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Chapter 5 – Project Charter

Part 3

Contract administration – what is that?

Contract administration allows contracts to be

  • designed,
  • concluded and
  • executed in such a way that the project objective is
  • attained or
  • surpassed.

In project contracts, the objective is usually the construction of a facility, in particular a building or an industrial plant. From a contractual perspective, the contract administration team acts to represent the project objectives. This means that it has to ensure that the contract deliverable is supplied in a defect-free state. For this, the contract administrator has to identify constraints in terms of time, finances, human resources or other factors and implement appropriate measures. For example, he ensures that contractually-agreed deadlines are met. This also forms the basis for the claim management process. Contract administration is closely related to change management and quality management.

So, in a nutshell the contract administration is the part of project management dealing with the coordination of contract design, conclusion, execution with a view to attaining the project objectives, and modification.

The contract administration process continues throughout the project. It comprises both factual activities (e.g. preserving evidence for claim management) and legal activities (e.g. contract changes, reminders). The main tools used for contract administration are the various forms of documentation available. These primarily include

  • contracts (e.g. with customers, sub-contractors, consortia)
  • other agreements and change logs
  • correspondence, construction site reports, job records, photos
  • delivery notes, customs certificates, official permits
  • other methods of preserving evidence
  • modern communication media (especially IT)
  • forms and checklists

What is special about contracts in projects?

Compared to other contracts, project contracts have some specific characteristics:

  • Acceptance: Acceptance is an important milestone in the project lifecycle. If the contractor has carried out the work or service in accordance with the contract, the customer is obliged to accept it and the contractor has the right to acceptance.
  • Warranty: A warranty is a declaration or assurance that the goods or services will perform as agreed. For example, German law stipulates quality and durability warranties. A warranty goes beyond statutory guarantee rights.
  • Exclusion of liability: The contractor must try to limit or exclude his liability. If sanctions have been agreed, it must be ensured that additional liability for damages is excluded. Claims for damages require a fixed upper limit, e.g. five percent of the contract value.
  • Limitation of defect claims: The following limitation periods apply in the law on contracts for work and services, which often applies to project contracts:
    • Five years for construction work or for planning or monitoring services rendered in connection with the construction project.
    • Two years for the manufacturing, maintenance or modification of a product and for planning or monitoring services rendered in this connection.

Rights in case of impairment of performance

In the event of performance impairment, the customer has the following rights:

  • contractual penalty
  • refusal of performance until counter-performance is affected (= retaining lien)
  • supplementary performance (formerly: rectification of defects – takes precedence over other defect claims)
  • self-execution (formerly: execution by substitution)
  • price reduction and cancellation of contract
  • damages (if the contractor is at fault)
  • termination for cause

In the event of performance impairment, the contractor has the following rights:

  • refusal of performance until counter-performance is affected (= retaining lien)
  • default interest
  • cancellation of the contract
  • damages (if the customer is at fault)
  • termination for cause

→ To assert the above-mentioned rights, customer and contractor must be aware of them and of the necessary procedures.

How is a good contract administrator is characterised?

Contract administrators should have interdisciplinary knowledge. Engineers with commercial knowledge or vice-versa, plus a basic understanding of the law. They are responsible that a contract is content-related and formally implemented.

Types of contracts

Types of contracts which are often used in projects are the

  • contracts of sale,
  • contracts for service and
  • contracts for work and service.

Entry into force of a contract and its invalidity

As soon as you have considered your project and the corresponding contracts, you need to know when and how a contract comes into effect. There are several ways in which a contract can come into force. One possibility is that all parties sign the contract, the other is that one party makes an oral or written offer and the other party accepts this offer unconditionally. Oral contracts usually have legal force, but aren't recommended because they aren't verifiable. It depends on the respective country if a contract becomes invalid. There are countries with contract autonomy (e.g. Germany) and countries without contract autonomy (e.g. Saudi Arabia).

  • Countries with contract autonomy:
    Everything which is not expressly forbidden is allowed.
  • Countries without contract autonomy:
    Everything which is not expressly allowed is forbidden.

How the story ends

After this conversation with his friend, Dr. Rogers deals with the topic of contracts. He'd read much about it, but it was all Greek to him. So he decides to delegate this matter to a project team member. As a project manager he cannot do all by himself, he needs the support of his team.