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Strategy Delivery and Commissioning

73. Importance of Contract Management

A tangible contract management function assists in managing obligations in an effective manner; this saves the two parties significant time and effort and provides benefits in terms of business strategies and procedures.

Contracts dictate every aspect of key business strategies and relationships. Many contractual parties spend a considerable amount of time and resources concluding contracts to their liking.

Once the contract is finalized and services are procured, many parties fail to properly monitor and oversee the implementation of these contracts and fail to fulfil their contractual obligations. Failure to meet these obligations can result in missed savings, heavy fines, costly litigation, and broken relationships — all of which constitute decreased public benefits and Value for Money.

Because PPP contracts define the payment terms, negotiation patterns, work flow, and expected service levels, effective contract management not only ensures better relationships between contractual parties, but also enforces compliance and mitigates risk.

Infrastructure works and services provided by a private partner on behalf of the government require as much, if not more, management by the procuring authority than those provided in-house[3]. This is particularly true of PPP contracts. Although output-driven, such contracts require considerable management efforts on the part of the government. This is due to the nature of such contracts which have a long time span, require substantial works and services to be provided, and from which significant complexities arise due to the uncertainty of the future events and occurrences.

Sound contract management is therefore crucial to the success of a PPP. Failure to adequately manage the project will inevitably erode its Value For Money and may ultimately undermine its objectives.

Furthermore, the PPP contract, through which project risks are shared at the start of the relationship between the government and selected private partner, is at the heart of the relationship between the parties. The initial allocation of risk must be managed over the whole life of the project in order to:

  • Enforce, clarify, and/or modify the risk allocation when unforeseen risks or consequences of those risks arise
  • Ensure that the private partner bears the risks it is required to bear and mitigates them adequately
  • Monitor and effectively manage the risks borne by the government.

The European PPP Expertise Centre (EPEC) (2014) states that proper project monitoring enables the government to develop a detailed understanding of the project issues and show the private partner that it is an informed and vigilant counterparty.[4] Once a PPP contract has been signed, opportunities for public expenditure savings often arise over its lifespan. Savings can be achieved and, better still, shared between the parties only if there is proper monitoring by the government (provided the PPP contract allows for such a sharing). These savings may enable the government to release financial resources that can be usefully reinvested in other activities or projects.

As contract management is important to the government, so it is to the private partner. It has been shown through reviews of PPP projects that, after a period of time, many private partners become complacent and do not execute their obligations, as the contract dictates. Therefore, it is crucial that the private partner is familiar with the government’s contract management procedures in order to enhance the efficiency and success of the PPP project.

Finally, contract management is important because a project is rarely undertaken in complete isolation from other PPP initiatives. Engaging in the communication and knowledge sharing of existing PPPs is critical to the identification of improvements that could be made in future contracts, which in turn creates a virtuous cycle.

PPPs are first and foremost a collaboration between the parties; the private partner has a genuine interest and stake in these types of procurement projects. As a result, relationship management and communication are extremely important when dealing with PPP projects.

 

[3] European PPP Expertise Centre (EPEC). (2014), Managing PPPs during their Contract Life – Guidance for Sound Management.

[4] European PPP Expertise Centre (EPEC). (2014), Managing PPPs during their Contract life – Guidance for Sound Management.

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