Contracts

4 ways to drive value from complex contracts

Large, door-stop style contracts may be impressive in their sheer complexity and coverage, but just like the fact that the world’s best spade won’t dig a hole on its own, a great contract doesn’t mean a great outcome. Contracts require careful attention, tailoring and active management in order to deliver successful outcomes.

Organisations which rely heavily on template contracts or framework agreements commonly suffer from over-reliance upon contract complexity during delivery.

Such agreements are frequently cited as a good way to increase the efficiency and uniformity of contracting, focusing upon boilerplates (i.e. liabilities, indemnities, dispute resolution etc.) and leaving plenty of space for users to tailor the more subjective elements (i.e. performance, scope, risk / reward).

However, without the right support and guidance, these types of agreements can have the opposite effect, resulting in unintended delays, disparate terms and the erosion of previously agreed terms.

Case study: Great contract, complex challenges

An example of how even great contracts can create complex problems, can be found in an organisation which had developed an advanced method of contracting using a complex structure and volumes of front end terms. The model was designed to achieve flexibility in scope, foster collaborative supplier relationships and centralise control of the supplier management roles.

The contract ran to a few thousand pages and the boilerplate terms were highly favourable to the organisation as a customer; everyone agreed it was an excellent contract and were confident in its ability to promote efficiencies as it was simply a case of ‘fill in the blanks’.

However, when it came to contracting, users began to have trouble filling in the blank spaces in order to contract with the supplier. Furthermore, under pressure from the supplier, different parties began accepting revisions to the previously agreed boilerplates, which acted to erode the protections and benefits achieved at the top level terms.

This created added complexity in contract delivery and caused significant delays to contract execution, for example:

  • Some projects were contracted under different frameworks as there was no clear mandate from the executive to utilise the contracts.
  • Business stakeholders did not fully understand the nuances, mechanisms an underlying intentions within the contracting structure, leading to clause overrides, confusion and scope deficiencies.
  • Those engaged in the development of the contract did not have sufficient guidance in relation to how the terms could best be leveraged or how a strategy should be developed to realise benefits.
  • Significant delays began to arise in the organisations ability to contract as a result of a lack of formalised process and assigned responsibilities.

Review of the situation presented clear findings, a lack of guidance, policy and process, combined with an over-reliance upon the as-is contract prevented the organisation from realising the benefits of the strong foundation the original contract had built.

In short, without the right guidance, direction and support (in execution and in delivery), the complexity of the contract alone could not deliver success.

Conclusion

In order to get the most value out of complex contracts or framework agreements, organisations should ensure that business users are supported in the execution of agreements through:

  1. Clear processes and assigned responsibilities to guide the contract through to execution;
  2. Guidance and pre-defined policies to support contracting and negotiations;
  3. A clear understanding of red-line principles which prevent the erosion of terms and conditions but maintain some degree of flexibility; and,
  4. A comprehensive contract management plan which sets out how to engage, manage and deliver success under the agreement.

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