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CONTRACTMANAGEMENTGUIDANCE NOTE ON PROCUREMENTDECEMBER 2021ASIAN DEVELOPMENT BANK

CONTRACTMANAGEMENTGUIDANCE NOTE ON PROCUREMENTDECEMBER 2021ASIAN DEVELOPMENT BANK

Creative Commons Attribution-NonCommercial-NoDerivs 3.0IGO license (CC BY-NC-ND 3.0 IGO) 2021 Asian Development Bank6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, PhilippinesTel 63 2 8632 4444; Fax 63 2 8636 2444www.adb.orgSome rights reserved. Published in 2021.ISBN 978-92-9269-269-8 (print); 978-92-9269-270-4 (electronic)Publication Stock No. TIM210515-2DOI: http://dx.doi.org/10.22617/TIM210515-2The views expressed in this publication are those of the authors and do not necessarily reflectthe views and policies of the Asian Development Bank (ADB) or its Board of Governors orthe governments they represent.ADB does not guarantee the accuracy of the data included in this publication and accepts noresponsibility for any consequence of their use. The mention of specific companies or productsof manufacturers does not imply that they are endorsed or recommended by ADB in preferenceto others of a similar nature that are not mentioned.By making any designation of or reference to a particular territory or geographic area, or by usingthe term “country” in this document, ADB does not intend to make any judgments as to the legalor other status of any territory or area.This work is available under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0IGO license (CC BY-NC-ND 3.0 IGO) go/.By using the content of this publication, you agree to be bound by the terms of this license.For attribution and permissions, please read the provisions and terms of use athttps://www.adb.org/terms-use#openaccess.This CC license does not apply to non-ADB copyright materials in this publication. If the materialis attributed to another source, please contact the copyright owner or publisher of that sourcefor permission to reproduce it. ADB cannot be held liable for any claims that arise as a resultof your use of the material.Please contact [email protected] if you have questions or comments with respect tocontent, or if you wish to obtain copyright permission for your intended use that does not fallwithin these terms, or for permission to use the ADB logo.Corrigenda to ADB publications may be found at http://www.adb.org/publications/corrigenda.Note:In this publication, “ ” refers to United States dollars.Printed on recycled paper

CONTENTSAbout this Publication ivAbbreviations viiExecutive Summary viiiI.Introduction 1II.Objective and Benefits of Contract Management 4III. The Contract Management Process 6IV. Reporting to and Requesting No-Objection from ADB 18V.19Resources for Further Review Appendixes1: Typical Contract Management Issues 202: Example of A Risk Management Plan 223: Manual on Contract Management 254: Example of Application of the Contract Management Plan 74

ivABOUT THIS PUBLICATIONIn April 2017, the Asian Development Bank (ADB) approved its new procurementframework, the ADB Procurement Policy: Goods, Works, Nonconsulting andConsulting Services (2017, as amended from time to time); and the ProcurementRegulations for ADB Borrowers: Goods, Works, Nonconsulting and ConsultingServices (2017, as amended from time to time). These replace the former Guidelineson the Use of Consultants (2013, as amended from time to time) and ProcurementGuidelines (2015, as amended from time to time). The procurement policy and theprocurement regulations address the procurement activities of project executingagencies and implementing agencies on projects financed in whole or in part by aloan or grant from ADB, or by ADB-administered funds. ADB designed the 2017procurement policy to deliver significant benefits and flexibility throughout theproject procurement cycle, as well as to improve project delivery through a renewedfocus on the concepts of quality, value for money (VFM), and fitness for purpose.This note is part of a series of guidance notes published by ADB in 2018 toaccompany the 2017 procurement policy and the procurement regulations.Each note discusses a topical issue for borrowers (including grant recipients),bidders, and civil society under the new framework (see list below). The guidancenotes cross reference each other frequently and should be read in conjunction.All references to “guidance notes” pertain to these notes. The notes may beupdated, replaced, or withdrawn from time to time.List of Guidance Notes for the 2017 ADB ProcurementPolicy and the Procurement Regulations1.2.3.4.5.6.7.8.9.10.11.12.Value for MoneyProcurement Risk FrameworkStrategic Procurement PlanningProcurement ReviewAlternative Procurement ArrangementsOpen Competitive BiddingPrice AdjustmentAbnormally Low BidsDomestic PreferencePrequalificationSubcontractingConsulting Services Administeredby ADB Borrowers13. Nonconsulting Services Administeredby ADB Borrowers14. High-Level Technology15. Quality16. Bidding-Related Complaints17. Noncompliance in Procurement18. Standstill Period19. State-Owned Enterprises20. E-Procurement21. Framework Agreements for ConsultingServices22. Public–Private Partnerships23. Contract Management24. Fragile, Conflict-Affected, and EmergencySituations25. Sustainable Public Procurement26. Use of Merit Point Criteria for Bid Evaluation

About this PublicationvADB procurement reforms intend to ensure VFM by improving flexibility, quality,and efficiency throughout the procurement cycle (see illustration below and theGuidance Note on Value for Money). VFM is part of a holistic procurement structurewith three support pillars: efficiency, quality, and flexibility. The two key principles oftransparency and fairness weave across all elements of the structure.Tra n s p a re n c yValue for MoneyThe effective, efficient, and economic use of resources, whichrequires an evaluation of relevant costs and benefits along with anassessment of risks, nonprice attributes, and/or total cost of ownershipas appropriateEfficiencyQualityFlexibility Decreased transactioncosts Increased skills Increased high-leveltechnology usage Improvedprocurement planning Support andencouragementof e-procurementsystems Contract managementsupport Prompt resolution ofcomplaints Improved developingmember countryprocurement process Improvedprocurement planning Governance Contracts with clearperformance criteria Minimal number ofcomplaints Improved ADBprocesses Open competitivebidding Decentralization Accreditationfor alternativeprocurementarrangements Principles-baseddecisions Improvedprocurement planning Delegation Bids with weightedproposalcriteriaFairnessTimeTime is an important element of VFM. When a project is delivered promptly or when aprocess is completed rapidly, greater value is created for all stakeholders. For example, aroad project completed early provides economic benefit, security, or other value to thecommunity it serves. It increases the return on investment to the executing agency andaccelerates the project and payment cycle to the successful bidder. Likewise, a projectdelivered late loses significant value.When considering VFM in the context of procurement, pay attention to anythingthat (i) shortens the procurement cycle timeframe, or (ii) accelerates delivery of thedevelopment project.

viAbout this PublicationObjectiveThis guidance note is intended to assist readers by elaborating on and explainingADB’s 2017 procurement policy and procurement regulations for borrowers(including grant recipients).This note identifies additional information for the reader to consider when applying ADB’sprocurement policy and procurement regulations to their circumstances.Living DocumentThis guidance note is intended to be a living document and will be revised as required.Be sure to check the ADB Business Center website for the latest version and updates,https://www.adb.org/business/main.The ReaderIn many circumstances, readers are expected to use this guidance note in a manner uniqueto their needs. For consistency throughout the suite of guidance notes, the followingassumption is made about the reader:The reader is a professional involved in activities financed in whole or in part by an ADB loanor grant, or by ADB-administered funds.FAQsFrequently asked questions, clarifications, examples, additional information, links to training,and other useful resources will be made available on the ADB website.Be sure to check the ADB Business Center website for more l and Order of PriorityThis guidance note explains and elaborates on the provisions of the ProcurementRegulations for ADB Borrowers: Goods, Works, Nonconsulting and Consulting Services(2017, as amended from time to time) applicable to executing (and implementing) agenciesunder sovereign (including subsovereign) projects financed in whole or in part by aninvestment loan from ADB (i.e., excluding ADB results- or policy-based loans),ADB-financed grant (excluding ADB-administered technical assistance and staffconsultancies), or by ADB-administered funds.In the event of any discrepancy between this guidance note and the procurementregulations, the latter will prevail. The financing agreement governs the legal relationshipsbetween the borrower and ADB. The rights and obligations between the borrower and theprovider of goods, works, or services are governed by the specific procurement documentissued by the borrower and by the contract signed between the borrower and the provider,and not by this guidance note.

viiABBREVIATIONSADB—Asian Development BankAPG—advance payment guaranteeCCP—community communication planCEMP—contractor’s environment management planCMP—contract management planCSPRA—country sector (agency) procurement risk assessmentDNP—defect notification periodEOT—extension of timeEMP—environment management planENAA—Engineering Advancement Association of JapanFIDIC— Fédération Internationale des Ingénieurs-Conseils(International Federation of Consulting Engineers)GCC—General Conditions of ContractESHS—environment, social, and health and safetyLARP—Land Acquisition and Resettlement PlanLOA—Letter of AcceptanceMDB—multilateral development bankPCC—Particular Conditions of ContractPIU—project implementation unitPMC—project management consultantPMU—project management unitPMO—project management officePPFD—Procurement, Portfolio and Financial Management DepartmentPPRA—project procurement risk assessmentRMG—Retention Money GuaranteeSPP—Strategic Procurement PlanningVFM—value for money

viiiEXECUTIVE SUMMARYThis Guidance Note on Contract Management explains the basic principles ofcontract management and proposes a structured and step-by-step approach toimplement it. Recognizing the need to deliver value for money, the guidance noteemphasizes demonstrating the benefits of good contract management and how itmay be applied in operations financed by the Asian Development Bank (ADB).How will this guidance note help the user?Increase Efficiency and Reduce Procurement Time Preparing, from the onset, a contract management strategy and mobilizingthe relevant resources for it.Supporting ongoing monitoring of the contractor’s performance.Operating a robust contract administration system, including maintaining arobust record management system.Reduce Risk Anticipating what could go wrong, e.g., payment delays, right of access tosite.Putting in place mitigation measures to address any identified risks.Managing the closure of the project, ensuring that no pending issues orobligations remain unaddressed.Deliver Value for Money Through the contractor meeting requirements of the project.Completing the project on time or earlier.Complying with applicable legislation.

I.Introduction1.1The 2017 ADB procurement regulations recognize that one factorcontributing to achieving value for money (VFM) is effective contractmanagement. Contract management ensures that supplier, contractor, and/orconsultant deliverables are met as agreed under the contract.1.2Contract management is the monitoring and control of contractorperformance to ensure optimal outcomes from a contract. It includes preparingfit for purpose tools (mainly the Contract Management Plan), mobilizing relevanthuman resources, monitoring progress toward delivery of contract deliverables,managing payments, controlling variations, measuring contractor performance, andclosing out the contract.1.3This guidance note provides operational level guidance for borrowers,through their executing and implementing agencies, on how contract managementshould be applied in ADB-financed projects involving the procurement of goods,works, and services.11.4This guidance note assists users with contract management in theprocurement cycle as shown in Figure 1. The activities relating to the borrower’scontract management are determined by decisions taken at the strategicprocurement planning stage and will later be implemented from contract award tocontract closure, to ensure that contract obligations are met and deliver VFM.1.5Appendix 2, the Manual on Contract Management, provides furtherguidance at the operational level and is meant to be used hand in hand withthis guidance note. More particularly, the manual explains how executing andimplementing agencies can develop a proper CMP and how it can be used as anoperational tool to monitor the contractor or supplier’s performance—in otherwords, to “manage the contract.” The manual is also expected to provide guidanceon a set of relevant indicators (contract dashboard) to be maintained at all timesthroughout the life of each contract. This will allow the executing and implementingagencies to take necessary measures to keep their projects on track.1Borrowers, through their executing agencies, and any other party to a financing agreement shallalways act in accordance with the highest standard of ethics during any procurement process(including contract management) subject to the procurement regulations and any use of funds,resources, assets, and authority by such parties shall be in accordance with ADB’s AnticorruptionGuidelines and Integrity Principles and Guidelines (both as amended from time to time).

2Contract ManagementFigure 1: Contract Management within the ADB Procurement CycleCountry PartnershipStrategyCountry and Sector/AgencyProcurement Risk AssessmentProject ConceptualizationFeedback or EvaluationProject Completion ReportContract CloseLessons LearnedEfficiencyPROCUREMENTCYCLEM alu eo n fo reyneProcurement PlanningProcurement Plan,Project Procurement RiskAssessment Rating,Project Administration ManualssVContract AwardsparencyTranContract Management PlanEconomyImplementation andContract ManagementlityuaQTransaction Technical Assistance,Project ProcurementRisk ClassificationFa i rBiddingBidding DocumentsBid EvaluationEvaluation ReportsContract managementSource: Asian Development Bank.1.6Figure 2 illustrates when the various contract management activities takeplace throughout the project cycle.1.7This guidance note applies to contracts financed in whole or in part by ADBloan or grant, or by ADB-administered funds, for the procurement of goods, works, orservices, including consulting services, to which the procurement regulations apply.22In this guidance note, the term “Contractor” will be used to collectively designate a workscontractor, a supplier of goods, a consultant or other service provider. The terms “borrower” and“employer” are used interchangeably.

IntroductionFigure 2: Summary of Contract Management Activities Throughoutthe Project CycleProject CyclePhasesStrategicProcurement PlanningBiddingBid Evaluation andContract AwardContractImplementationFeedback orEvaluationSource: Asian Development Bank.Contract ManagementActivities1. Create/updater risk register2. Define contract strategy, including(choice of specification, pricing andcontract form).3. Calibrate and set up the contractmanagement team1. Prepare the CMP2. Ensure that any Contractorrequirements relating to CMP areincluded in the bidding document3. Ensure that Site SupervisionConsultant TOR includes scoperelating to CMPBorrowers submits CMP forapproval by ADB's beforecontract award1. Borrower receives and analyzes themonthly report2. Borrower takes relevant correctivemeasures (as needed) to keep(or put back) project on trackDuring the 6 monthly projectreview, the last 3 Monthly Reportsshould be used to compare theactual site conditions to the reports.3

II. Objective and Benefitsof Contract ManagementA.Objective of Contract Management2.1The aim of contract management is to ensure that all parties meet theircontractual obligations under each awarded contract financed in whole or in partby ADB, or by ADB-administered funds. In order for this to be achieved, borrowersmust plan properly and deploy the right resources, tools, and techniques ensure thisis achieved.B.Benefits of Contract Management2.2Figure 3 summarizes the benefits of good contract management.Figure 3: Benefits of Good Contract ManagementSupplier MeetsRequirementsEnvironmentaland SocialBenefitsProbityValue forMoneyLower RisksLegislativeComplianceSource: Asian Development Bank.ReputationHealthand Safety

Objective and Benefits of Contract Management2.35Each of these benefits will impact on VFM, for two reasons:(i)(ii)Contract management increases the likelihood that the contractorwill meet the project requirements, helping to realize the VFMavailable at the time of contract award.Contract management lowers risk in contract implementation,improving the probability that the expected VFM will be achieved.2.4In addition, more efficient and effective contract management promotesincreased and more timely loan disbursements. Conversely, poor contractmanagement can compromise portfolio performance and delay intendeddevelopment results. Appendix 1 gives a list of typical contract management issues.

III. The Contract Management Process3.1Figure 4 describes the contract management process from the perspectiveof the borrower, which comprises three stages: precontract award, contractadministration, and contract closure.3 Contract “implementation” describes thecontractor’s work within the contract and occurs concurrently with the borrower’sstage of contract administration (i.e., the borrower administers the contract whilethe contractor implements it).Figure 4: The Borrower’s Contract Management ProcessABPrecontract AwardContractAdministrationCContract Closure1. Develop risk assessment1. Record management1. Contract close-out2. Develop contractmanagement strategy2. Performancemanagement2. Post contract review3. Develop contractmanagement plan3. Managing payment3. Filing contract records4. Managing changes5. Claim and disputemanagementReporting to ADBSource: Asian Development Bank.3The terms “contract management” and “contract administration” are sometimesinterchangeably used in the literature on management topics. To avoid ambiguity, in thisguidance note, contract management is used as encompassing all stages and activities aiming atthe overall goal of ensuring optimal contract outcomes. Contract administration designates onestage of those activities focusing on the day-to-day interactions with the contractor as requiredunder the contract.

The Contract Management Process73.2These stages for the borrower follow a logical flow: the precontract awardstage is the design phase of contract management during which the strategy is defined;the contract administration stage consists mainly in implementing this strategy byperforming a number of monitoring and control activities in interaction with thecontractor, starting from contract award; and the contract closure phase aims atproperly “exiting” the contract and drawing lessons for future projects. Each of thesestages is described below.A.Pre-Contract Award3.3Contract management needs to be considered early in the procurementprocess for it to be effective. Its starting point lies in Strategic Procurement Planningstage which should be formulated early on between the project conceptualizationand project preparation stages.3.4Pre-contract award activities should include a risk assessment which willtranslate, at contract level, some of the risks which were primarily identified at theCountry Partnership Strategy (CPS) stage through the Country/Sector ProcurementRisk Assessment (CSPRA) and later on, at the project conceptualization andpreparation phase through the Project Procurement Risk Assessment (PPRA)4,which itself feeds into the risk assessment that is part of the strategic procurementplanning. Such risk assessment will lay the foundation of a contract strategy.3.5The contract strategy will then inform the contract management plan(CMP) which will define activities and responsibilities to monitor the contractor’sperformance during contract implementation until contract closure. The CMPshall be developed by the borrower at the time of preparation of the biddingdocument. It shall subsequently be submitted to ADB for endorsement prior tocontract signature. It is a key tool of contract management which, during contractimplementation, should be updated on a monthly basis and be used to capture andmonitor all necessary information on physical progress, technical issues, financialmanagement, time management and other relevant aspects.3.6Many of these activities require the contractor and the borrower toperform certain assigned tasks. Some of these tasks may have a cost implication tothe contractor and/or borrower, and many will need to be specified in the contractto ensure that the responsibility is a contractual obligation. Therefore, contractmanagement arrangements need to be considered at the time of development ofthe proposed contract to inform bidders of contractor’s obligations and costs.1.Develop Risk Assessment3.7To develop the contract and to prepare for its implementation, a riskassessment should be conducted at an early stage of the procurement process4Further information on the general approach to risk management can be found in the GuidanceNote on Procurement Risk Framework. t-riskframework.pdf.

8Contract Managementin the framework of the strategic procurement planning (SPP) stage, and moreparticularly as part of the project procurement risk assessment (PPRA).(i)Contract Risk Allocation3.8The first aspect of the risk assessment is to define a contract riskallocation. This involves determining the best risk allocation between the borrowerand the contractor.5 The principle guiding this analysis should be that the partyin the best position to control and to manage the identified risk should bearresponsibility for that risk under the contract. A party being allocated a risk shouldtake all necessary preventive, mitigating, or corrective measures as deemed fit tomanage that risk, with the understanding that should the risk eventuate, this partyshall bear the financial consequences thereof (Box 1).Box 1Example of Contract Risk AllocationThe risks associated with the design of a complex water treatment plant, andparticularly the risk that the plant, once completed, be unfit for its intended purpose,can be transferred to the contractor through the use of a design and build contract,where the contractor holds ultimate responsibility for the design of the works basedon the employer’s requirements (preferably expressed in the form of performancespecifications). Under such contract, no specific design will be prescribed; instead,the contract will stipulate a set of performance specifications that are to be achievedby the facility (e.g. maximum energy consumption, maximum chemicals consumption,plant production in m3/day, chemical contents, noise and odor levels, etc.). It will becontractor’s responsibility to select the design most suited to meet these specifications,to develop it and later to implement the works accordingly so that so that performanceof the facility conforms to the prescribed targets. This type of contract usually providesfor performance damages to which the contractor will be liable in case the prescribedspecifications are not met.Source: Asian Development Bank.3.9This contract risk allocation should be based on a technical analysis anda proper market analysis. Borrowers should, however, resist the temptation to“dump” all (or most) allocated risks to the contractor. An unfair or unbalanced riskallocation is likely to discourage competition, drive prices up, and lay the groundfor disputes during contract implementation—all circumstances being prejudicialto obtaining VFM.3.10Risk allocation should subsequently be reflected in the draft contract sothat bidders are able to reflect the cost of their risk in their quoted price.(ii)Risk Management Plan3.11The second aspect of the risk assessment is intended to address the risks.For the identified employer’s risks (e.g., delays in granting the contractor right of5This analysis may be fed by “high level” risks at country or sector level that are identified duringthe project preparation phase (see the Guidance Note on Strategic Procurement Planning).

The Contract Management Process9access to the site, payment delays, etc.), an action plan needs to be prepared for theirmitigation (Box 2). For each risk identified, the action plan should define, for each riskidentified, preventive, mitigating, or corrective measures, and the party responsiblefor implementing these measures along with a time frame. The borrower should beaware of the contractor’s risks, even if he bears no responsibility towards such risks,and monitor their potential impact on the project.Box 2Example of Employer’s Risk ManagementIn some countries, it is a requirement that a state-specialized body approve detailed designsbefore any work is carried out. This issue may be of particular importance in a design andbuild contract, since untimely approval is likely to delay the works and give rise to a claim bythe contractor. The borrower will thus have to determine a way to “manage” such risk, whichcould for instance involve the appointment of an officer dedicated to follow-up the approvalprocess in liaison with the contractor and the state-specialized body.Source: Asian Development Bank.3.12The consolidation of all such identified risks, including the associatedaction plan, is usually referred to as the risk management plan (or contractrisk register). It should be managed throughout the contract implementationperiod and updated as known risks change and new risks are identified. The riskmanagement plan is one component of the contract management plan.3.13An example of a risk management plan is shown in Appendix 2.2.Develop the Contract Management Strategy3.14The contract management strategy is the approach to be adopted toenable the proper management of the contractor performance during contractimplementation. This involves:(i)(ii)Calibrating the relevant resources needed to conduct contractadministration activities and to manage the risk management planDefining how the borrower and the contractor will communicateduring contract implementation (electronic communication tools,meetings, performance monitoring and reporting, etc.).3.15Similarly to the risk assessment referred to above, the assessment of thenecessary human resources will be addressed during the strategic procurementplanning (SPP) stage, and more particularly as part of the project procurement riskassessment (PPRA).(i)Calibrating Resources3.16The borrower shall put in place a contract management team of the rightsize and composition. This team may consist of a Project Management Unit (PMU)or Project Implementation Unit (PIU) internal to the Implementation Agency. Thisaspect is sometimes underestimated, with too much reliance on the works supervision

10Contract Managementteam on site. The size and composition of the borrower’s contract managementteam should be commensurate to the scale and complexity of the project involved.For example, an ordinary supply contract will not require the same resources as thatof a large-scale construction contract. The team should include skills in the relevanttechnical field, contract management, and document administration (all the abovemay be limited to one person for a small and/or simple project).3.17According to its available resources and competence, the ImplementationAgency may wish to recruit an external project management consultant (PMC)to assist and advise its contract management team. For high-value and complexcontracts, the Implementation Agency may also need to secure access tospecialized external advisory such as local law firms, specialized claim consultants(including in delay analysis experts). Acquisition of other resources such as projectmanagement and planning control software (e.g. Primavera) and documentmanagement system may also be considered.3.18The borrower’s contract management team should have access to theappropriate level of decision makers in their organization, so that relevant decisionscan be made promptly. Delays in making contract-related decisions have thepotential to greatly increase the cost and slow the completion of constructionprojects (e.g., the approval of a small contract variation, if delayed, can lead to theincurrence of substantial additional costs and time delays, as the contractor is notauthorized quickly enough to implement the action required).(ii)Communication Management3.19It is important to define the manner in which the various stakeholderswill communicate during the contract implementation period. Several typesof meetings should be planned, each with representatives of different levels ofseniority, different agendas and frequencies, for instance:(a)(b)(c)(d)Weekly meetings between the supervision engineer and thecontractor to discuss and resolve day to day technical oradministrative issues;Monthly meetings between the Implementation Agency, theengineer

development project. T r a n s p ar e n c y Value for Money The effective, efficient, and economic use of resources, which requires an evaluation of relevant costs and benefits along with an assessment of risks, nonprice attributes, and/or total cost of ownership as appropriate Efficiency Quality Flexibility Decreased transaction costs