Contract Administration Best Practices
Contract Administration Best Practices
Contract administration includes all components of contract management, from ensuring that a contract is satisfactorily performed and that the responsibilities of both parties are properly discharged, to minimizing or eliminating problems, potential claims, and disputes.
Functions of contract administration:
- Participate in contract development
- Monitor performance to ensure goods and services conform to the contract
- Identify and report violations, and pursue remedies
- Manage contract changes
- Ensure taxpayer dollars are spent wisely
- Perform contract close out responsibilities
- Maintain contract records
Contract Manager Responsibilities - Overview
The program or project’s contract manager ensures that goods and services are delivered in a timely manner and that the financial interests of SPPS are protected. It is essential for contract managers to understand of the principles of public contracting and the provisions of the contract. They must be able to communicate to all parties involved and maintain oversight over contract performance.
The contract manager is responsible for:
- Develop the solicitation and evaluation documents
- Determine contract pricing method, and request bids or proposals accordingly
- Consult with legal counsel to address any legal concerns and/or issues
- Develop a contingency plan in the event that things go wrong
- Establish scope of authority, clear lines of communication and reporting
- With the contractor and the Purchasing Office
- Meet with the contractor to discuss progress, problems and changes
- Identifying and solving problems
- Disputes with the contractor
- Potential problems and solutions (within the scope of the contract)
- Contract monitoring
- Progress and performance, to ensure goods and services conform to the contract
- Ensure SPPS compliance with all terms and conditions of the contract
- Request a certificate of liability insurance if needed
- Inspection and approval of deliverables, in writing
- Inspection and approval of invoices
- Authorize payments consistent with the contract terms
- Budget and property management
- Monitor the budgeting/accounting process to ensure sufficient funds are available
- Manage any property used in contract performance
- Management of documentation, including correspondence, data and reporting
The Contract File
Keeping a complete contract file is critical. The file provides a basis for settling claims and disputes should they arise. Contract files need to be well organized to allow someone to reconstruct and understand the history of the contract
Recommended Contract File Documents (not all contracts will have all components)
- The solicitation document
- The contractor’s response
- The award document
- All specifications, drawings or manuals pertaining to the contract
- All contract amendments
- Contract submittals that have been received
- A list of furnished property or services
- Memorandums and correspondence related to the contract, even if prior to award
- All routine reports required by the contract
- Sales reports
- Pricing schedules
- Approval requests
- Inspection reports
- Audit reports
- All notices to proceed, to stop work, or to correct deficiencies
- Records and minutes of meetings
- All backup documentation for payments made under the contract
Orientation Conference with Contractor
It may be helpful to hold an orientation conference with the contractor prior to starting any work. This is an opportunity to clarify the roles and responsibilities of both parties. The conference should be conducted by the contract manager.
Topics worth covering at the conference:
- The school or program’s mission and how the contract relates to it
- Overview of the contract’s requirements
- Any special contract provisions
- Procedures to be followed in monitoring the contractor's performance
- Discussion of the Contractor’s approach to quality control
- Discussion of any reports that the contractor must provide
- Invoicing and payment procedures
- Clarification of authority and the process for changes to the contract
- Any restrictions on subcontracting
- Identification of the escalation path for school or program and the contractor
- Delivery requirements
After the conference, a written report should be distributed to everyone who attended the meeting, as well as any other appropriate personnel.
Monitoring Contractor Performance
Monitoring the performance of a contractor ensures duties are performed in accordance with the contract. It allows the school or program to be aware of and address any developing concerns. Contract monitoring may be viewed as a preventive function and as quality control regarding the goods or services being provided.
Small or simpler contracts require little, if any, monitoring. However, that does not preclude the possibility of more detailed monitoring. Large dollar contracts may need little monitoring if the items or services purchased are not complex, and there is a low level of risk associated with the procurement. The amount of monitoring should be limited to achieve the desired result without unnecessarily increasing costs. Burdensome performance metrics or over-monitoring can interfere with the contractor’s ability to accomplish the work and increase the cost.
Deliverables and Timeframes
The scope of work should identify the services required including, but not limited to, specific deadlines for completion of tasks and a schedule for submittal of deliverables, required meetings, presentations or other activities. Different funding sources may have specific requirements for contract monitoring. The contract manager must be familiar with these requirements and include them in the scope of work.
Determining What to Monitor
The contract manager should consider the following questions when determining what to monitor
- How the school or program knows it is receiving what it paid for
- How the school or program knows the contractor is complying with the contract
- How the school or program knows the contract is complete and ready for closeout
Consider the effect the contract payment methodology has on what should be monitored. If payment is based on a fixed price (a negotiated amount regardless of incurred expenses), it is not necessary to verify contractor’s expenses as they are not relevant to this type of payment methodology. If payment is based on a cost reimbursement, the school or program pays for the contractor’s expenses to a set limit, plus an additional fixed fee.
Under a fixed price payment contractor, monitoring should ensure that:
- The number of goods or the amount of services invoiced is the same as that received
- The quantity and price agree with the Contract amounts.
- The goods or services meet or exceed the Contract specifications
Under a cost reimbursement payment methodology, monitoring should consider:
- Whether the goods or services invoiced were provided
- Whether the goods or services invoiced were used for the purpose of the contract
- Whether the goods or services were necessary and reasonable for the contract
- Whether the goods or services were of the quality and quantity specified
- Whether the cost of the goods or services was duplicated in either overhead or profit
- Whether the goods or services were listed in the contractor’s approved budget
The contract’s requirements are deliverables to which the parties agree. A good monitoring program is designed to focus on the most important requirements. Outcomes may include:
- The school or program receives the services required
- Service costs are within budget, and as identified in the bid or cost proposal
- The contractor protects assets purchased with tax dollars
- The contractor provides accurate reports;
- The contractor makes corrections to goods and/or services not meeting requirements
- Goods are provided on time.
Contract Modification and Amendment
It may be necessary to make changes to the contract. These changes can be minor, or they can substantively affect the time, scope or cost of the contract. Typically, the parties to the contract agree in writing to contract changes.
Contract Modification vs Amendment
A contract modification involves changes that are minor enough that they fit within the original contract scope. An amendment involves changes that are significant enough that the contract, or parts of it, need to be replaced. Different contracts may have different thresholds for when the contract itself needs to be amended.
A change requires a contract amendment when:
- The change affects the competitive nature of the contract
- The competitive process might have ended differently if the change had been known
- The changes considerably alter the contract scope identified in the solicitation
Effective Change Management
An effective change management process includes, but is not limited to:
- Formal, written approval of all changes prior to the change taking place
- The formal process must be completed before implementing a change
- Evaluation of the impact of each change to the contract
- Deliverables and/or products
- The schedule
- Cost, including increases in school or program overhead
- Impact to work in progress and completed work
- Standards identified in the contract
- Acceptance criteria.
- Establishment of a single point of contact to authorize any change
These are changes within the scope of the contract and do not affect or alter the rights of involved parties. These changes are typically executed via a unilateral amendment.
Administrative changes include:
- Changes in billing instructions or address
- Corrections of typographical errors
- Changes in school or programs personnel assigned to the contract
These are contractual changes that affect the rights of both parties. Such changes generally require bilateral amendments (agreement by both parties).
Substantive changes include change:
- In the price of the contract
- In the delivery schedule
- In the quantity
- To the specifications
- Of key personnel
- Of any terms and conditions
If a contractor perceives that work beyond the scope of the contract was ordered, they may claim that the contract was constructively changed, and they may be entitled to additional compensation. Generally, a constructive change will require an amendment. Constructive changes may occur when school or program personnel:
- Provide suggestions that alter the contractor’s activities under the contract
- Accelerate the delivery schedule
- Direct the work to be performed differently
- Change the sequencing of the work
- Delay acceptance or rejection of deliverables
- Delay reviewing invoices and approving payment
- Interfere with or hinder performance
The above instances should be avoided, and the contract manager should take action early in the procurement process to prevent them.
Resolution of Contract Problems
In rare circumstances, a contractor may fail to provide the contracted goods or services, or their performance may be substandard. It is critical to identify problems early and act accordingly to prevent a negative impact on the school, program, or district.
Assessment of Damages
There are two types of damages:
- Liquidated damages are a specific, approximated sum, identified in the contract to be paid by the defaulting or breaching party to the party damaged
- Must be as close as possible to the actual damages
- Must not be lieu of the assessment of a penalty
- Actual Damages are defined as a specific, known sum (where the actual amount of the damage is known) identified in the Contract, to be paid by the defaulting or breaching party to the party damaged
- The amount of damages and the instances in which they can be invoked must be agreed upon by the parties to the contract
It is normally the school or program that makes a request to the Purchasing Office for termination. A contract may be terminated via either of termination for convenience or termination for default, if provided for in the contract.
Termination for Convenience
Termination for convenience allows the school or program to terminate any contract, in whole or in part, at any time, if it is determined that such termination is in the best interest of the school or program. The Purchasing Office generally advises against providing termination for convenience rights to the contractor.
Justification for Invoking Termination for Convenience
If the school or program finds that it has a need to invoke a termination for convenience clause that is included in a contract, the administrator or program manager must provide a written request to the Purchasing Office justifying the reasons for the request.
In such as case, the School or Programs must include with that request both an interim plan identifying how the School or Program’s needs will be met until a new Contract is in place and a re‐procurement plan.
Termination for Convenience Notifications
The contractor shall be provided with written notice specifying when all or part of a contract is being terminated. The notice of termination shall give the date of termination. If the contract is being terminated in part, the school or program must specify which parts are being terminated.
Notice of Termination for Convenience
A termination notice should include wording similar to: “Pursuant to Section ___, Termination, this Contract is hereby terminated effective [date]. [Contractor name] is directed to immediately stop all work, terminate subcontracts, and place no further orders. In accordance with this notice of termination, you shall: 1) Keep records of your compliance with this notice, including the extent of completion on the date of termination; 2) Immediately notify all subcontractors and suppliers, if any, of this notice of termination; and 3) Take any other action required by [School or Program name] to expedite this termination.”
The contractor will generally be paid for allowable costs incurred up to the termination. The school or program will not be liable for payment to the contractor related to the terminated portion of the work or any work performed or costs incurred after the effective date of termination.
Final Invoice Review
Upon receipt of any invoice from the contractor for work performed prior to the notice of termination, the school or program should thoroughly review the invoice to ensure that it is only paying for goods or services received prior to the effective date of termination.
Termination for Default
A contract may be terminated for default when the school or programs concludes that the contractor has failed to perform, make progress, or in any way breaches the contract. A school or program is not required to terminate a contract even though the circumstances permit such action. Agencies may determine that it is in their best interest to pursue other alternatives; however, alternative actions must be provided for in the contract. Alternatives include extending the delivery or completion date, allowing the contractor to continue working or working with the contractor’s surety (if a performance bond has been provided in accordance with contract requirements) to complete the outstanding work.
The school or program should consider whether the breach is a material breach or a non‐material breach, and consult with the Purchasing Office or legal counsel, regarding these matters. Termination for default should be used as last resort and not as punishment. The purpose of a termination for default is essentially to protect the interests of SPPS.
Factors to Consider Prior to Invoking Termination for Default
- Has the school or program reasonably assisted the contractor in curing any default?
- The provisions of the Contract and applicable regulations
- The specific contractual failure(s) and the explanation provided for these
- The urgency of need for the goods or services
- The pros and cons of allowing the contractor to continue versus soliciting a new contract
- Availability of goods or services from other sources, and the time required to obtain them
- Availability of funds and/or resources to re‐purchase in the event such costs cannot be recovered from the defaulting Contractor.
Under a termination for default, the school or program may require re‐procurement costs from the defaulting contractor. However, the contractor may not be financially capable of financing the re‐purchase, and requirement of this may result in protracted legal action.
Justification for Invoking Termination for Default
If the school or program finds that it has a need to invoke termination for default, it must provide a written request to the Purchasing justifying the school or program’s reasons for the request. The request should include, both a re‐procurement plan and an interim plan identifying how the school or program’s needs will be met until a new contract is in place.
Documentation Standards for Termination for Default
The school or program must provide documentation both in detail and in summary format.
The documentation must be catalogued in such a way so that the Purchasing office can easily understand and verify the documentation.
Cure Notice Format
Prior to terminating a contract for default, a cure notice must be sent to the contractor. A cure notice is a letter provided to the contractor that provides them a period of time, not to exceed thirty calendar days to correct or “cure” the deficiency.
The format for a cure notice is follows: “[Contractor name] is notified that the state of Minnesota considers [specify failures] to be conditions that cause the contract to be in default. Therefore, unless these conditions are cured within [X] days from the date of this letter, the [school or programs name] may terminate for default in accordance with [subsection], the termination clause of this contract.”
Notice of Default Termination
If the contractor fails to cure the deficiencies identified in the cure notice, the contract may be terminated. The notice of termination should contain the following:
- The contract number
- The effective date of termination
- Reference to (or full text of) the clause under which the contract is being terminated
- A concise, accurate statement of the facts justifying the termination
A statement that the goods or services required in the contract being terminated may be re‐procured by the state of Minnesota and that the contractor will be held liable for any costs incurred by the State due to the re‐procurement
If a contract is terminated for default, the contractor is liable for actual damages and costs incurred by the school or program unless the contract states otherwise.
A contract may not be terminated for default when the failure to perform is due to unforeseeable circumstances. In order to qualify as force majeure, the cause must be beyond the control, and without the fault or negligence of the contractor.
Instances of force majeure include, but are not limited to:
- Acts of god or of the public enemy
- Fires, floods, epidemics, and unusually severe weather
- Strikes, freight embargoes, and acts of terrorism
- Acts of the school or programs
- Denying the contractor access to a location due to administrative error or delay
The goal of any dispute resolution process is to address problems before they become worse or more complicated. Contract management and routine communication help avoid these problems. This is also why the contract manager should respond quickly and appropriately when problems are identified.
Initial Dispute Resolution Steps
- Identify the problem, and communicate
- What may appear to be a problem can be resolved by providing clarification
- Research facts
- Obtain information regarding the problem from all relevant sources
- Evaluate the situation
- Review the facts, the requirements, terms and conditions of the contract
- Determine the appropriate course of action
- Take action
- Correct or address problems within the school or program as far as its interactions with the Contractor;
- Address problems with the contractor with informal and formal meetings and cure notices
There are cases in which disputes cannot be resolved. In such cases it may be necessary to invoke certain remedies.