Contracts used Internationally and Apply Enterprise Contract Management

QUESTION

 

 

ANSWER

 

Introduction

Contracts are always in use by the humans or the business organizations for smooth relations between the buyers and the suppliers. Over the years contracts have been evolved and have become a better version of themselves in order to provide more stability to the work process. In order to work internationally one has to acquire several permissions and grants so that the work process can be commenced smoothly and for that matter standard form of contracts are written between the parties to work smoothly and hassle free. However, standard form of contracts are necessarily signed between two parties where the negotiations between the parties are very low due to the high bargaining power of the party that will draft the contract (Aberdeen, 2008).

Standard form of contract

A standard form of contract is also sometimes referred as an ‘adhesion contract’ or ‘take it or leave it’ contract or ‘boilerplate contract’. It is a contract between two parties, in where the rules or the terms and conditions of the desired contract are drafted by one of the parties and the other party at times does not hold the ability to negotiate for favorable terms and are most of the times found themselves in a take it or leave it conundrum (Law school, 2015).

These types of contracts are not legal per se, however, there is a little scope for unconscionability. In addition to this there is also some provision for ambiguity and in the event of ambiguity the matter will be resolved and will be held against the party that has drafted the contract (CEC, 2016).

Black’s law dictionary defines standard form contract as “A standard-form contract prepared by one party, to be signed by the party in a weaker position, usually a consumer, who has little choice about the terms. Also termed contract of adhesion, adhesory contract; adhesionary contract; take it or leave it contract; leonire contract.” (Black’s law dictionary,p.38).

Standard form of contract usually provides unfair advantage to the party that is drafting the contract as they have the higher bargaining power as compare to the consumers that are generally at the receiving end only has to sign the contracts (Williamson, 1979).

Types of standard form of contracts used internationally

Big business organizations that have expanded globally in order to expand their business have to obtain contracts that will allow them to work in certain countries. There are different types of standard forms of contract that are being required for business organizations to work efficiently in those countries. For our article here we will focus on two types of standard forms of contract that are being used worldwide by the companies to do their business overseas. Following are the two types of standard forms of contract:

1. International Federation of Consulting Engineers (FIDIC)

2. Joint Contracts Tribunal (JCT)

These are two most commonly used standard forms of contracts that are applicable in almost 70% of the countries worldwide.

International Federation of Consulting Engineers (FIDIC)

FIDIC is the French acronym for the international federation of consulting engineers. It was formed in 1913 and is best known for the FIDIC family of the contract templates. The organization has a French title and that bears testimony to its foundation by France, Belgium and Switzerland. As of now, FIDIC has its presence in 104 countries across the world. The main objective behind forming this organization was to promote the interests of the consulting engineering firms globally. The FIDIC standard form of contract is best known for its complete range of the standard conditions of contract for the plant, construction and design industries. It is also one of the most widely used standard forms of contracts across the world that also includes World Bank for all its projects (Vitasek, 2011).

The FIDIC family of contracts

In 1999, new contracts were published and are known as the FIDIC‘s rainbow suite contracts. These includes:

• The Red Book: It covers conditions of contract for the construction of building and engineering works designed by the employer

• The Yellow Book: It covers conditions of contract for the plant and design build

• The Silver Book: It covers the conditions of contract for turnkey projects or the EPC

• The Green Book: It covers the Conditions of short form of contract

These were the new forms and were the first editions and are designed in a way to be user friendly with standardized approach. It also have reduced the general conditions to 20 clauses as compare to 60 clauses earlier.

In addition to these new additional forms were introduced and are in use since 1999. They are:

• The Blue Book: It covers contract of reclamation and dredging works

• FIDIC/MDB contract: It covers the conditions incorporated for the standard bidding procedures and the documents

• The White Book: It covers the consultant or the client model services of agreement

• The Gold Book: It covers FIDIC design, build and operation projects

FIDIC always have maintained standard approach while drafting the contracts and they make sure that the risks are allocated fairly between the parties and the risks must be borne by the party that has the ability to control them (Ashworth, 2001).

Evaluation of FIDIC contract

FIDIC contract are well known for its standard approach and clauses and have fared well for the construction companies across the world in terms of providing them the right platform for carrying out their business operations in different countries (Hartwel, 2008).

In this section we will evaluate the FIDIC contracts in terms of

• Strategy

• Ease of management

• Financial burden

• Risk of failure

• Cost and Time

Strategy

The main strategy behind taking a FIDIC contract is to provide stability in business operations. While commencing business in overseas countries there are lots of problems and situations arise which a business organizations has to face and in order to eradicate those situations companies takes the FIDIC contracts. In these terms we can say that the strategy behind adopting FIDIC approach is a must for multinational companies (Broome, 1997).

Ease of management

Managing a contract requires high level skills and proper business acumen. As we all know construction is a complex business industry and for that matter managing the contracts for the same can be hard at times and companies requires proper management team for it. It is not that easy as one have to be very attentive while drafting the contracts as well as implementing them. In terms of erase of management we can deduce the fact that it can be a bit labored (Cheung, 1999).

Financial burden

The mismanagement of the contact can lead to heavy financial losses as well as reputation loss. Implementing the contract can also be costly as companies have to appoint legal counsellors for the same and have to go through vigorous process while implementing the contract (Rozilawani,2003).

Risk of failure

The risk of failure is relatively low in FIDIC contracts as all the points of disputes are well mentioned and are thoroughly processed by both the parties (FIDIC,1999).

Cost and time

The implementation costs are relatively higher and also the time taken for drafting the same is also higher. There are lots of points to be understood and that makes the job a little time taking and also the costs go a notch higher because of the legal counselling it requires while drafting the contract (Hamon, 2003).

Advantages of FIDIC contracts

• The contracts are color coded and hence are easy for references.

• The FIDIC books offer a proper guarantee for the works quality through contractual conditions that are mentioned well in advance.

• The FIDIC books also covers all the contractual bindings for any unwanted situations that arises after the completion of the work.

• The validity of the good performance guarantee can be extended further by the contractor.

Disadvantages of FIDIC contracts

• It needs to be localized in terms of its presence as there many conflicts with the national regulations

• It is not very popular or known by the local contractors

• It is wide open for claims

• There is no proper control over the delays during the implementation

• There is frequent cost and time over runs

• The DAB is not much used and relatively inefficient

All in all we can say that the FIDIC contract has gain popularity amongst the construction companies across the world and multinational companies because of its easy and user friendly manuals.

The Joint Contracts Tribunal (JCT)

The Joint Contracts Tribunal (JCT) is comprised of seven members that represents a broad range of interests in the construction industries. It provides standard forms of contract, standard documentation and guidance notes for varied purpose of use in the industry. The main objective of the JCT is to provide a balanced allocation of risks between the parties.

It was established in 1931and has become a limited company in 1998. It was established by the Royal Institute of British Architects (RIBA) and the National Federation of Building Trades Employee (NFBTE).

The JCT suite of contracts

The JCT suite of contracts are updated recently and the 2011 suite is the most recent JCT suite. The previous editions of the JCT are also in use and are widely used in UK for all the construction works. The important contracts in the JCT suite are all as follows:

• Standard building contract

• Intermediate contract

• Design and build

• Intermediate contract with design

• Minor works with design

• Minor works

• Major projects

• Various sub contracts

• Frameworks, binding and non-binding

• Practice notes, guidance books and forms

The standard format of a JCT contract is:

• Articles of agreement

• Particulars for the contract

• Contract conditions

• Schedules

Main provisions of the JCT

• Definitions and the details

• Carrying out the works

• Works control

• Payment

• Damage, injury and insurance

• Collateral warranties, third party rights and assignment

• Termination

• Disputes settlement

• Variations

Evaluation of JCT contracts

JCT contracts are well known for its balanced approach towards allocation of risks between parties and have found quite a status amongst the construction companies across the world.

In this section we will evaluate the JCT contacts in terms of:

• Strategy

• Ease of management

• Financial burden

• Risk of failure

• Cost and Time

Strategy

The main objective of the JCT contract is to provide stability across different aspects of construction projects in order to balance out the risks involved between both the parties. For that matter companies that are taking up construction work across UK strategize their contracts around JCT in order to get hassle free work environment.

Ease of management

Managing JCT contract is relatively easier than the FIDIC contract as it is very user friendly and provides very simple approach towards construction contracts. Managing the contracts in order to reduce the financial loss is a must and for that matter JCT contracts are easily manageable.

Financial burden

There is a relatively a higher financial burden while implementing JCT within a multinational company however that financial burden can be rationalize as it provides better financial results after the implementation.

Risk of failure

There is a different approach within the JCT contract to avoid risks. They have maintained a different section in terms of dealing with risks with their collateral warranties and variations. This allows the contractor to have a safe approach while entering the contract.

Cost and time

The costing of implementing JCT varies with the nature and the scope of the project and the same can be said about the time taken for the implementation. The whole process of implementation is time consuming and is not so much cost effective as compare to FIDIC contract.

All in all we can say that JCT contract is more user friendly than that of FIDIC contract.

Advantages of JCT contract

• The procurement time for the JCT contracts is significantly lower than that of other traditional methods

• The undertaking from the contractors in terms of finished building can easily be fit for its purpose

• The time required for the realization of the general provisions is quick

• Very few claims are likely to occur as the main control for the claims are under the contractor

Disadvantages of JCT contracts

• There is always a risk of increased administration due to the scattered amount of time spent during the consultations process

• It may also prevents client from considering other opportunities

• There is always a risk of incomprehensiveness and inconsistency if the clients fails to manage the contracts watchfully

JCT contracts is relatively a new phenomenon as compared to FIDIC contract and is more popular in UK as compare to FIDIC worldwide presence. However, both the contracts have their shares of pros and cons and it’s up to the individuals and the companies to decide upon which contract they would like to work.

Answer two:

Introduction

Globalization has forced the business organizations to think of in better ways of managing the contracts that are with them in order to reduce the financial losses that are incorporated with it. The construction industry in particular is a very complex industry that requires an extensive way of ensuring the end to end processing of the contracts that are retained with the companies. However, in this fragile global environment where there is always a change around the corner companies have to be always on their toes to make a smooth transition from old process of keeping their contracts to newer and advanced ones.

Enterprise contract management (ECM) is a new age tool that allows companies keep a start to end records of their contracts with various parties and administered the contracts for the benefit of the business organization. It is about significantly managing the contracts as a closed information loop with proper and controlled channeling and gating to acquire optimum results for the business organization.

In this report we will discuss about one of the biggest construction companies across the world and how they manage their contracts in order to maintain their results. L&T is the company we are talking about here and we will address the issues faced by them and see how new age enterprise contract management helped them overcome their problems. We will also discuss about the contract life cycle of the company and see how it works and can be bettered for increased financial gains.

Enterprise contract management (ECM)

Enterprise contract management is a new age tool that provides discipline, perspective and a systematic approach for managing the contract process on end to end basis for the benefits of the business organizations. It helps in reducing the fragmentation that signifies the contract process in different organizations. It also helps in increasing and improving quality control and consistency. The other important aspect of an effective contract management program is to provide proper compliance with the law and the organizational policies. It also increases efficiency that in turns reduces time cycle and transaction overheads.

Larsen and Toubro (L&T) constructions

Larsen and Toubro (L&T) is one of the biggest construction companies in the world and over the years have successfully completed several big projects across the world with distinction. The company over the years has successfully maintained its vison of providing world class infrastructural developments and have worked towards the goal of attaining perfection in terms of completing their work within stipulated time.

L & T and ECM

Construction industry is one of the very complex industry due to the complex structure of the contracting process and for that matter companies need to adapt an extensive approach for managing tonnes of contracts papers in order avoid financial losses. As we all know maintaining the contracts on stat to end process is a tough job and for that matter a proper and effective program must be adopted to scrap the chances of losing contracts or profits.

L & T have successfully adopted the contract management program over the years and that certainly has made them an enviable construction company across the world. a considerable amount of time and money is made within the organization to negotiate the best possible terms and conditions for their business contracts. However, once the contract is executed the contracts and the other associated amendments are more often than not are forgotten until something mishaps happened. Our business organization have been long dependent on the old age methods of managing their business contracts and for that matter we need to find some modern alternative methods of managing all the contracts.

Following are the three important steps that companies must take in order to create a successful enterprise contract management:

1. Project management

Business organizations till manage their business contracting process in a manual, fragmented and ad-hoc manners which in turn results in poor visibility, ineffective management of contract compliance and monitoring and inadequate analysis of the performances of the contracts. However, with proper tools, business organizations can turn these contracts into collaborations.

From the original analysis of the project requirements, to the design and negotiation of the contract, to the execution of the contract, to the close of the contract, effective project management will save the organization a great deal of money.

2. Change management

Contracts must also be able to adapt to the changes that are frequent in terms of the legislations and the regulations that will in turn alert the parties to change the contracts as per the new and revised compliances and requirements.

The contract manager must have the requisite skills to work with both the parties both externally and internally in order to ensure proper negotiation of the contracts and also to ensure the smooth run of the contracts.

3. Risk management

Managing risk is all about controlling the access to the contract repository. Risk management is very much important for ensuring a smooth run for the ECM as transparency across all the stakeholders is must and that will in turn provide lesser chances of disputes and claims across the whole network.

The advantages of a successful contract management can be seen at all the levels not just in the finances of the organizations.

The stages of enterprise contract management (ECM)

• Request

• Generate

• Negotiate

• Approval

• Execute

• Search or report

• Comply

• Amend or review

Automated contract management process can be very much beneficial for the business organizations as it will get the work done faster and more efficiently.

Benefits of contract management

• It helps in decreasing the cycle times

• It helps in closing in on more deals

• It helps in reducing or stopping the revenue leakage

• It propels increased in visibility

• It helps in increasing compliance

• It helps in providing better security propositions for the business organizations

• It helps in gaining adequate control over the whole contracting process

• It diminishes risks

• It helps in increasing the user adoption rates

• It allows business organizations to have more face time with the consumers

• It helps in reducing administrative costs

Life cycle of the contract

Life cycle of a contract is dependent on the nature and the scope of the project. It varies with every project however, project managers must read in all the details and must ensues all their experience in order to get the right time cycle for the specific projects. Every closed project and its profitability is dependent on the successful completion of the project within the stipulated time. Hence, the importance of determining the correct time cycle of the project is essential for a successful contact management program.

The whole process of determining the time cycle of a project is critical for the successful adoption of the contract management program. Business or contract managers must file all the required details about the project in order to get the right time cycle of the project. The process however is not that simple as there will lots of variables and the compliances that are to be met while commencing the project however, project managers must ensure to make a proper contingency plan to get the desired results in case of any variations.

Contract must be created first and then must be uploaded into the company’s system. From there it must be managed in order to understand it easily and accessible to all the stakeholders. The contract must be then properly stored in the infrastructure of the company through content management system. For the long term use the contract must be maintained in a proper way.

Conclusion

Enterprise contract management is a must in today’s fragile business environment. The whole business environment is changing constantly and very frequently and the contracts must be maintained and stored well in order to get it right way when is needed for any further future references. The process however is not that simple and cannot be done manually as the contracts within a big multinational companies increases with times and the storing and management of the contracts must be done automatically in order to save them for longer time.

References

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