Tag: Contract Formation

Dear Readers,

In the last post we discussed Contract Life Cycle and its 4 stages. Please click on below link to read this post again

http://www.rkstrainings.com/contract-life-cycle-and-its-various-stages/

In this post, we are going to discuss the meaning and definition of other key terms related to Contracts i.e. Contract Formation, Administration and Management. Contract life cycle explains the activities under Contract Formation and Administration.  This post will clearly bring out the difference between Contract Administration and Management

The above discussion will eventually give a clear overview of Contract Management Process

Difference between Contract Administration and Management

A) Contract Formation

This process starts after receipt of user requirements and ends when Contract is signed with selected vendor. Contract formation process commence upon sending RFQ/Enquiries to identified bidders/agencies. It continues until offers received, technical and commercial evaluation completed, price agreed and LOA issued. The process ends when both parties sign the formal agreement

Let us understand Contract Formation Process in context to painting example

We know that objectives in term of Scope, Time, Budget, and Quality are set under stage 1 of Contract Life Cycle. So, the next step is to identify and appoint a painter who is a best fit for meeting such objectives. We achieve this by undertaking following steps

1. Identify 2-3 potential painting agencies
2. Send RFP/Enquiries (with requirements: Scope, Time, Quality) and invite offers from agencies identified
3. Receiving offers and evaluating against set requirements
4. Shortlist agency who meets most of requirements & offer better price
5. Discuss, negotiate and agree upon the final price and payment terms
6. Put all agreed terms on a piece of paper and sign the agreement

Contract Formation is a pre-award process because it covers all activities until Contract Award. Because it starts with PR and ends with PO (Contract Award), we also call it Purchase Requisition (PR) to Purchase Order (PO) Process

Contract Administration

Contract Administration is a process that involves all activities undertaken by Owner to ensure receipt of goods/services or completion of works as per the contract thereby meeting the intended contract objectives. This process commences upon Contract Award. It continues until goods/services received or work completed, payment made, claim settled and all contractual obligations met by both parties. This Process ends when the contract is formally closed

In context to painting example, here painter carryout the painting work as per Contract and Raj makes due payment to painter. Once both parties have completed their respective obligations to the satisfaction of each other, they formally close the Contract and come out of the binding relationship

Contract Administration is a post-award process because it covers all activities after contract award. It is also called PO to Closeout Process because it starts with PO (Contract Award) & ends with Contract Closeout

The process focuses on getting goods/services/works of requisite quality, on time and within Contract Price

Contract Management

Contract Management is a process of entering into a Contract with vendor/contractor for meeting certain objectives and undertaking Contract Administration for achieving such objectives through performance by each party as per Contract. This is broader term which includes Contract Formation, Administration and Closure

From the above, we can say that:

1) Contract Management = Contract Formation + Contract Administration
2) Contract Management = PR to PO Process + PO to Closeout Process

The above explanation brings out the difference between Contract Administration and Management. In other words, Contract Management is a larger process and Contract Administration is one part of it

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Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Dear Readers,

In previous posts we discussed the meaning and definition of Contract, Agreement and Consideration. Subsequent posts briefly touched Contracts Laws and Principles. To read last posts again, please click on link below;

http://www.rkstrainings.com/contract-principles-equity-justice-and-reasonableness/

In this post, let us discuss Contract Life Cycle and its 4 distinct stages as mentioned below

A) Stage 1 of Contract Life Cycle – Identifying Contract Objectives

This is first stage of Contract Life Cycle. This deals with WHY to enter into a contract and WHAT is the purpose of signing a binding agreement. This stage addresses questions such as: what a person want or desire to have. Accordingly, this want or need, when worded in the form of a statement, becomes the purpose or goal to achieve. Subsequently, the purpose emerges into clearly defined and measurable requirements called objectives. Accordingly, Contract Life Cycle starts when a person has certain need or desire and he wishes to fulfil the same

Let us illustrate the above with a simple example

Let us assume Raj wants to see his house painted before Diwali and Diwali falls 90 days from now. Therefore, Raj’s need or purpose is to get the house painted within next 90 days. In order to achieve the purpose, Raj needs to find out the followings

1. Detailed Scope for Painting Work (work items / quantities)
2. Paint specifications, manufacturer & color and application requirements
3. Amount of money he want to spend
4. Time available to plan and execute the Work

From the above, we see that the purpose of having the house painted gets translated into followings “specific requirements”

1. Scope of work (SCOPE)
2. Color/manufacturer/specification (QUALITY)
3. Budget and Funds Allocation (COST)
4. Time for completion for entire Works (TIME)

Above requirements in term of Scope, Cost, Time & Quality are called Contract Objectives. These objectives shall become the basis of forming a contract with the eventual painter

Stage 2 of Contract Life Cycle – Contract Formation

It is second stage of a Contract Life Cycle. It starts upon finalization of contract objectives. Here Raj needs to identify a person/painter who can meet the above mentioned contract objectives. Subsequently, he will sign a legally binding agreement with selected agency

Above stage which ends with signing of agreement between the parties is called Contract Formation. Such signed contract shall become the basis of work execution. Here both parties commit to execute the work as per contract

It is also called planning stage because here;

1. Works execution planned
2. Requirements and responsibilities of parties frozen
3. Price and payment terms agreed and
4. Time period for work execution fixed

Stage 3- Contract Administration

The word administration means to execute, follow up, enforce or implement what has been stated in a policy or law or a rule book. This is third stage of Contract Life Cycle and is known as work execution stage. Work is actually performed and delivered here. During this stage, parties execute the work and discharge their responsibilities as per contract

For painting example, painter execute the work in accordance with agreed technical requirements and timelines. Accordingly, Raj see that, job has been performed as per the contract. Also, Raj make due payment as agreed. Here owner receives the painting services and painter receives the agreed money. Hence, parties receive what they wanted & intended contract objectives are met

Stage 4 – Contract Closure

This is final stage of the Contract Life Cycle. Here parties intend to come out of the binding relationship. This is because, there is no need to continue the contractual relationships anymore when

• Owner gets the painting services to his full satisfaction and
• Painter receive due payment
• Intended contract objectives met for both parties

Once both parties have discharged their responsibilities under the contract, they need to formally close the contract. This is necessary so that parties are free from any further obligation towards each other. The cycle ends here upon formal contract closure

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Next Post – Contract Administration versus Management

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Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

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