Last updated on May 9th, 2020 at 08:51 am
The signing of a contract doesn’t end the work of the contract administration team that helped negotiate and write the deal. Instead, the team must then prepare a contract administration plan and prepare to handoff the contract to the contract manager.
This plan is just as crucial to the success of the deal as the negotiation process.
Purpose of a Contract Administration Plan
The contract administration plan is a guide to the essential details of the contract. It will be used by the contract manager, the executive team, and the managers inside the organization tasked with fulfilling the company’s obligations under the deal.
The contract administration plan is the centerpiece of the contract handoff meeting. This document ensures that both sides know exactly what is expected and how they will perform their part of the contract.
A well-written contract administration plan will allow even a stranger to the agreement to easily understand the key provisions.
There are three primary reasons for creating a contract administration plan:
- Commercial contracts are lengthy and technical. It’s hard for employees to easily understand what they need to do from the contract. A contract administration plan is written in plain language and is much shorter than the full contract
- Often the people who need to execute the contract were not involved in the negotiation of the deal. The contract administration plan ensures that both sides of the deal understand the mechanics of the agreement. It helps prevent misunderstandings and disputes
- If there is a dispute in the future, the contract administration plan can be used as a reference. It may help resolve disputes without the need for litigation. However, the plan can also be used as evidence in a dispute as to the thought process of the parties and what everyone’s understanding of the original contract was shortly after it was signed.
The contract administration plan is not a rephrasing of the contract. The actual terms of the agreement will still be the controlling language of the deal. A plan is also not meant to be so comprehensive that it details every single step everyone in the company will take to fulfill the contract.
A contract administration plan is less of a set of instructions and more of a detailed outline of the contract.
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What You Need to Get Started
The worst part of every project is knowing where to begin. Instead of trying to create a contract administration plan from scratch, you should create a rough outline of the contract. Your outline should contain the following sections:
• Key Contacts at Both Companies
• Scope of the Project
• Detailed Description of Deliverables
• Project Milestones
• Detailed Contract Timeline
• Contract Budget
• Financial Details
• Risk Mitigation
You will need to pull the required information for each section before drafting the contract administration plan. While much of the information will be directly from the contract itself, you will need to look elsewhere for some of it. The key contacts will not be listed in the contract. The contract also may not have split the project up into milestones.
Milestones are the most efficient way to manage a big project and the easiest way to monitor progress. If the contract has not provided milestones, you will need to work with the managers in your organization to split the contract into sensible chunks.
The last thing you will need before preparing the plan is a list of who will receive it. This list will include the key contacts listed, as well as everyone who will need to be the contract handoff meeting.
Prepare with an Eye Towards Litigation
Nobody enters into a contract with the expectation that things will go poorly and end up in court. However, when preparing the contract administration plan, you need to write it with an eye towards potential litigation.
A contract administration plan is often a tool that can help avoid disputes. But, when there are disputes, the document can be powerful evidence of what the terms of the contract meant and what the two parties understood their roles to be.
While the report needs to be as thorough as possible, it is best to be clear when estimates are being given and when procedures are described that are not specified in the contract. The plan may employ phrases like subject to change, or it is estimated that.
Who Should be Involved in the Preparation?
The contract administrator is responsible for creating the contract administration plan. However, they cannot create a useful plan without the input and cooperation of others from both companies.
People who need to be involved in the preparation of the plan include:
• Negotiators of the deal
• Managers who will be in charge of implanting the contract
• Contact at the other company who can provide contact information for key players in their organization
• Contract Manager
• Member of the executive team
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While you will need assistance in creating the plan, it is vital that the plan not become a document drafted by the committee. You should maintain control of the drafting process, asking for input and corrections on the technical details. You should only seek final approval from the member of the executive team with the ultimate authority over the contract.
When too many people are involved in a written project, it makes it impossible to create a useful, cohesive document.
Your job in creating the contract administration plan isn’t to please everyone—it’s to document the terms of the contract.
The plan cannot alter the terms of the contract.
You will need to create a list of the key contacts at each company who will have anything to do with any of the other sections of the report. Because people will come and leave during the project, the key contact list should include the title of each contact and not just their name and contact information.
One best practice is to also include a short description of each person’s role in the contract process.
Because each of these contacts will be getting a copy of this report, make sure to verify the spelling of the names and the accuracy of the contact information.
Define the Project Scope
The first substantive section of the contract administration plan is the Project Scope section. Here you will define the scope of the contract. This section will be like an executive summary of the entire plan.
It will only include the essential details. This section should be brief, usually no more than two pages. It explains in plain language the reason for the contract and who will be doing what. For simple contracts, this section may only be a couple of paragraphs.
However, even though this section should be brief, it still needs to include all of the essential details of the deal. Another way to think about this section is to imagine what details a news story about the contract would include.
Detailed Description of the Deliverables
The next part of the contract administration plan looks at the finer points of the deal. One of the first things you will want to do is provide a detailed description of what will be delivered.
While the scope was brief, this section is usually lengthy. It gets to the heart of the agreement between the two sides. A simple listing of components to be delivered is not enough. A detailed description of the deliverables needs to include any technical specifications, special provisions, other details essential for the successful fulfillment of the contract.
This section may also include definitions of key terms relating to the deliverable.
If the contract is for services, it should also include a description of the expectations are for who will be delivering the services. It may list specific people, or what qualifications the parties agreed on for the service providers.
The goal of this section is to make it impossible for anyone to misunderstand exactly what is expected in the deliverable.
Breakdown Project into Milestones
Almost every organization uses some form of milestone management when managing complex projects. However, not every contract is drafted with milestones in mine.
Milestones are simply interim steps in the completion of the project. They allow both sides to know how much progress is being made. They also make it easier to organize labor and parts. Milestones simplify communication between the two sides when challenges arise.
If the contract lists specific milestones, all you will need to do for this section is to list each milestone with a full description.
When the contract does not list milestones, you will need to create your list of milestones. This is where you will need input from the contract manager, the managers who will oversee the various parts of the project, and your counterpart at the other company.
If you create your own milestones, they will not replace the terms of the contract. They will only be a convenience that makes the completion of the contract easier.
Create Detailed Timeline
So far, the contract administration plan has dealt with the what of the contract. Now it’s time to address the when.
The plan should have a detailed timeline of the entire project. This timeline will include:
• Project initiation date
• Deadline for final project delivery
• Milestone deadlines
• Payment deadlines
• Project approval and acceptance deadlines
• Review Contract Budget
Any specific date or time mentioned in the contract needs to be accounted for in the timeline. For example, if the contract states invoices will be sent every 90 days and paid within 30 days, those timeframes will need to be explained in this section of the plan.
Milestone deadlines that are not specified in the contract should be indicated as estimates in the plan.
One of the best practices for the timeline section is to use a visual timeline as well as detailed paragraphs explicating each point on the timeline.
Every contract comes down to money. The more transparency there is around the financial details of the contract, the less likely there will be any disputes.
The financial section of the plan should include a list of all documents that need to accompany invoices that will allow the contract manager to reconcile payments with the terms of the contracts.
While some parts of the plan will have to be general, the best practice when writing the finance section is to be as detailed as possible. This will be the most read section of the report. You will want to include accurate and comprehensive information about:
• Contract Pricing Structure
• Compliance Penalties
• Payment Schedule
• Payment Methods
Contract Pricing Structure
The plan should describe when payments are due. This may include a mixture of specific dates and time frames based on other actions (payment is due 30 days after invoice received, etc.). If payments are dependent on other factors such as timeliness or quality of delivery, those conditions need to be explained.
Any factor that will affect the price paid will need to be mentioned in this section.
If the two sides are using a set price, that should also be indicated.
Someone unfamiliar with the original contract should be able to read this section and know how to calculate the price that is going to be paid.
Often contracts will list specific penalties when terms of the contract are not met. This could include penalties for late deliveries, missed milestones, incomplete deliveries, or sub-standard deliveries. The financial section needs to list all of the information about compliance penalties, including:
• Conditions When Penalty Issued
• Amount of Penalty
• Process for Billing of Penalties
• Process for Paying Penalties
• Deadlines for Payment of Penalties
You will want to describe when payments are going to be made. This includes what actions will trigger the sending of an invoice, how long after receiving an invoice payment needs to be made, and when interest for late payments is charged.
When possible, specific dates should be listed for payments. When this is not possible because payments are dependent on other actions like receipt of deliverables, the timeframe for the payment process needs to be explained.
One payment detail that sometimes gets overlooked in contract administration plans is the description of payment methods.
The plan needs to explain how the payments will be made. If dealing with international companies, the currency or any exchange rate information detailed in the contract will also need to be mentioned in the plan.
In the deliverables section, you describe what the contract is about, and in the timeline section, you describe when the terms of the contract will be carried out.
The workflow section of the contract administration plan describes how the terms of the contract will be fulfilled.
The workflow section will require input from the people in charged with doing the actual work of the contract. Some of the details may be listed in the contract. But, usually, the workflow is left to the contracting parties to figure out.
The workflow section needs to be descriptive enough to be useful. It should help the parties feel comfortable that they understand the process. But, it should not be detailed to the point of being tedious. It also needs to allow for potential changes in the workflow.
You do not want to tie your company down to a specific set of intricate procedures that may be later refined and made more efficient.
Every contract comes with risks. Part of the role of the contract administration plan is to describe and weigh the most likely risks the project faces.
Your job is not to be a fortune teller. There is always a chance that something nobody expects to happen will derail the project.
But, with the help of your team, you should be able to identify the most likely risks the project faces. This section is not just a catalog of different risks or scenarios.
When you are identifying risks, you will also need to comment on the likelihood of the risk, the preconditions that must exist for the risk to come to pass, and how disruptive to the agreement each risk might be.
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The least significant risks are the ones that the least likely and would be the least disruptive, and the most significant risks are the ones with the greatest likelihood of occurrence and would be the most disruptive. All of the other risks fit between these two extremes.
This section should be organized so that the different risks are ranked from most important to least important.
List Risk Mitigation Strategies
Identifying risks is important. But it’s not enough. You also need to describe what needs to be done to prevent these risks, and what can be done to mitigate the damage these risks cause if they occur.
The risk mitigation strategies section only needs to summarize preventive and mitigation strategies. Including full risk mitigation plans would make the contract administration plan unwieldy. It may refer to more extensive risk documentation.
The better everyone involved in the deal understands the risks, the more likely most of them can be avoided, and the contract can be successfully fulfilled.
Drafting a contract administration plan is a high-pressure activity. Like anything else, the more practice you have created plans, the easier the process becomes. When drafting a plan, you will be successful as long as you remember:
• You are creating a guide to the contract
• You cannot change the terms of the contract with the plan
• You need to seek input from others in the organization
• You should break down each section of the contract into the smallest possible parts for the plan
• Your goal is to use clear, concise language
A well-done contract administration plan is as valuable to the company as the original contract. It is the plan that implements the contract possible.