Improving project management through effective contract and claim management
Contract and claim management play an important role in project management: In order to complete projects successfully and economically, laws and contracts must be strictly adhered to. If this is not the case, risks increase, e.g., due to additional demands from the client. In this context, both contract management and claim management are essential to the project. Contract management deals with the design, analysis, conclusion and amendment of contracts, taking into account the links with change and claim management, as well as the monitoring of contract performance. Claim management is the part of project management that manages requirements, change requests or enhancements.
Content
Contracts in externally commissioned projects
The basis for almost all externally commissioned projects is the project contract. Its contents are binding on all parties to the contract. They, and especially the project managers, must know and understand it. Contract management, which is described in detail below, first helps to identify the rights and obligations arising from the contract. This is where the first risks to the project become apparent. Only when your rights are clearly identified and documented is it possible to enforce them. Contract management controls the execution of contracts during the course of the project in such a way that obligations can be precisely fulfilled, and risks minimised.
A prerequisite for effective contract management is that management and the project manager are aware that contracts must be precisely fulfilled. This is the only way to avoid additional demands from the contractual partner and to keep the costs and deadlines of the project under control.
A prerequisite for effective contract management is that management and the project manager are aware that contracts must be precisely fulfilled. This is the only way to avoid additional demands from the contractual partner and to keep the costs and deadlines of the project under control.
Legal sphere
The law applicable to a project and its facets can be divided into different legal spheres according to their historical origins. The largest of these are the continental European, Anglo-Saxon, Chinese and Islamic legal systems. The legal spheres differ in terms of the establishment of norms, i.e., statutory law, customary law and case law, divine law (based on rules given by God and not on conventions agreed by human beings), etc., but also in terms of the application of law, e.g. the role of a judge.
Depending on the area of law applicable to the project, it is necessary to clarify how contract law is regulated. In addition, provisions on general terms and conditions as well as special provisions for individual types of contracts, such as the contract for work and services, the contract of sale and the contract for services, must be taken into account. Of particular importance for the performance of the contract is the applicable law in the event of a disruption of performance.
Depending on the area of law applicable to the project, it is necessary to clarify how contract law is regulated. In addition, provisions on general terms and conditions as well as special provisions for individual types of contracts, such as the contract for work and services, the contract of sale and the contract for services, must be taken into account. Of particular importance for the performance of the contract is the applicable law in the event of a disruption of performance.
Contract
Contracts are the most important form of legal transaction. They govern the relationship between two or more parties. The contract sets out who does what for whom, what is to be done and what rules apply. Contracts are a kind of law between the parties to create legal certainty. Therefore, the parties to the contract must be clearly defined. Contracts must also be clear and unambiguous. The parties and the subject matter of the contract must be clearly defined. However, particularly in the case of international contracts, there are additional challenges to be considered in relation to the choice of law, the place where the law is to be applied and local regulations.
Verbally concluded contracts
In some legal spheres, a contract concluded orally is valid, but for reasons of evidence, even if permitted, it is not advisable. In other legal spheres, most types of contracts are subject to a written form requirement. All contracts should be in writing, regardless of the jurisdiction.
Freedom of contract and state approval requirements
There are legal spheres in which contractual freedom (= contractual autonomy) prevails. Thus, all contractual arrangements are permitted and effective. However, the principle of contractual freedom finds its limits in constitutional principles. The contracting parties must observe the applicable laws and good morals. Contracts that violate these are invalid. In other legal spheres, it must be examined whether the conclusion and content of contracts are subject to state approval regulations. For example, arbitration agreements may only be permitted to a limited extent. But even if they are permissible, it must be clarified whether an arbitration award can be enforced in the respective country and whether a claim derived from an arbitration award can actually be collected in the legal sphere of the contracting party.
Verbally concluded contracts
In some legal spheres, a contract concluded orally is valid, but for reasons of evidence, even if permitted, it is not advisable. In other legal spheres, most types of contracts are subject to a written form requirement. All contracts should be in writing, regardless of the jurisdiction.
Freedom of contract and state approval requirements
There are legal spheres in which contractual freedom (= contractual autonomy) prevails. Thus, all contractual arrangements are permitted and effective. However, the principle of contractual freedom finds its limits in constitutional principles. The contracting parties must observe the applicable laws and good morals. Contracts that violate these are invalid. In other legal spheres, it must be examined whether the conclusion and content of contracts are subject to state approval regulations. For example, arbitration agreements may only be permitted to a limited extent. But even if they are permissible, it must be clarified whether an arbitration award can be enforced in the respective country and whether a claim derived from an arbitration award can actually be collected in the legal sphere of the contracting party.
Project contract
The project contract is a contract concluded between the project executing agency (= client) and the executing party (= contractor). It regulates the rights and obligations of both parties in a specific project. In project contracts, the contractual goal is usually the construction of a plant, in particular a building or an industrial plant. In accordance with the definition of the project as an undertaking under unique conditions, the project contract is also characterised by the uniqueness of its goal. The contract is fulfilled when this goal is achieved. The authorised signatories of the contracting parties must sign the final contract. If the project manager was not involved in the drafting of the project contract, he must check the clauses of the signed contract for particular pitfalls. During the course of the project, he pays particular attention to disruptions in the execution of the contract and their legal consequences - for example, contractual penalties that threaten if the project team exceeds contractually agreed deadlines. In addition, he has to monitor contractual arrangements with subcontractors and contracts within a consortium. He also has to deal with the specific risk areas that may result from project contracts. Such risk areas could be:
Free choice of law
The free choice of law refers to the relationship between the parties under the law of obligations. The question of transfer of title is governed by the mandatory property law of the place where the plant is built. The same applies to tort claims. A limitation of liability is necessary because of the connection with the standards applicable at the place of installation.
Choice of law
The first thing to consider is whether the national law allows the choice of law at all. If possible, the familiar law of one's own legal sphere should be chosen. If this is not possible, the neutral law of Switzerland could be chosen. The choice of law determines the jurisdiction and the arbitration agreement.
Contractual language
As far as possible, the contract should be drawn up in a single, internationally recognised language (e.g. English). In the case of multilingual versions of the contract, the priority of one language must be determined.
Arbitration
The arbitrators may be experts appointed by the parties. As there is only one instance, an arbitral tribunal can speed up proceedings compared to ordinary courts. In addition, arbitration is less expensive than litigation. The recognition of arbitral tribunals and the enforceability of their decisions must be verified in advance in the same way as for the competent state courts.
Contractual penalty
In some legal systems it is not permissible to agree on a contractual penalty. It is therefore preferable to agree liquidated damages rather than penalties in international contracts.
Transfer of risk and ownership
The transfer of risk and ownership must be regulated precisely; if necessary, separate regulations (including local laws) must be made on the transfer of ownership.
Guarantees
Guarantees go beyond the legal claims for defects. In this respect, exclusion of liability is not possible. Therefore, the guaranteed services should be precisely defined for the purpose of limiting liability.
Other possible risk areas may include import and export restrictions, local partners, licensing, customs and foreign exchange regulations, currency risks, transfer risks, cost changes during the project term, price clauses or licensing procedures.
Free choice of law
The free choice of law refers to the relationship between the parties under the law of obligations. The question of transfer of title is governed by the mandatory property law of the place where the plant is built. The same applies to tort claims. A limitation of liability is necessary because of the connection with the standards applicable at the place of installation.
Choice of law
The first thing to consider is whether the national law allows the choice of law at all. If possible, the familiar law of one's own legal sphere should be chosen. If this is not possible, the neutral law of Switzerland could be chosen. The choice of law determines the jurisdiction and the arbitration agreement.
Contractual language
As far as possible, the contract should be drawn up in a single, internationally recognised language (e.g. English). In the case of multilingual versions of the contract, the priority of one language must be determined.
Arbitration
The arbitrators may be experts appointed by the parties. As there is only one instance, an arbitral tribunal can speed up proceedings compared to ordinary courts. In addition, arbitration is less expensive than litigation. The recognition of arbitral tribunals and the enforceability of their decisions must be verified in advance in the same way as for the competent state courts.
Contractual penalty
In some legal systems it is not permissible to agree on a contractual penalty. It is therefore preferable to agree liquidated damages rather than penalties in international contracts.
Transfer of risk and ownership
The transfer of risk and ownership must be regulated precisely; if necessary, separate regulations (including local laws) must be made on the transfer of ownership.
Guarantees
Guarantees go beyond the legal claims for defects. In this respect, exclusion of liability is not possible. Therefore, the guaranteed services should be precisely defined for the purpose of limiting liability.
Other possible risk areas may include import and export restrictions, local partners, licensing, customs and foreign exchange regulations, currency risks, transfer risks, cost changes during the project term, price clauses or licensing procedures.
Contract management
In implementing the contents of the contract, the contractor usually makes use of other companies. He regulates the cooperation with external companies (= third parties) according to two models: Either he awards subcontracts to subcontractors, or he works together with equal partners within the framework of a consortium. Accordingly, the contract situation is different.
Contract management is embedded within project management to control the drafting, conclusion, updating and execution of contracts in order to achieve the project goals. Methodologically, it is closely linked to change management. From a contractual point of view, contract management stands up for the goals of the project. This means: the contractually agreed work must be produced free of defects.
Tasks and responsibilities
Contract management oversees contract negotiations between the client and contractor, the implementation of contracts, and contract changes that may be required for technical, scheduling, or financial reasons. It helps to design, conclude and manage a contract in such a way that the project objective is met or exceeded. It captures all contractually relevant data, prepares it for project management and thus creates the prerequisites for claim management. Contract management can be carried out by the affected and involved areas of the company, a member of the project team, a separate staff unit or external experts. Those responsible for contract management should have interdisciplinary knowledge. Technicians with commercial knowledge or business people with technical knowledge are needed. Both groups of people need basic legal knowledge.
Relevant documents for contract management
Contract management runs parallel to the project and includes, for example, securing evidence for claims management, but also legal activities such as amending contracts and managing the dunning process. It makes use of all available documents.
This includes in particular
Contract management is embedded within project management to control the drafting, conclusion, updating and execution of contracts in order to achieve the project goals. Methodologically, it is closely linked to change management. From a contractual point of view, contract management stands up for the goals of the project. This means: the contractually agreed work must be produced free of defects.
Tasks and responsibilities
Contract management oversees contract negotiations between the client and contractor, the implementation of contracts, and contract changes that may be required for technical, scheduling, or financial reasons. It helps to design, conclude and manage a contract in such a way that the project objective is met or exceeded. It captures all contractually relevant data, prepares it for project management and thus creates the prerequisites for claim management. Contract management can be carried out by the affected and involved areas of the company, a member of the project team, a separate staff unit or external experts. Those responsible for contract management should have interdisciplinary knowledge. Technicians with commercial knowledge or business people with technical knowledge are needed. Both groups of people need basic legal knowledge.
Relevant documents for contract management
Contract management runs parallel to the project and includes, for example, securing evidence for claims management, but also legal activities such as amending contracts and managing the dunning process. It makes use of all available documents.
This includes in particular
- Contracts (e.g., with customers, subcontractors, consortia),
- other agreements and change logs,
- correspondence, construction site reports, construction logs, photos,
- delivery notes, customs confirmations, official permits,
- other means of preserving evidence as well as
- forms and checklists.
Claim management
In the context of contract management, supplementary claim management is of particular importance. But what does this mean exactly? A claim can be made by one contracting party to the other on the basis of a contract if there are additional claims for remuneration, for example because of
Claim management helps to ensure that project goals can be achieved or exceeded, especially in financial terms. Its focus is on the rights that exist beyond the actual contract and result from additional work, additional orders and deadline postponements by the contractual partner. The systematic recording of possible additional claims and the legal enforcement can bring a significant increase in revenue compared to the original contract value. At the same time, claim management fends off unjustified claims by the other party to the contract.
Claim management interacts with other project management functions, such as
Interaction with document management
All available documentation shall be used to record deviations from the contract specifications. This includes change orders or change logs, correspondence and site reports that show changes in performance or deadlines. If additional claims are settled quickly, some of the costly documentation may not be necessary. It is helpful to have an agreement with the partner on procedure and change management. Contract and claims management is therefore closely related to several other project management functions.
Interaction with change management
In a project, both the client and the contractor may propose or request changes. If these are accepted in accordance with the agreed change procedure, they become contractually effective and constitute a change to the contract. Contract Management is responsible for adapting and supplementing the contracts according to the change management specifications. If there is no approved change, this provides a basis for disputed mutual additional claims.
Interaction with risk management
Risk management is the process of identifying and preventing risks. If risks are identified in good time, there is an opportunity to make additional claims. In this context, risks can be understood as the possibility of harmful changes in status. Risks in this sense are identified and limited as part of contract management. For this purpose, the contract manager primarily identifies possible defaults and the associated consequences. Risks are identified and described almost automatically. Excerpts from the contract and additional comments can be used as supporting documentation. From a legal perspective, risks can be divided into the following groups:
On the possible alternatives for dealing with the risks
As part of the project organisation, the project manager should ensure close cooperation between the responsible staff in these different management areas.
- change agreements,
- additional services rendered on the basis of verbal instructions, or due to deviations from plan specifications, because
- the other party to the contract does not fulfil its contractual obligations or only fulfils them inadequately and therefore
- the execution of the contract is demonstrably impeded and interrupted.
Claim management helps to ensure that project goals can be achieved or exceeded, especially in financial terms. Its focus is on the rights that exist beyond the actual contract and result from additional work, additional orders and deadline postponements by the contractual partner. The systematic recording of possible additional claims and the legal enforcement can bring a significant increase in revenue compared to the original contract value. At the same time, claim management fends off unjustified claims by the other party to the contract.
Claim management interacts with other project management functions, such as
- Document management
- Change management
- Risk management
Interaction with document management
All available documentation shall be used to record deviations from the contract specifications. This includes change orders or change logs, correspondence and site reports that show changes in performance or deadlines. If additional claims are settled quickly, some of the costly documentation may not be necessary. It is helpful to have an agreement with the partner on procedure and change management. Contract and claims management is therefore closely related to several other project management functions.
Interaction with change management
In a project, both the client and the contractor may propose or request changes. If these are accepted in accordance with the agreed change procedure, they become contractually effective and constitute a change to the contract. Contract Management is responsible for adapting and supplementing the contracts according to the change management specifications. If there is no approved change, this provides a basis for disputed mutual additional claims.
Interaction with risk management
Risk management is the process of identifying and preventing risks. If risks are identified in good time, there is an opportunity to make additional claims. In this context, risks can be understood as the possibility of harmful changes in status. Risks in this sense are identified and limited as part of contract management. For this purpose, the contract manager primarily identifies possible defaults and the associated consequences. Risks are identified and described almost automatically. Excerpts from the contract and additional comments can be used as supporting documentation. From a legal perspective, risks can be divided into the following groups:
- Foreseeable risks
- Special, not yet quantifiable risks from weaknesses in the contract
- Special, not yet quantifiable risks from the environment
On the possible alternatives for dealing with the risks
- eliminate or avoid,
- reduce or mitigate,
- insure or pass through,
- shift or accept,
As part of the project organisation, the project manager should ensure close cooperation between the responsible staff in these different management areas.
Conclusion
In order to complete the project successfully, the project manager and their team must strictly adhere to the law and focus on the contractually fixed agreements. This is the only way to avoid risks such as additional demands by the client.
The project contract is of great importance in this context because it is the starting point for contract management, with its help rights and obligations from contracts can be identified and implemented or enforced. The project contract also serves as a basis for qualified claim management. In other words, it is used to assert additional claims and to generate revenue resulting from changes that go beyond the actual contract.
The project contract is of great importance in this context because it is the starting point for contract management, with its help rights and obligations from contracts can be identified and implemented or enforced. The project contract also serves as a basis for qualified claim management. In other words, it is used to assert additional claims and to generate revenue resulting from changes that go beyond the actual contract.
Author: Dr. Roland Ottmann
Keywords: Project management, Guide, Contract management, Claim management