The construction industry is a complex sector involving many stakeholders, including contractors, subcontractors, vendors, and clients. On top of this, skyrocketing raw material costs, scrupulous compliance requirements, and the onerous nature of labor engagements makes contract management in the construction industry a most challenging task.
We had the privilege of interviewing Gemma Nugent, principal lawyer, SoundLegal, and seasoned contract management professional with extensive experience in the construction industry in Australia. In this blog post, we've shared our discussion with her on some of the most significant contract management challenges in the construction industry, and strategies for overcoming them.
The major contract management challenges in construction projects
First, Gemma highlighted the three main contract management challenges in construction projects, each of which are discussed below.
Accurately defining the scope of work
Establishing a clear and detailed scope of work is essential for managing all parties' expectations and ensuring a successful project outcome. This involves outlining and specifying tasks, deadlines, and costs, allowing all parties to have a mutual understanding of the project's requirements.
A well-defined process for handling changes is crucial for addressing potential issues, such as supply chain delays, modifications in building approvals, or shifting project needs. By having a clear system for managing changes, parties can better negotiate alterations to the scope, price, and timeline of the project, minimizing potential disputes.
Handling project timelines
Incorporating provisions into contracts for managing project timelines helps to maintain healthy relationships between parties. As tight labor markets and supply chain interruptions cause delays beyond a contractor's control, having a transparent process for addressing these disruptions can prevent misunderstandings and strained relationships among stakeholders.
Gemma says, "Each of these challenges influence the other. While drafting the scope of work, the contract author must have a good understanding of the project timelines, interests of the parties involved, possibilities for fluctuations in raw material and labor costs, and availability. A well-written first draft of SOW [scope of work] can make change management less difficult than it needs to be."
The effect of the pandemic on contract management
Gemma discussed the impact of the pandemic on contract management in Western Australia. She observed the following changes in contract management as the industry, along with the rest of the world, emerged from the pandemic.
Implementing strategies to address COVID related delays
As the COVID related delays became foreseeable, parties started implementing dedicated COVID strategies as opposed tousing force majeure clauses. These strategies helped parties address changes in project scope, time, and cost more effectively.
Introduction of escalation clauses
Lingering supply chain delays and rising labor and material costs led to builders negotiating escalation clauses into contracts for the first time; for example, moving from a lump sum delivery model to cost-plus contracts.
Addressing potential risks and uncertainties
Contract managers began to proactively address potential risks and uncertainties at a project's start, enabling them to better handle issues when they arose.
"By discussing potential risks and uncertainties at the outset of the project and developing a process for managing them, contract managers are better positioned to handle any issues that arise during the construction process," Gemma said.
How can you mitigate the challenges?
To mitigate the challenges and improve contract management processes, Gemma advised organizations to complete the following tasks.
Conduct a contract audit
Companies must review their current contracts to check for any inconsistencies, outdated clauses, and inefficient processes, and ensure compliance with current legislation and ethical obligations.
Update and streamline contracts
Based on the audit findings, companies must work with their legal and commercial teams to update and streamline their contracts, ensuring they are clear, concise, and effective.
Integrate contracts with contract management systems
Adoption of a powerful contract management system will help companies effectively manage deadlines, cash flow, and other essential aspects of the project.
Strive for continuous improvement
Organizations must regularly evaluate and adjust their contract management processes, keeping an eye on industry trends, technological advancements, and changes in legal and regulatory requirements. This will ensure that their contract management system remains effective and up to date.
Develop strong relationships with stakeholders
Companies must foster healthy relationships with their clients, suppliers, and partners to create a collaborative environment that promotes successful project outcomes.
Invest in training and professional development
Providing training and professional development opportunities for employees involved in contract management will help companies stay informed about best practices, new tools, and new techniques, ultimately contributing to the effectiveness of their contract management processes.
"The ultimate objective is to achieve a great project outcome, where all parties involved are satisfied with the result and are willing to work together again in the future," Gemma explained.
The key skills contract managers need to have
Gemma has some practical advice to contract managers in the construction industry to help them stay relevant and contribute to their organization.
Gain practical experience
Contract managers should spend time on-site to understand the processes involved in construction. This can help them grasp the practical implications of contract provisions and adapt accordingly.
Develop a diverse skillset
Contract managers should strive to acquire various skills related to budget management, project programming, and team management. This will enable them to handle the different aspects of contract management effectively.
Building strong communication skills is essential, as contract managers need to interact with various stakeholders such asproject owners, subcontractors, and builders. Engaging in open dialogue can help resolve issues and better understand project needs.
The importance of ethics in managing contracts
In the construction industry, ethics in contract management involves not only adhering to legal requirements but also maintaining a commitment to ethical principles. Organizations must consider a variety of factors, including anti-bribery, anti-corruption, and modern slavery laws, when managing contracts ethically.
However, merely incorporating such clauses into contracts might not be sufficient. Companies should also ensure they live up to these commitments by:
Establishing strong relationships with trusted commercial partners who share similar ethical values and practices.
Continuously monitoring their supply chain for any signs of unethical behavior, and addressing issues promptly when they arise.
Implementing robust internal controls and processes to maintain ethical standards across the organization.
Engaging with all stakeholders to maintain transparency and accountability in their actions and decision-making processes.
By taking a proactive approach, organizations in the construction industry can demonstrate their commitment to ethical conduct and help promote a more responsible and sustainable industry as a whole.
The future of contract management in the construction industry
Gemma felt that technology will have a huge role to play in contract management in the future. She made the following predictions, discussed below.
Influence of technology
Advancements in artificial intelligence and digital solutions will reshape the industry, even though it has been traditionally resistant to change.
Adoption of smart contracts
Contract management will eventually shift towards digital and holistic approaches, such as smart contracts, facilitating better management of variations and extensions of time.
Technology will enable better data collection and analysis from contracts, enabling informed decision-making, better compliance, and project risk mitigation.
Improved data management will aid in creating comprehensive contracts that are less dependent on analog transactional documents.
"Effective contract management helps to ensure that all of parties involved in the project understand their obligations, and that the project is completed on time, within budget, and to the satisfaction of all stakeholders.With the right approach and tools, construction projects can be delivered successfully, with benefits for all involved," concludes Gemma.
The increasing complexity and volume of contracts in today's business environment make it crucial to have an efficient and automated contract management solution. Read our blog on the contract management challenges in the oil and gas sector to learn more. If you're ready to take your contract management to the next level, sign up for a free trial of Zoho Contracts and see the difference it makes to your business!