The importance of smaller contracts

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Author: PASA

Why smaller contracts are important and how your organisation can manage them better.

Given the potential financial payoff from large projects and contracts, it’s easy to see how smaller contracts can get lost in the ‘company soup’.

Yet according to Open Windows account manager, Tania Scott, failing to pay careful attention to smaller contracts can result in more costly scenarios and delays than you might expect.

Given this reality, why do organisations continue to overlook small contracts and how could they be managing them better?

Counting the cost

“Most organisations focus principally on their larger contracts, and from a certain perspective this does make sense,” says Tania. “Large contracts involve high risk and big dollars.”

“On the face of it, a contract to construct an $80 million power station seems more significant than a $250,000 contract to refurbish a single piece of equipment. However I have seen the latter result in enormous expense as a result of poor contract management, even leading to the loss of millions of dollars.”

Because they are seen as less significant, details in smaller contracts are often overlooked. When something goes wrong, often no one is sure about the correct process. Actions may be taken on impulse that end up muddying the waters of the contract terms. The resulting confusion can have a multi-million dollar impact on service delivery and bottom line.

The multiplication effect

Individually, a smaller contract may not seem valuable. Yet even small businesses may have numerous small contracts which, when added together, represent a significant investment.

“When you consider the overall value of all your smaller contracts, it’s worth ensuring they are properly managed and delivered.”

“Training is important here,” says Tania. “Up-skilling staff in contract management, and investing in an easy-to-use contracts management software platform can make a measurable difference to any business.”

Scope is still important

Because limited time is generally invested in negotiating small contracts, the scope and terms are often not watertight.

“You need really tight systems and processes to be applied across every single contract,” says Tania. “I’ve seen organisations end up in court over small contracts because the scope was not property negotiated, documented and agreed on at the outset.”

“If you have a tool like Open Windows contracts management software, make sure all the dates and project milestones are in there, the right people are scheduled to receive reminders, and that everything is set up correctly from the start.”

Think downstream, not upstream

Tania says a common problem with smaller contracts is that while they may be negotiated by procurement, they are invariably left to individual departments and managers to oversee.

“Or worse, the contract delivery is left to the supplier to manage. The risk here of course is that the supplier’s approach may not be in the best interests of your organisation, meaning the risk to your business could be significant.”

Consider consolidation

Many businesses end up with a raft of small contracts for a single service.

“Transport is a good example. I’ve seen companies trying to manage multiple individual transport contracts when consolidating the lot into a single contract with one transport provider would save time, money and effort.”

At the same time, Tania says every scenario is different.

“It’s horses for courses and it may be that retaining a number of small contracts works for your company – the key thing is to evaluate your situation and establish what’s going to be more efficient. Oftentimes, consolidating smaller contracts comes out as the most cost effective and manageable option.”

Smoke and mirrors

Small contracts can be deceiving, says Tania. They may seem trivial but managing them can quickly become a major time sucker.

“One example is labour hire. In many organisations, individual project administrators want to hire the people they know to carry out project work, and on the face of it, it can appear cheaper to do it this way. Yet if you allow project administrators to directly engage contract staff, the burden of personnel contract management is shifted onto them as well.”

“I’ve seen individual project administrators end up responsible for 10 – 15 individual contract engagements – which then involves managing individual scopes of work, performance, invoicing and payments etc. While it may appear more expensive to engage a recruitment firm, in fact this frees up the project administrator to do his or her job properly. It also shifts the risk onto the recruitment company, which is so important should anything go wrong.”

Final thoughts

Despite the temptation to adopt a ‘set and forget’ approach to smaller contracts, Tania advises organisations of all sizes to view small contracts with the same care and focus as larger contracts.

“Small cultural changes and a renewed focus on smaller contracts can reduce risk, save time and deliver significant business benefits.”

“It’s tempting to overlook the importance of contract management. It’s not until something goes wrong that you realise the enormous impact that even a small issue with a small contract can have on your company.”

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  • This article was sponsored by Open Windows, a leader in Contract Management Software for Australian organisations www.openwindows.com.au

 

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