Contracts – what are they all about and why should project managers take note?

In the first of a series of webinars for APM, independent solicitor-advocate Sarah Schütte shares how important contracts can be in project management, and what to look out for.

Contracts are the foundation of partnerships in business. They are an agreement that not only sets out legal liability, but also the nature of the work, how it is done and what it is worth.

According to independent solicitor-advocate Sarah Schütte, project managers are the “central piece” of the project, but contracts are all about ‘enabling’ them to lead.

So, how important are contracts in project management, and what should we look out for?

Why are contracts important?

“We have risk when there’s uncertainty,” says Schütte. “And there’s uncertainty where you don’t know what the parameters of a relationship are. Being at risk means fragility to project success.”

Contracts can help minimise this uncertainty if they are done correctly, she says, and can provide a legal framework for the project. They can set out the terms of when, how and what the work is, and who might be doing it. They can also ensure there is clarity around who has authority.

“As a project manager, it’s not your responsibility to get the contract right. But as the central piece to the contract, to the relationships and then to delivery, it really is incumbent on you to ask questions if things don’t feel right,” says Schütte.

There are five 'essential’ elements of a contract:

An offer

The first element of a contract must be an offer. This is something that Schütte says is “capable of acceptance”, and should pinpoint clearly what the contract is relating to.

However, there is also a legal principle called an ‘invitation to treat’, which Schütte says can ‘masquerade’ as an offer, but isn’t. This could be like an advertisement for people or tender, which could eventually turn into an offer, but does not have terms capable of acceptance at this point.

“It’s really important to have an offer, because you can’t go any further if you don’t have one,” says Schütte.

Acceptance

Once an offer is established, there must be a clear acceptance of this offer.

This can be complicated by the “battle of the forms”, says Schütte, where both parties can say terms and conditions apply, but the question becomes whose T&Cs?

“It’s a challenge when there are different offers on the table – whose is the last one on top?

“You can start to help yourself as a project manager by being aware of this offer of acceptance battle and using the words ‘subject to contract’ where it would be appropriate. So, if you’re not sure whether you want to make the arrangement or if you’re able to make it, you can use those words to mitigate the risks.”

Consideration

This next element is all about how to recompense one party for doing the work, which is right ‘at the heart’ of the buy-and-sell relationship between a client and contractor.

Five things that project managers need to be aware of in this area of consideration include:

What is the payment mechanism, or the basis for calculating the sums due?
Is there a payment procedure in place which dictates the timing and method of payment?
Are there conditions for payment, such as a collateral warranty or guarantee, or a series of documents to prove certain parts of the contract have been delivered?
Are the terms compliant with regulation, and are there any amendments to the standard forms? For example, in the construction sector there are minimum payment terms.
Check for prompt or fair payment codes. Again, this will be industry specific and often depend on the size of the business and what kind of contract it is.

“Ultimately, as a project manager, being the sort of central piece to the delivery, you’re going to need to have a good handle on how all parts of the contract chain are going to be able to work,” explains Schütte.

Intention to create legal relations

Contracts also require a statement as to why the parties are making the contract and that they’re happy to do so together.

For example, X is a property owner and wants to build a skyscraper; Y is a skyscraper developer. Both X and Y agree to enter into this contract together with signatures at the bottom of the contract.

“It's all about scene setting. It doesn't set obligations – it is a statement of intention,” says Schütte. “My advice to you is to have it drafted simply, properly. As project managers, you're not looking to do that yourself, necessarily. But you are going to want to be able to identify those different things.”

Capacity

The final element of a contract relates to the capacity and authority to enter into an agreement. This means ensuring the signatory has the authority to act on behalf of their organisation, or the capacity to personally agree to the work.

“What does this all mean for project managers?” asks Schutte. “It means a real understanding of where that uncertainty and the relationship can lie.

“When you're the project manager sitting between those parties to the contract, I want you to have as little uncertainty as possible, as little discomfort as possible about what the parameters of that relationship are.”

Letter of intent

Not every agreement between parties has a contract, and sometimes during contract negotiations there can be a mechanism to speed up starting the project before a full contract is signed.

This can be done via a letter of intent, which sets out the intent to enter into a contract.

However, Schütte says to be careful with these because they can expire and leave the parties without a contract. They can also be limited in terms of when sums are due and who has the authority to spend money or not.

“They are quick and cheap to set up,” she explains. “But there are some risks attached to them. This can be mitigated by simply saying we plan to enter into a form of contract, and mention the name of the contract. But also be aware of the limitations, and when you get towards the end of them, don’t just let things drift. Move into the contract space.”

Scope of contract

Contracts themselves can also be limited in their scope, so care needs to be taken when reviewing the terms and clauses within the document.

Terms can either be expressed or implied. When things are implied, they are often invisible, such as ‘don’t break the law’. However, sometimes these implied terms can present problems down the line.

For example, contractors have a legal right to fix a defect within a ‘reasonable time’ before the client calls a third party. However, the ‘reasonable time’ is an undefined period, and will vary in different circumstances.

“My general advice to project managers is to minimise the use of implied terms,” says Schütte.

“The real issue with invisibility is you don’t know where you stand – and we come right back to this uncertainty of relationship. We don’t want to have parties in those situations not knowing where they stand until a dispute arises. I want you to be knowledgeable before then.”

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