construction of a facility, in particular a building or an industrial plant. From a contractual perspective, the contract administration team acts to represent the project objectives. This means that it must ensure that the contract deliverable is supplied in a defect-free state. For this, the contract administrator has to identify constraints in terms of time, finances, human resources or other factors and implement appropriate measures. For example, he ensures that contractually agreed deadlines are met. This also forms the basis for the claim management process. Contract administration is closely related to change and quality management.

So, in a nutshell the contract administration is the part of project management concerned with the coordination of contract design, conclusion, execution with a view to attaining the project objectives and modification.

The contract administration process continues throughout the project. It comprises both factual activities (e.g. preserving evidence for claim management) and legal activities (e.g. contract changes, reminders). The main tools used for contract administration are the various forms of documentation available. These primarily include:

  • Contracts (e.g. with customers, sub-contractors, consortia)
  • Other agreements and change logs
  • Correspondence, construction site reports, job records, photos
  • Delivery notes, customs certificates, official permits
  • Other methods of preserving evidence
  • Modern communication media (especially IT)
  • Forms and checklists

What's special about contracts in projects?

Compared to other contracts, project contracts have some specific characteristics:

  • Acceptance
    Acceptance is an important milestone in the project lifecycle. If the contractor has performed the work or services in accordance with the contract, the customer is bound to accept it and the contractor has the right to acceptance.
  • Warranty
    A warranty is a statement or representation that the goods or services will perform as agreed. German law, for example, specifies quality and durability warranties. A warranty goes beyond statutory guarantee rights.
  • Exclusion of liability
    The contractor must make an attempt to limit or exclude its liability. If penalties have been agreed, it should ensure that additional liability for damages is excluded. Claims for damages are required to have a fixed upper limit, such as five percent of the contract value.
  • Limitation of defect claims
    In the law governing contracts for work and services, which often applies in project contracts, the following periods of limitation apply:
    • Five years for construction work or for planning or supervision services rendered in connection with the construction project.
    • Two years for the manufacture, maintenance or modification of a product and for planning or supervision services rendered in this connection.

Rights in case of impairment of performance

Performance impairment claims can be a huge threat to a project itself. There are different perspectives and each party has its own rights, if this occurs. One differentiates between both

  • rights of the customer and
  • rights of the contractor.

Customer's rights
In the event of performance impairment, the customer has the following rights:

  • Contractual penalty
  • Refusal of performance until counter-performance is affected
    (= retaining lien)
  • Supplementary performance
    (formerly: rectification of defects - takes precedence over other defect claims)
  • Self-execution
    (formerly: execution by substitution)
  • Price reduction and cancellation of contract
  • Damages
    (if the contractor is at fault)
  • Termination for cause

Contractor's rights
In the event of performance impairment, the contractor has the following rights:

  • Refusal of performance until counter-performance is affected
    (= retaining lien)
  • Default interest
  • Cancellation of the contract
  • Damages
    (if the customer is at fault)
  • Termination for cause

→ To assert the above-mentioned rights, customer and contractor must be aware of them and of the necessary procedures.

International contracts

When you plan to manage an international project, you should attach great importance on contracts in the international environment. Legal systems and laws depend on the country. You need to catch up on the special characteristics of the specific country - it's not possible to generalise those characteristics.

How is a good contract administrator characterised?

Contract administrators should have interdisciplinary knowledge. Engineers with commercial knowledge or vice-versa, plus a basic understanding of the law. They are responsible that a contract is content-related and formally implemented.

Types of contracts

Types of contracts which are often used in projects:

  • Contracts of sale
  • Contracts for service
  • Contracts for work and service

It is also possible that a mixture of those contracts appears in a project. As an example, an industrial plant contract can be mentioned. This contract not only includes elements of contracts for work and services, but also of commercial and service contracts. However, the emphasis of the contract is generally on the law governing contracts for work and services, so this law applies. This fact includes some potential pitfalls: the contractor is liable because the major part of the project contract constitutes a contract for work and services.

Entry into force of a contract and its invalidity

As soon as you have thought about your project and the according contracts you need to know, when and how a contract comes into force. There are different ways how a contract becomes legally valid. One way is, that all parties involved sign the contract, the other way is that one party makes an oral or written offer and the other party accepts this offer unconditionally. In general, oral contracts have legal force, but they are not recommended because of missing verifiability. When a contract will become invalid depends on the specific country. There are countries with contract autonomy (e.g. Germany) and countries without contract autonomy (e.g. Saudi Arabia).

  • Countries with contract autonomy:
    Everything which is not expressly forbidden is allowed.
  • Countries without contract autonomy:
    Everything which is not expressly allowed is forbidden.

How the story ends…

After this conversation with his friend, Dr. Rogers deals with the topic of contracts. He'd read much about it, but it was all Greek to him. So he decides to delegate this matter to a project team member. As a project manager he cannot do all by himself, he needs the support by his team.