Handling and Managing Commercial Projects and Contracts in the Second Decade of the 21st Century.

Published: 2019/12/06 Number of words: 4259

Contract and commercial issues that develop before, during or after a project has been successfully completed can make or break an organisation involved in such a project. Unless the issues are addressed, the company can be severely affected or be forced out of business. Hence, corporations should always seek to improve their contract and commercial awareness through good strategic management, business planning, teamwork, risk reduction, financing, negotiation and contract management, and should also be aware of the legal framework.

This report gives a critical evaluation of ways to handle and manage commercial and contract issues associated with projects in the second decade of the 21st century. The contract and commercial issues to be appraised are: negotiation, project bidding and tendering, forming alliances, partnerships and project marketing.

Bidding for Contracts and the Tendering Process
Contracts have been described in many ways by different authors. Recent research (Armandi, Sherman & Rowley, 2010) defines a contract as a legally binding accord between two or more parties with reciprocal commitment in return for particular privileges. The agreement involved in a contract, which is legally enforceable, means it can be used to attest to acknowledgment of liabilities.

Drew, Lo and Skitmore (2001) have explained that bidding for a contract is a recognised system for allocating work to interested suppliers with the expectation that contractors can make strategic resolutions in respect of (a) choice of contracts for which to bid and (b) the stages of the bid process required to secure contracts.

Corroborating the above viewpoint, Banki, Esmaeeli and Ravanshadnia (2008) maintain that bidding for a contract requires strategic decisions to be made by contractors about which contracts to bid for and the at what level to bid to secure the contract. Nevertheless, contractors can undertake projects without winning any tenders and still make profits.

Tendering for a contract involves the entire process undertaken by an awarding organisation in order to produce, publish and manage the tendering documents. The bidding process requires the integration of effort from organisations that signifies their interest in winning contracts through their response to tenders. The facilitation of the bidding/tendering process is particularly essential in the project environment, where the well-timed recognition of opportunities and the formation of consortiums are crucial factors for winning contracts (Halaris, et al., n.d.).

Taking a different standpoint, Hensher and Wallis (2005) have criticised the above author and maintain that strong monopolist providers can be competitive in winning tenders. A competitive tendering process generally comprises the following: (a) prequalification request (b) prequalification (c) invitation to tender (d) shortlisting and evaluation of tender (e) negotiations with shortlisted tenders and (f) the best tender chosen and concession awarded (Zhang et al., 2002).

To satisfy the needs of a customer, the bid- and commercial managers (at senior level) engage the customer in pre-bid negotiations. Frequently, they choose to discuss the business challenges prior to the issue of an invitation to tender. Effective management of the pre-bid phase of a project results in enhanced overall designs and better productivity in the later stages (Murtoaro, Kujala & Artto, 2005; Brady, Davies & Gann, 2005). Before the commencement of a bid process, unofficial conversations with prospective or current customers should take place in order to understand their strategic priorities and needs. Such discussions may involve strategic issues like re-shaping a business model or opening up new markets. High-level competencies in consulting and strategic management resources are essential because the conversations are at senior level (Brady, Davies & Gann, 2005).

Contract Negotiation
The process of making joint decisions is known as negotiation (Young, 1991, cited in Murtoaro, Kujala & Artto, 2005, p.4; Murtoaro & Kujala, 2007). After an in-depth analysis of negotiation, Kronaveter and Shamir (2009), substantiating this viewpoint, have suggested that negotiation is a mutual process of solving problems in which the parties involved interact and communicate. However, if during the negotiation there are difficulties with differences of opinion, one of the parties may break off the process. Negotiation analysis can be viewed as the process of selling and delivering a project.

The necessity for negotiation occurs when there are interests, which overlap, from more than one player (actor or entity). These actors communicate their expectations regarding a prospective, jointly satisfactory, agreement. The outcome of the process of negotiation is an agreement which all entities are committed to for future project opportunities (Urbanaviciene, Kaklauskas & Zavadskas , 2009).

Negotiation is perceived as a more appropriate method than competitive tendering when selecting consultants and contractors. The reason is because competitive tendering encourages clients to select the minimum bid which can lead to poor service being offered by consultants (Tilley et al., 2000) while contractors adopt a ‘claims conscious’ tactic for improved margins or cost recoveries of items overlooked during preparation of their competitive tender .

This view has been supported by Holstius (1987) and Cova with Holstius (1993) as cited in Murtoaro et al. (2005, p. 39) in the identification of six generic and sequential project phases, from the perspective of project marketing. They are: search, preparation, bidding (and tendering), negotiation, implementation and transition. Negotiation is performed after bidding and tendering so that the shortcomings in the latter can be eliminated or reduced.

As the second decade of the 21st century progresses, with the technological advancement in software development, project negotiation can be discussed without any physical contact between the parties.

Negotiations performed on websites are generally known as e-negotiations while the utilised systems for e-negotiations are called e-negotiation systems (ENSs). ENSs are software installed on websites which can aid negotiator(s) and can include email, chat and video streaming during negotiations (Kersten & Lai, 2007).

A number of websites have been developed which offer business corporations an ‘e-negotiation (electronic negotiation) table’ such as http://www.tradeaccess.com, http://www.biosgroup.com, http://www.frictionlesscommerce.com and http://moa.com. The sites provide virtual space to search for prospective partners, exchange information among parties, keep negotiation records and provide online documentation (Vetschera, Kersten & Koszegi, 2001).

In mobile network projects, where mobile agents act as online auction representatives, e-negotiation agents like Agora, Impulse, MAgNET, and BiddingBot are useful (Kowalczyk, Ulieru & Unland, 2010).

One-to-one and group negotiations through video conferencing, email and other forms are also possible on Skype, Yahoo Messenger and Google Talk etc (Deng et al., 2008). The engineering manager at Cakasa Nigeria Company Limited once communicated with the project manager of International Energy Services Limited (IESL) during a USAN FPSO (Floating Production Storage and Offloading) project through Skype. In addition, the lead mechanical engineering section used the same means of communication when discussing issues highlighted for clarification with the engineering team of Mobil Producing, Nigeria Limited.

Improvement in a company’s performance and efficiency in handling projects can be achieved through networking with suppliers as well as the formation of partnering (Dubois & Gadde, 2000; Tang, Duffield & Young, 2006).

Essentially, partnering can aid the design of a project and improve its subsequent construction. Therefore, in partnering, there is the potential for improvement in the quality and productivity levels on project sites. Improvement in productivity is also attainable in design offices if the procurement of projects is not by the customary competitive tendering process (Bresnen & Marshall, 2000). For this reason, partnering can result in proactivity in the management of business relationships but is not a system for establishing regulations, procedures, documentation and rules. Potentially, therefore, partnering will result in the provision of an environment that facilitates improvements in productivity, safety and quality. Cultural and attitudinal changes accompany partnering from the inception of a project; work relationships are enhanced and trust is built. These are some of the benefits for the project related industry (Matthews, Pellew, Phua & Rowlinson, 2000).

Chloride Zimbabwe, one of the battery manufacturers in Zimbabwe, entered into a technical partnership with Hawker Batteries, UK. The former benefited from the expertise, technical know-how, and research and development of the latter; the UK company audited the quality of the final products and processes on a quarterly basis, ensuring conformance to standards in Europe. (Karekezi , Kithyoma & Majoro, 2000) .

From the inception of a project until its decommission, there are numerous risks surrounding project delivery. Such risks can be reduced when all the parties involved in the project form an alliance. The forming of alliances is considered to be a long-term strategy in business and links the contractor, those involved in the supply chain and the client. Partners form an alliance for a particular project or outcome and have a common goal. Rewards and risks are shared (Sakal, 2005; Walker & Hampson, 2003 cited in Tang, Duffield & Young, 2006, p. 220; Peters, Walker & Hampson, 2001 cited in Rowlinson & Cheung, 2005; Walker & Hampson, 2003 cited in Tang, et al., 2006).

Sakal (2005) has argued that collaboration and cooperation among partners in an alliance are vital for establishing a project team which will affect the success of the project. Resources such as professional expertise can be shared between partners; when cooperation is sustained the flow of ideas is increased. When a constant flow of communication and information stops, the alliance is likely to break down; the risks of this happening may be avoided if sincere and open channels of communication are maintained in which parties are better able to understand each other’s needs. Hence, sharing knowledge, continual, open communication and trust are crucial factors for an alliance to be successful (Rowlinson & Cheung, 2008).

Furthermore, the unambiguous alignment of goals among parties in the alliance will contribute towards achieving success. All the members of the alliance are encouraged to strive towards obtaining the best solutions for the project; this can be achieved by implementing a reward/risk mechanism which will serve as motivation (Rowlinson & Cheung, 2005). Top management needs to embrace the alliance, be fully committed to it and offer its full support to the project. The aims and goals of the alliance should be passed down to the operation staff, too (Cheung, Rowlinson, Simons & Rafferty, 2006).

A good example of this is the alliance formed between the National Security Agency and Google in which the latter enlisted the assistance of the former for improvement in the security of its digital infrastructure when reacting to cyber attacks from China (DeVos, 2011).

A partnership is an accord that is established between two or more parties which have like-minded objectives. The partners will work in a way that is reciprocally beneficial for the accomplishment of a mission which may not have been possible by only one of them (Sabieh, 2001; Susilawati & Armitage, 2005).

Mubin and Ghaffar (2008) have observed that the shortage and limited resources available to governments of different nations for infrastructural development at the best place and time results in many engaging the private sector for the provision of facilities. A well-prepared public–private partnership (PPP) is a panacea for any government. However, the government has its responsibilities which will be discussed in the sections below:

Creation of an Environment for Investment

According to Zhang (2005), an environment that is conducive to investment for infrastructural projects and operations will attract investors in the private sector. Hence, the government will have to encourage such investment and therefore a sustainable PPP by means of stable economic, social, financial and legal conditions.

Supporting Zhang, Kwak, Chih and Ibbs (2009) emphasised that provision of assistance or guarantees specific to a project by the government – for instance, reduction in tax and guaranteed minimum revenue for a specific time – will make private sector investors interested in PPP projects.

Establishment of an Adequate Regulatory/Legal Framework

The establishment of a solid regulatory framework is a precondition for a PPP. Such a framework is useful for securing an appropriate risk allotment and avoiding possible corruption during the implementation of the PPP. Recent research (Jamali, 2004) indicates that regulation assures the private partner that the regulatory system contains commercial dispute arbitration, protection from expropriation, respect for contract agreements and legitimate costs recovery. Such a regulatory framework will make private sector investors more willing to participate in the development of facilities and, at the same time, be of immense benefit to the government by facilitating efficient project operations. However, too much regulation will frustrate the PPP and should be avoided (Kwak, Chih & Ibbs, 2009).

Establishment of a Supportive and Coordinating Authority
In any PPP project, the aims of the diverse public agencies or government parastatals and departments can differ. Hence, it is prudent to set up a central authority which will manage and resolve conflicts among the departments, parastatals or agencies (Kwak, Chih & Ibbs, 2009). The authority can maintain a database of various PPP facilities and projects and also provide technological assistance and training. For instance, as well as advocating the policies of Build-Operate-Transfer (BOT), the BOT Centre in the Philippines has generated a project database and offers technological assistance and training courses (Kwak et al., 2009).

Selection of an Appropriate Concessionaire
Choosing a suitable concessionaire is crucial to the success of a PPP project. Governments need to institute a working format for procurement so that there is no ambiguity in the specifications and criteria for all phases of the project (Kwak, Chih & Ibbs, 2009). When making their selection, assessors should be able to derive comparative defects, merits and risks associated with each tender submitted, according to the working format. (Zhang et al., 2002).

Project and Project Marketing
There are various definitions of what a project is (Ahmed, 1993, cited in Skaates, Tikkanen & Lindblom, 2002, p. 390). According to Turner and Muller (2002), a project is a transitory organisation to which capital and assets are allocated to embark on an exceptional, novel and temporary endeavour controlling the innate uncertainty and requirement for integration to facilitate the delivery of favourable purposes of transformation.

Uncertainty is generally one of the main characteristics of projects since they involve the marketing of ideas but not the finished product. The disjointed, complex and uncertain characteristics of projects have been scrutinised from the perspective of networks (Olaru, Purchase & Peterson, 2008).

As a result, project marketing and project marketing milieus are essential to eradicate or minimise these uncertainties and ensure that organisations have both enough projects and the necessary and relevant capabilities and capacities to handle the project. Laurence and Patel (2009) point out that project marketing is important in the industrialised sector and deals with huge and complex projects such as the construction of structures and power plants. It is concerned with the diverse marketing activities that occur prior to the award of a contract. When marketing a project, those involved work intimately with clients in order to discover and increase project opportunities while focusing on the ongoing effects of such projects on a particular customer’s business through a strategic approach (Cova & Salle, 2005; Laurence & Patel, 2009).

The milieu in project marketing is a socioeconomic methodology of managing a corporation’s dealings with a community network of non-business and business actors. An analysis of the milieu is vital for identifying and prioritising the business relationships of the buying and selling firms involved with the project – before, during and after delivery (Tikkanen, Kujala & Artto, 2007).

Criticising the above authors, Cova and Salle (2005) adopted a notion of milieu which highlights that the project marketing atmosphere is complex with a socio-spatial make-up that comprises a total of four elements:

  • A territory
  • A network of assorted actors linked to one another in this territory
  • A representation built and accepted by all the actors
  • A code of behaviour and norms (‘the edict of the milieu’) controlling the interactions among the actors.

Hence, the project marketing milieu is a network that has a number of its own peculiar ‘laws’ in which social, institutional, economic, cultural and several other regulations and conduct models subsist.

Challenging the milieu concept, Haimala (2008) maintains that the milieu actors are not ignorant of the ‘laws’ but at any convenient time, they attempt to alter the regulations.

A milieu, also termed the project horizon or a permanent network, assists in supporting the relationships in a network that may have been established for building particular competences. These networks are fostered by social processes. A milieu consists of all players, not just suppliers and customers:

  • Non-business players: lobby groups, governments, unions, activists, lobbies, syndicates, etc.
  • Business players: sub-contractors, financial backers, engineering companies, consultants, agents, etc.

(Cova & Salle, 2005; Haimala, 2008 ).

Criticising project marketing, Hadjikhani (1996, cited in Skaates, Tikkanen & Lindblom, 2002, p. 392) posits that, at multiple levels of the project, discontinuity in seller-buyer bonds poses a key strategic setback. The project marketing process involves, among other phases, pre-bid analysis, bidding and transition (Holstius, 1987; Cova and Holstius, 1993, cited in Skaates, Tikkanen & Lindblom, 2002, pp. 391 – 392; Cova, Salle and Vincent, 2000 cited in Haimala, 2008, pp. 52 – 53).

This critical analysis has produced a brief, but not exhaustive, appraisal of the various contracts and commercial issues pertaining to handling and managing projects in the second decade of the 21st century. Current and future organisations need to be constantly aware of- and use to their advantage, a corporate understanding and resolution on these matters to remain in business. All the stages of a project design, its subsequent construction, commissioning, operation and its finalisation can be improved through the proper utilisation of all the handling and management techniques related to contract and commercial issues.


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