Contract Management failures again?

We regularly encounter failures in contract management. The problems are not focused on any type of organisation or what they purchase. A report to the Montana Legislative, “Contract Management- Department of Military Affairs”, reference 11P-06 is enlightening.

All contracts designate a contract liaison. This person serves as the department’s representative for the duration of the contract and is the primary contact for contractors. Their duties include oversight of the provision of goods and services, approval of contractors payments and assistance of compliance with contract terms. So far, so good! What happened in practice includes the points below:

• Despite having millions of dollars worth of contracts, the department does not know how many contracts in which it is currently engaged. This is a common problem we encounter, exacerbated by not having a system to track contractor’s financial commitments, thereby making cash flow projections almost impossible.

• The department does not have an effective method of maintaining proof of insurance documents it receives from contractors. This is potentially a significant corporate risk. Many procurement departments abdicate accountability for assuring contractor’s insurance provision, once the contract has been let.

• 15% of contracts in the sample audit had amendments which were not signed by the contractor. The transfer of learning to other organisations is that ineffective amendment of contracts presents the risk of fraud. It is not unknown for amendments to be used to circumvent financial limits on individuals within the procurement chain.

• We also identified on instance in which a contract worth nearly $1.6 million was modified without a formal amendment. It goes on to say that the contract liaison allowed the contractor to be paid for partial completion of a milestone. The contract liaison stated an amendment was not necessary because payment milestones were “subjective”. There are significant risks for every organisation making milestone payments. How is the milestone identified? Will title and risk pass to the buying organisation when payment is made? Will a vesting certificate be signed? Will we make a retention against the payment?

The failure to put in place effective contract management is a chilling thought for organisations. It has risk stamped all over it.

How are you enabling and equipping your people to assess the risks impacting your organisation?

If you’ve got any questions or comments, be great to hear from you.

Thanks

Steve

www.Procurisk.com – The evolution of risk management For more information and a free trial please contact me, Ray Gambell on 01744 20698, or [email protected]

Interested in insight on managing supplier performance? We recommend reading “Do you believe in the reliability, truth and ability of your suppliers? Do you trust them?”

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