De-risking complex projects with contract management
19 January 2020 René Søegaard
In large, complex projects, managing risks and safeguarding the value of the business case is of the essence. The optimal way to realise both is through project contract management. But that is easier said than done. This article explores the elements and benefits of contract management in complex projects.
Commercial contracts are like marriages: complex relationships that thrive on transparency, work well when the parties see eye to eye, and yet — despite the best intentions — often still fail to meet expectations.
“When you sign the contract, that’s the moment you step out of the church,” agrees René Soegaard, a senior expert in Ramboll Management Consulting’s contract and commercial management team.
Too many not on time, on budget
Contract and commercial management (CCM) is a relatively new discipline that helps organisations to reduce the complexity of large projects — and the business case for it has never been stronger.
Consider the following figures from the International Association of Contract and Commercial Management (IACCM). While 25 percent of global GDP is generated through projects, only 40 percent of projects are delivered on time and on budget, with 44 percent failing to deliver on their original strategic initiative.
Meanwhile, fewer than half of companies achieve “high alignment” between their executed projects and their overall organisational strategy. In other words, the wedding bells are ringing, but the marriages are struggling. “It is tremendously complex to deliver a contract,” Soegaard says. “Big projects are by definition complex.”
Struggling with complexity
Indeed, the handmaidens of complexity will be familiar to anyone who’s ever seen a commercial contract. In recent years this complexity has grown. The headwinds include new regulatory requirements; increases in contract volumes; the dynamics of globalisation; and increasing pressure to reduce costs and improve financial performance. All told, the turbulent commercial climate has whipped up a perfect storm of contractual complexity.
At the same time, research indicates that traditional linear project-management tools and techniques — while still necessary — are often insufficient to handle the complexities of major projects in the 21st century.
Little wonder, then, that a growing number of organisations are turning to CCM to help them handle contractual and commercial matters in a more structured, transparent and efficient manner.
Three core elements of CCM
The first important element of CCM is commercial management. A contract manager typically operates as “a guardian of the business case”, acting as a trusted adviser to the project manager and ensuring that the commercial relationship stays on track (and freeing up the latter to focus on the delivery schedule and handle any technical issues).
The second key element of CCM is relationship management. “Projects are characterised by their uncertainty in scope, high complexity and low trust between potentially unknown business partners,” Soegaard says. With projects typically a matter of “what happens between the buyer and the seller”, CCM ensures that the parties are more likely to talk to one another and speak the same language.
The third element of CCM is risk management. Soegaard says it reduces complexity by proactively managing “delays and disputes” — addressing them early — and by managing changes in scope or unintended developments.
A controlled environment
According to Soegaard, there are two major potential benefits to CCM. The first is that it reduces complexity and increases transparency. Less successful projects are characterised by a learning by doing approach. But that creates a complex and ambiguous environment in which nothing is certain.
Broadly speaking, CCM uses the contract to proactively encourage and support collaboration between the parties. And, as the roles and processes are based on better practices, the project environment becomes controlled, making it easier for all parties to deliver on their contractual obligations.
Andrea Cardellino understands this well. He is the Director of Substations Project Management at Ørsted, Denmark’s largest – and greenest – power producer. A single wind-farm project typically consists of several hundred supplier contracts. “When working diligently with CCM, we experience a more constructive and cooperative relationship with suppliers. Also, we benefit from more efficient and faster contractual close-outs and – overall – get a better execution and completion of contracts”, says Cardellino.
“CCM is a way to ensure the right deliverables on time, protect the business case, and provide contractual and legal compliance”.
Rene Soegaard, Manager, Contract & Commercial Management, Ramboll.
Realising value with CCM
CCM’s second major potential benefit is value realisation. IACCM studies show there is often a significant loss of value if there is insufficient focus on the contract both before and after it is signed. On average, in fact, the realised value of the project is 9 percent lower than its expected value. The bigger the project, the bigger the loss in monetary terms.
As such, Soegaard explains, “CCM is a way to ensure the right deliverables on time, protect the business case, and provide contractual and legal compliance”.
Not an expense; rather a value maximiser
CCM necessarily means contractors work more closely with their suppliers, creating better and more productive relationships with them, if not allowing a smooth pipeline of projects with the same suppliers.
All things considered, CCM should only grow in the years ahead — but only if its role is properly understood, says Soegaard. “Project managers need to stop seeing it as an expense,” he explains. “It is about maximising net value.”
Paradoxically, of course, CCM’s success is defined by the absence of failure — that it is valuable precisely because it nips problems in the bud. “It’s hard to show value when you’ve met the business case,” Soegaard says. “You can’t see the problem you didn’t have because of CCM.”
Perhaps not. But in today’s increasingly complex commercial landscape, taking the plunge without CCM by your side is more foolhardy than ever.
Written by James Clasper and edited by Martin Christiansen
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