Eyeing the Big Picture When Managing Contracts

Wednesday, January 6th, 2016
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Engineering Education Australia – 300 x 250 (expire Nov 30 2016)
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The adept management of contracts involves knowing when and when not to exercise legal options based on broader circumstances just as much as it requires a sound understanding of the agreement themselves.

According to Philip Hall of Engineering Education Australia, a sound strategic understanding of one’s legal options in the context of broader business conditions is a critical aspect of successful contract management for engineering professionals.

“For contract management in general, it’s all well and good to understand what your obligations and commitments are, but you need to also know when the time is right to exercise your options with a view to improving your own position,” he said.

“There may be circumstances where it’s not prudent to enforce those actions to the nth degree because in the bigger business context it’s going to be of overall detriment.

“At the end of the day, it’s all good to be litigious go to court, but if it costs you three years and five million dollars to enforce a million dollar claim, you have look at whether that’s worth it in the long run.”

Hall points to the need to maintain sound relationships with reliable suppliers as one reason why leeway might be granted when the counter-party to a transaction fails to fulfil contractual obligations in a one-off manner that is uncharacteristic of past performance.

“You might have a supplier who has always provided you with specific parts for a construction site, you’re on good terms and enjoy a strong working relationship whereby if you need something last minute you can call them up and you can rely on them to deliver in that situation,” Hall said. “Then a situation might arise where you have agreed upon a contract and purchase order, yet they aren’t able to fulfil that commitment.

“While there may be times when you might want to terminate the agreement and pursue them for damages, you should bear in mind that if they’re a trusted supplier that has always performed in the past, and you want them to perform again in the future, you will be ruining that relationship and no longer able to rely on that supplier in the future to meet you needs at the last minute as they have done in the past.

“You’ve severed a business relationship because of one individual contract or one individual circumstance, when there’s no point terminating a relationship if they’re the best alternative in town.

Hall also points to the option of granting leeway as a useful contract negotiation tool that can be serve as bargaining chip for accruing benefits in other areas.

“There may be times when you need to trade [a contractual right] for a better overall position,” he said. “Depending on your circumstances, you may be able to get a better outcome for you and your company as compared to enforcing a purely contractual right to go to litigation.”

Hall points to one example where companies might refrain from pursuing litigation given that breach of contract will not be of material detriment to them, and instead trading their leniency for other advantages in the business relationship.

“If you have liquidated damages on a supplier because they’re on your critical path, it may turn out that due to an unrelated event you get an extension of time under the customer contract. So the supplier is no longer on the critical path, and if they’re late, you’re no longer going to be late to your customer.

“While technically you’re still entitled to enforce liquidated damages against the supplier for being late, you should consider whether it’s worth doing given that it may ruin that relationship or contract.

“You may want to show a bit of leniency, or use that for some other purpose – for example you may need them to fix something up which isn’t part of their contract, but you might be able to make a trade.”

Overall, Hall believes successful contract management in the engineering sector involves keeping an eye on the big picture of key business relationships in the broader environment while remaining flexible with respect to the exercise of available options.

“Maintaining that flexibility and maintaining relationship is key to contract management – it’s about being flexible, looking at the bigger picture and realising that there’s more than one option when managing contracts,” he said.

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