the time required to manage the contract based on this plan. The hourly rate can be used to calculate the estimated costs. Recording the time actually spent, and analyzing the differences between that and the estimated time, ensures that the organization continuously improves its own experience figures on which subsequent estimates are based.
When preparing their business case, suppliers often calculate a form of TCCO in advance, in which they include costs such as contract management, relationship management, project management, and service management. When structuring their contract management, they will often take into account the structure chosen by the client.
■ 1.4 BALANCING COSTS AND BENEFITS
Organizations with contracts who want to professionalize their contract management to make sure that they realize their intended contract objectives, choose to what extent they want to professionalize contract management. This is established in the contract management policy. This policy also identifies the choices that have been made regarding the desired effectiveness and efficiency of the contract management process. For some organizations, compliance with certain laws and regulations is reason enough to implement intensive, full-scale contract management. Other organizations want to see a monetary result related to contract objectives or contract value.
When the choice to apply contract management must be made, every organization makes its own evaluation of risks, costs and benefits. Regardless of the result of those evaluations, the following always applies:
Contract management pays off when its execution leads to added value, better risk management, and/or better (demonstrable) compliance with laws and regulations.
In the previous chapter, we explained the effectiveness and efficiency of contract management. When organizations decide to use CATS CM to organize their contract management more effectively and efficiently, it is best to know the definitions used in CATS CM. This chapter defines the most important terms related to contract management. These terms are the foundation for the rest of this book.
■ 2.1 DEFINITION OF CONTRACT
A book about contract management must, first of all, define the term ‘contract’. Laws and regulations in different countries give definitions of the term contract that may seem to differ in nuances but which largely share a common foundation. This common foundation is expressed in the following definition:
A contract is a written agreement, the result of a multilateral legal act, in which one or more parties enter into an agreement with one or more other parties.
When we delve deeper into this definition, we see that the definition indicates that compliance with the terms of the contract can be legally enforced. This is meant by the term ‘legal act’. The ultimate form of enforcement is that a dispute arising from the contract can be brought before a court of law. There are other ways of resolving disputes as well, such as mediation, which can be agreed upon in the contract.
The definition also mentions the fact that a contract is a written agreement. Most legal systems offer the option of entering into a contract by verbal agreement. Because it is crucial, from a contract management standpoint, for the agreements to be in writing, the definition uses the words ‘written agreement’.
In practice, supply agreements between different parts of the same organization are also called internal supply agreements or internal supply contracts. As disputes about these agreements can’t be brought before a judge (but rather taken to the higher management levels) and are subject to entirely different forms of dispute resolution, we don’t consider them to be ‘real’ contracts. This is also why we are especially careful when applying contract management to this type of internal agreement. In addition, the implementation of contract management for internal agreements means the costs double for the organization as a whole and the benefits for one party are the additional costs for the other. This means that monetary yield for contract management is zero while the organization still has to pay the costs.
■ 2.2 CONTRACT COMPONENTS
When considering contract management, the content of every contract can be divided into two parts: The Work To Be Done (WTBD) and All Other Contract Matter (AOCM). The distinction between these two components forms the foundation for the CATS CM methodology for defining and identifying the different tasks and responsibilities during the execution of a contract, and to allocate them to the different roles.
Figure 2.1 The Work To Be Done and All Other Contract Matter
The WTBD describes the performance to be provided by the supplier, which the client wants to receive. This includes how this must be done, the other aspects such as location, time of delivery, and how parties measure and account for the WTBD. Other aspects of the WTBD are the matters that the client has to arrange to ensure that the supplier can meet the performance obligation.
CATS CM categorizes all elements that are not part of WTBD as AOCM. These include, in any case, the agreements about compensation, agreements about how to act when the WTBD is not delivered according to the contract, agreements about interaction and collaboration between both parties, and also the applicable procurement or delivery terms and conditions.
■ 2.3 DEFINITION OF CONTRACT MANAGEMENT
The contract life cycle, which will be extensively explained in Chapter 4, represents the phases that every contract has to go through. The contract life cycle has an important transition moment, which occurs when the contracting parties finalize the contract by signing it. Contract management is the managing and monitoring of a contract from the moment the contract has been signed. With this in mind, the CATS CM definition of contract management is as follows:
Contract management is the realization of intended contract objectives by proactively monitoring the fulfillment of all contractually established responsibilities, obligations, procedures, agreements, conditions and rates, resolving all ambiguities, contradictions and white spaces, managing all contract-related risks, and implementing all desired changes to the contract, during the execution phase.
The AOCM described in Section 2.2 can be recognized in the definition as the ‘contractually established responsibilities, obligations, procedures, agreements, conditions and rates’.
■ 2.4 DEFINITION OF CONTRACT MANAGER
The definition of contract manager can clearly be derived from the definition of contract management.
The contract manager is the person appointed by the contract owner to ensure that all activities arising from the contract management process are carried out.
This
