Using the Theory of Contracts to design and manage donor-funded projects

Theory of Contracts or Contracts Theory is defined by Investopedia as, “…. the study of how people and organizations construct and develop legal agreements. It analyzes how parties with conflicting interests build formal and informal contracts […]. Contract theory draws upon principles of financial and economic behavior as different parties have different incentives to perform or not perform particular actions.”
Over the years, most International Governmental Organisations (IGOs) have been able to raise substantial amounts of money through donations and gifts, and allocate this money in various locations around the world to empower and improve the lives of many. Today, it has never been more important for IGOs to employ highly skilled professionals who can assist in the management of complicated projects and programmes being implemented around the world. The need for well-equipped, career-minded human resources with the skills to design, develop and manage donor-funded humanitarian projects, as well as the vital surplus funds at the end of financial years, which generate skills that enable them to progress in their careers, is paramount.
Theory of contracts in donor-funded projects

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The six (6) phases of the humanitarian project cycle

According to the United Nations Office for the Coordination of Humanitarian Affairs (OCHA), a total of $1.23 billion in donor funding was raised in 2022. This money, if well managed, can go a long way in significantly improving and transforming the lives of the very poor and vulnerable in our societies, as well as those displaced by war and natural disasters. The six (6) stages of the Humanitarian Project Life Cycle (HPLC) are
 
Stage 1: Programming

This is the first stage of the HPLC, and includes an analysis of the process of setting broader organisational and sector policy objectives at the global level. The relationship between these overarching objectives and those of the Sustainable Development Goals (SDGs) is considered and demonstrated. 
 
Stage 2: Identification

This is the second stage and involves the design of the various techniques used to identify the core areas that fall under the purview and implementation of the Humanitarian Project Life Cycle, from the prioritised list of overall objectives.
 
Stage 3: Formulation

This is the third phase of the HPLC and must focus on the design and implementation strategies as well as logic testing and feasibility analysis, i.e. how best to infuse the implementation taking into account the enterprise environmental factors and the private donor's objective and expectations.
 
Stage 4: Financing

This is the fourth stage and defines the contractual obligations between the funding agency i.e. the contracting authority and the implementing agency or party i.e. the contractor, supplier, consultant (individual and technical services based). It is at this stage that the theory of contracts or contracts management plays its most important and effective role. Without the input of a Contracts Portfolio Specialist, the chances of having a non-deliverable project implemented without the time, cost and quality parameters are examined.
 
Stage 5: Implementation

This is the fifth stage and involves structuring the stages of project implementation.
 
Stage 6: Evaluation

This is the final stage and is designed to continually evaluate the initial five (5) phases as a Total Quality Management (TQM) tool for continuous improvement and also to quickly identify and well document both in and out learned lessons. This process also seeks to justify and complete the cycle for the reasons why donors contributed to the implementation of the applicable HPLCs.

Theory of Contracts

The five (5) aspects of the theory of contracting define such IGOs and how they engage third party partners such as contractors, consultants and affiliates. Effective procurement and disbursement requires a very rigorous and scrutinising analysis of expenditure and each stage of funded project implementation and transparent reporting mechanisms. If funds are not used and spent carefully, the confidence of beneficiaries, donors, internal staff and all stakeholders will be undermined. It is only when funds are used effectively per the reasons for which they were sourced and managed in accordance with the expectations of the donor that funding is tied to the expectations and requirements of the donor. 
The theory of contracts plays a crucial role in keeping HPLC and other project costs down in general. It ensures compliance with legal requirements, i.e. sovereign. Enterprise environmental factors and designs are the ideal contractual vehicles to mitigate, avoid and, in the worst case, transfer risks. The importance of engaging a highly experienced contract portfolio specialist for humanitarian projects cannot be underestimated. The wrong or poorly drafted contract clause can easily cost the donor agency huge sums of money and inconvenience that could have been easily avoided. By implementing good contract management practices, project managers can anticipate and manage potential delays, limit disputes and conflict management, and greatly increase the potential for successful project implementation. It is also important to emphasise that there is a clear difference between contract expertise and legal advice.

How does Theory of Contracts ensure project implementation success?

To better appreciate and understand how the theory of contracts affects the implementation of the project life cycle, it is better to have a very simple overview of what this involves. Contract management involves three (3) key stages:
 
Pre-Signing Stage
 
  • Confirming the need to engage a third party.
  • Confirming the availability of funds.
  • Establishing specifications.
  • Conducting market research.
  • Initial enquiry.
  • Designing the type of contract to be used i.e. one-off Standard Contract, Framework Agreement or Dynamic Purchasing System (DPS) etc.
  • Drafting of the contract.
  • Review and approval of the draft contract. 
Signing Stage
 
  • Initiate negotiation processes.
  • Approval of the contract.
  • Signing of the contract by all parties. 
Post-Signing Stage
 
  • Issue call-offs for framework or DPS agreements (where applicable).
  • Contract execution.
  • Management of commitments.
  • Revisions, amendments and variations.
  • Contract review.
  • Contract renewal (where applicable). 
The importance of effectively implementing each stage of contract management in the overall HPLC design, development and implementation to ensure its ultimate success is key. The theory of contracts or contract management ensures that there is clear clarity about the roles and responsibilities of each party to the contract. Such non-clarity can lead to a shift in acceptance of which party is its responsibilities especially for Time & Materials (T&M) or Fixed Price Economic Price Adjustment (FPEPA) model contracts which in some cases can serve as a much better long term engagement tool than framework agreement contracts.

In summary

In summary, the effective implementation of contract theory or contract management ensures, in a very simple but crucial way, that all projects, and HPLC in particular, are delivered on budget and on time, and most importantly, with minimum or minus complications, legal disputes or litigation. This will ensure that there is always an Equitable Allocation of Risk (EAR), as no donor agency wants contractual disputes to derail the implementation of their projects.

Theory of contracts in donor-funded projects - the author
Author: Dr. Nana Sackey PhD is a Contract Portfolio Specialist with several years of experience in innovative contracting across shipping, telecoms, managing donor funded projects and academia. He is a Certified Agile Project Manager (IAPM), holds an M.Sc. in Procurement and a PhD in Contract Management. He has facilitated several corporate trainings in the past, focused on contract administration, cost estimation, spend analysis and risk management within contract portfolios. He remains committed to shaping the future of contract design, structure, analysis and management.
He is happily married to Debbie with whom he shares three kids – Iden, Ibby & Ilse – with.
Keywords: Project management, Contract theory

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