EFFECTS OF CONTRACT MANAGEMENT ON CONTRACTORS PROFIT

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Construction industries in India are the second largest industry providing employment next to agriculture. But, the performance record of successful implementation of infrastructure projects has not been encouraging in accomplishing projects or intended requirements. Management of contracts is one of the important aspects of construction management. Contractors engaged for the specific purpose usually execute construction projects. Even when large-scale turnkey contracts of large projects are awarded to big contacting agencies, sub-contractors execute the works. Construction projects in India are worth cores of rupees per year. It is the most competitive and risky business. The money involved in this sector is from public fund, so it becomes very important to see that such projects get successful to avoid any type of blockage of funds. In addition it is equally important to complete the project in time to avoid obsolescence loss of the product. In some instances, the owner of the project does not have control over these subcontractors, as they are normally accountable only to the main contractor, resulting in delays and poor quality output. Construction is one of the businesses where high level of risk is involved during contractor’s fulfilment of their contractual obligations [Nguyen, 2013]. Effective contract management lies in assessing contractor’s performance through safe, timely delivery of their duties. Profitability, support compliance and risk management can be improved by effective contract management. Construction companies should give higher priority to contract management to overcome risky and dangerous operating environments [Enshassi, Mohamed, Sherif and Abu Mosa, 2008]. A well established and mature contract management process can generate great deal in additional savings [Mossalam and Mohamad, 2016]. Poor operational control, low customer satisfaction, high risk and unwanted costs are the drawbacks of inefficient contract management [Ntayi, Rooks, Eyaa and Qian, 2010; Fagbenle and Adeosun, 2012]. In almost all construction projects, there is a contract between owner and contractor for desired product after successful completion of the construction project. Each construction contract is unique and need unique understanding and interpretation as per the contractual requirements. Each contract carries a set of obligations to be performed by the parties involved in the contract, so there is a need of contract administration. In current time, the projects are becoming giant in size and more complex due to technological development, joint ventures and foreign collaboration, specified needs, time constraints, special infrastructural requirements and parallel involvement of various agencies in project. According to Issaka (2014), a review of the Public Procurement Authority’s Annual report (2009) revealed that Contract Management had a very low compliance level; it was observed therein that most entities are not enthusiastic about Contract Management and took the practice for granted, signifying a major challenge and concern for the procurement sector of the Construction Industry. Odonkor (2011) also inferred from the works of Crown Agents (1998) and Westring (2014), Anvuur and Kumaraswamy (2006) that, the performance of the Construction Industry in India was poor and saddled with problems of poor Contract Management practices and challenges of finance. Agyekum (2012) also alluded to some conclusions of Vulink (2010) that, because of the poor performance of contractors most of the nation’s major projects were usually awarded to foreign contractors. The above notwithstanding, some other significant challenges with the Contract Management of the local contractor were noted as, poor change management and documentation systems and poor management and administration of contracts in accordance with contract specifications and conditions of contracts. Improper documentation of variations, improper record keeping (site reports, material inventory records and accounting records) within the currency of projects causes a lot of distortion and difficulty in assessing or evaluating claims, as there were usually not enough supporting 3 documents for their claims. It was common to observe that most contractors did not have their own internal policies to record project events and changes. There were no standard procedures to receive instructions, confirm verbal instructions, registers to capture new drawings and phase out obsolete information, check and document variations. Also some project consultants fail to properly review the standard forms of contracts that are used for the procurement of construction contracts to include appropriate project specific clauses and specifications, as such the Contract Management phase is encumbered with challenges usually to the detriment of the contractors during project execution. The execution phase of the project is thus exasperated by disagreements, disputes, and misunderstandings on what was expected in terms of requirements and specifications. Today construction industry is operating under high level of competition and profitability became the prime concern for all the contracting organizations. The real strength of successful contracting parties lies in cooperation of the owner and contractor as partners of the same team with common goal laying more stress on their mutual trust and understanding, their positions are rarely equal and contracts are left open to multiple interpretations. Problems of contract management in construction industries in India can be minimized to a great extent, if management of contracts is taken up even before drafting the contract documents. In fact, this should be done while carrying out the planning and investigations of the project and estimation of items of work at tender stage. Therefore, it should be ensured that what is likely to be asked for, is possible to be performed, well before formulation of the contract documents. A good contract document should therefore have fairness or equity to either parties to the contract, clarity or un-ambiguity of all items of work, avoidance of redundancy due to lack of knowledge or in-attention to details and general and detailed specifications (Saha, 2016).

1.2 STATEMENT OF PROBLEM

A review of the PPA Annual report (2009) revealed that “Contract Management has a very low compliance level; it was observed that most entities are not enthusiastic about Contract Management and take the practice for granted which signifies a major challenge and concern for the procurement sector of the Construction Industry in India.” The state of the Contract Management and administrative conditions of Local Contractors is poor, emanating from some challenges identified by earlier research in the procurement process such as the lack of qualified personnel, incorrect interpretation and application of some contract provisions, lack of training, poor record management, poor procurement planning, mobilization and implementation and lack of Contract Management systems in the management of contracts by local contractors in the Construction Industry in India. This is contributing to the reasons why our local contractors are not able to compete professionally as compared to their foreign counterpart companies in India. In order for local contractors in India to remain competitive, it is necessary that they build their professional capacities by pursing professionalism and instituting proper organizational structures and systems that will enable them manage construction contracts more effectively and efficiently.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine effects of contract management on contractor’s profit. Other general objectives of the study are:

1. To examine the practice of contract management in the Construction industry.
2. To examine the challenges faced by contractors in the practice of contract management in construction industries.
3. To examine the effects of contract management on contractors profit.
4. To examine the factors that affects project cost in construction industry.
5. To examine the impact of contract management on time, cost and quality delivery.
6. To examine the best practice for contract management and level of practice in the construction industry.
   1. RESEARCH QUESTIONS

1. How is the practice of contract management in the Construction industry?
2. What are the challenges faced by contractors in the practice of contract management in construction industries?
3. What are the effects of contract management on contractor’s profit?
4. What are the factors that affect project cost in construction industry?
5.  What are the impact of contract management on time, cost and quality delivery?
6. What are the best practice for contract management and level of practice in the construction industry?

1.5 RESEARCH HYPOTHESES

H0: Contract management has no significant impact on the time, cost and quality delivery in construction firms.

H1: Contract management has a significant impact on the time, cost and quality delivery in construction firms.

1.6 SIGNIFICANCE OF THE STUDY

This study sought to provide empirical data on the level of practice of Contract Management by contractors in the Construction industry by investigating the activities of construction in line with Contract Management activities. The study will also help contractors, clients, consultants and all parties involved in construction projects about ways of improving their current method of cost management and control. The study will also be of great benefit for other student researchers who may want to venture into the same subject matter. Having gotten results-both empirically and theoretically, the study will serve as a foundation for future research studies. The research is intended for applicability by various users or stakeholders such as Government agencies, project managers, contractors, general public, construction management authority, financial institutions, students as well as professional bodies. The study was determined to identify the areas where urgent action needs to be taken to safeguard the interest of the sector. The study may help in application of theoretical training to policy makers to address practical problems in the sector, and to provide insights to today’s and the future managers on the importance of construction completion. The study may encourage further researchers on the area to research as it’s not exhaustive. The study may also benefit scholars who would wish to undertake further studies aimed at establishing factors influencing construction projects completion. The study provides insight to practical actions required to control cost overruns and time management, facts necessary to change for effective site productivity and possible pit-falls and how to address them amicably.

1.7    SCOPE OF THE STUDY 

The study is based on effects of contract management on contractor’s profit.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1. DEFINITION OF TERMS

Construction: In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking. Normally, the job is managed by a project manager, and supervised by a construction manager, design engineer, construction engineer or project architect.

Cost: A cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost.

Contract: An agreement enforceable by law is contract

Contract Management: Contract management is the management of either common commercial or complex contracts made with customers, vendors, partners or employees. It is a process of systematically and efficiently managing contract creation, execution and analysis for the purpose of maximizing financial and operational performance and minimizing risk. It was found that 42% of enterprises the top driver for improvements in the management of contracts is the pressure to better assess and mitigate risks and nearly 65%of enterprises report that contract life cycle management has improved exposure to financial and legal risks.