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USING QUALITY PRINCIPLES TO IMPLEMENT CONTRACT RISK MANAGEMENT: A CASE STUDY

Philip Crosby, one of the leading philosophers of quality management, once noted:

Business consists of transactions and relationships. Quality management's purpose is to cause all transactions to be complete and correct, while all relationships are to be successful. If we understand those two sentences we know all we need to know about quality management.[1]

in light of Crosby's profound truth, contract risk management and quality management have a lot in common. The following case study [2] shows how the latter can help improve the former. the work of the Better Agreement team at Molzen-Corbin & Associates, an Albuquerque engineering and architectural firm, illustrates the benefits that are possible from a quality- oriented approach, a measurable goal, and scoring. it also demonstrates that you do not have to be a lawyer to improve the contracting process or the management of contract risks.

At one time, Molzen-Corbin developed their professional services contracts the way many companies do: they used old contract forms—each project manager had their own—or they agreed to their clients' proposals for contracts. This approach continued until they realized that the profit from—and the risk assumed in—a project depended on the contract. the firm found that to remain viable, it had to negotiate equitable agreements that limit the risks assumed and allow an acceptable profit. Within the framework of a quality initiative that had been launched in the firm, a Better Agreement Team (BAT) was appointed to improve contracts and the contracting process. the team included three engineering project managers, the company's accountant, and the executive vice president. the chief executive officer gave full support to the effort.

the Bat developed a "what makes a perfect agreement” list and selected provisions that should be included in a "perfect” professional services agreement. A 1-page, 32-item checklist was developed with points assigned to each provision related to its relative importance. A "perfect” agreement would include all those provisions and score 100. Copies of recent agreements were scored by the BAT. The average score for them was 49, with a high of 79 and a low of 14. There was definitely room for improvement. The BAT analyzed the existing situation, located the fundamental reasons for "defects” in contracts, and prioritized the areas that needed improvement. Then they suggested three areas for improving the contracting process: [3]

  • 2. Agreement Training and Reference Notebook: provide managers with training and a notebook that includes the provisions of a "perfect” contract (with background information as to their intent and importance) that they can use when preparing contracts, and
  • 3. Agreement Checklist: before executing contracts, require a completed checklist in which a "yes” answer to all questions indicates a "perfect” contract and a "no” answer requires a "why not” explanation.

The firm's agreements did indeed improve. In a test conducted after a small group of project managers had followed the new process, the average score was 68—a major improvement compared to 49 for the earlier tested agreements. The test results encouraged the firm to implement BAT recommendations. Project managers and management were informed about the new process, and training was provided. In the next test after implementation, the average score of the contracts was 71. The BAT succeeded, and the results were measurable. Several additions to the "what makes a perfect agreement” list were identified during testing and implementation, and these provisions were incorporated into the forms, notebook, and checklist. The ongoing review of the "why not” responses allows identification of further opportunities to improve agreements.

In summary, Molzen-Corbin realized that contracts impact risk and that the management of contracts and risks can be improved using quality management methodologies. Contract risk management was improved by providing people in charge of the pre-contract process—in this case, the project managers—with easy access to common tools such as contract forms, notebooks, and checklists. As this example illustrates, development of the tools does not need to be complicated.

  • [1] 2 Crosby, P.B. (1996) Quality Is Still Free. Making Quality Certain in Uncertain Times.New York, NY: McGraw-Hill, p. 21.
  • [2] the case study and quotations are from Clark, R.H. and Paul, R.A. (1996)improving professional services agreements: a case history. in ASQC 50th Annual QualityCongress Proceedings. Milwaukee, WI: American Society for Quality Control, pp. 788-93.
  • [3] "Perfect” Agreement Forms: develop "perfect” draftagreements so that project managers could begin thepreparation of a contract with an appropriate "perfect”form that would score 100,
 
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