THE EFFECTIVENESS OF CONTRACT MANAGEMENT ON CONTRACTORS

PERFORMANCE: A CASE STUDY OF OIL AND GAS COMPANY

RAJAB I. SHIWA

A DISSERTATION SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENTS FOR THE DEGREE OF MASTER OF PROJECT

MANAGEMENT OF THE OPEN UNIVERSITY OF TANZANIA

2014
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CERTIFICATION

The undersigned certifies that, he has read and hereby recommends for acceptance by the

Open University of Tanzania a dissertation titled The effectiveness of contract

management on contractors performance- a case study of Oil and Gas Company in

partial fulfilment of the requirements for the degree award of Master of Project Management

(MPM) of the Open University of Tanzania.

Signature

Dr Severine Kessy

Supervisor

Date.
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COPYRIGHT

No part of this dissertation may be reproduced, stored in any retrieval system, or transmitted

in any form by any means, electronic, mechanical, photocopying, recording or otherwise

without prior written permission of the author or the Open University of Tanzania in that

behalf.
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DECLARATION

I, Rajab I. Shiwa, do hereby declare that, this dissertation is my own original work and it

has not been presented and will not be submitted to any other university for a similar or any

other degree award.

Signature.........................................................

Date.................................................................
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DEDICATION

This dissertation report is dedicated to my lovely wife Tatu Hassan, for her perpetual

encouragement and material support during my significant period of my studieswith

love.
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ACKNOWLEDGEMENT

I would like to express my appreciation to Dr Ngatuni who has given me ideas and advice

during my participation on the research methodology sessions, for his tireless inputs,

criticism, and advice had been giving during the whole period of his facilitation in the class.

I would particularly like to mention in this respect my research supervisor Dr. Kessy, for his

assistance and kind comments during the whole process of doing research and the

compilation of this report.

Many thanks should go to the management of a case company particularly Mr. Gbemiga

Owolabi and Mr. David Johnson whose permission created a room for me to conduct

research at the organisation. Other members of a case company I would like to thank include

Mr Ramsay Benjamin, Adrian Katesigwa, Mark Hesketh, Richard Cooke, Elias Pius, Glen

Phillips, David Schmidt, Josia Moirana and Mr Ifeanyi Olike for their support they showed

to me making sure the research is of success.

I would like to sincerely thank those individuals who spared time to respond to the

questionnaire, particularly case company workers. Their contribution to this study is

invaluable. My appreciation also goes to all those who contributed directly and indirectly to

making this research possible. I would also like to express my thanks to my classmates with

whom I have exchanged ideas.

I would also thank my friends; Subrina Mushi, Joseph Mkose, Silivesti Narsisi, Mwemezi

Ndibalema and Stanley Mwenda, and my son Idrissa Shiwa for their tireless support and

finally my wife Tatu Hassan for her encouragement for the whole period I have been

working on this research. Lastly, I would like to exonerate the acknowledged persons and the

organization from any liability for errors and omissions, should it occur in this report.
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ABSTRACT

In the world of business, it is common for an organisation to involve contractors or suppliers

in one way or another to support in providing service or product to meet its intended

requirements. It is a main duty for operating company to make sure contractors perform their

duties safely and timely through appropriate contract management (CM) procedures. Despite

significant research progress, the effectiveness of contract management in terms of

monitoring contractors performance in Tanzania has not been tracked and published widely.

The main objective of the study was to examine the effectiveness of contract management on

contractors performance in fulfilling their contractual obligations at case company. The

findings reveal that the contract management process is very effective on monitoring

contractors performance. 28 were sampled out of total population of 82 based on their

involvement in contract management and managing contractors performance. The study

was conducted at a case company, Dar es Salaam and Mtwara office.

It is concluded that, the case company CM activities are effective and there is a relationship

between CM and Contractors performance. The researcher recommends more improvement

to the following areas; scope of work and specification; risk management; and KPI so that to

achieve much better contractors performance outcomes timely, safely and within budget.

TABLE OF CONTENT
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CERTIFICATION ............................................................................................................. I
COPYRIGHT.................................................................................................................... II
DECLARATION ............................................................................................................ III
DEDICATION ................................................................................................................ IV
ACKNOWLEDGEMENT ............................................................................................... V
ABSTRACT.................................................................................................................... VI
LIST OF TABLES ....................................................................................................... VIII
LIST OF FIGURES ........................................................................................................ IX
ABBREVIATIONS ......................................................................................................... X
CHAPTER ONE ............................................................................................................... 1
INTRODUCTION AND BACKGROUND INFORMATION ........................................ 1
1.1 INTRODUCTION..................................................................................................... 1
1.2 BACKGROUND OF THE RESEARCH PROBLEM ......................................................... 1
1.3 STATEMENT OF THE RESEARCH PROBLEM............................................................. 3
1.4 RESEARCH OBJECTIVES ........................................................................................ 5
1.4.1 General research Objective ........................................................................................ 5
1.4.2 Specific research Objectives ...................................................................................... 5
1.5 RESEARCH QUESTIONS ......................................................................................... 5
1.6 SIGNIFICANCE OF THE STUDY ............................................................................... 5
1.7 ORGANIZATION OF THE STUDY ............................................................................. 6
CHAPTER TWO .............................................................................................................. 7
LITERATURE REVIEW ................................................................................................. 7
2.1 INTRODUCTION..................................................................................................... 7
2.2 CONCEPTUAL DEFINITIONS OF KEY TERMS ........................................................... 7
2.2.1 Contractors performance .......................................................................................... 7
2.2.2 Contract management ................................................................................................ 9
2.3 THEORETICAL LITERATURE REVIEW ................................................................... 11
2.3.1 The principal-agency theory .................................................................................... 11
2.3.2 Pareto analysis ......................................................................................................... 11
2.3.3 Kraljic matrix ............................................................................................................... 12
2.3.4 Factors for effective contract management .................................................................. 17
2.4 EMPIRICAL LITERATURE REVIEW ........................................................................ 18
2.5 CONCEPTUAL FRAMEWORK ............................................................................... 23
CHAPTER THREE ........................................................................................................ 26
RESEARCH METHODOLOGY ................................................................................... 26
3.1 INTRODUCTION................................................................................................... 26
3.2 RESEARCH DESIGN AND APPROACH ................................................................... 26
3.3 POPULATION AND SAMPLING PROCEDURES ........................................................ 26
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3.4 VARIABLES AND MEASUREMENT PROCEDURES .................................................. 28

3.5 METHODS OF DATA COLLECTION ........................................................................ 29
3.6 RELIABILITY AND VALIDITY OF DATA................................................................. 29
3.7 DATA PROCESSING AND ANALYSIS ..................................................................... 31
CHAPTER FOUR........................................................................................................... 31
FINDINGS AND DISCUSSION.................................................................................... 31
4.1 INTRODUCTION................................................................................................... 31
4.2 THE INFORMATION OF THE RESPONDENTS .......................................................... 32
4.5 RESPONDENTS OPINION ON THE CM ACTIVITIES EFFECTIVENESS ...................... 33
4.4 EFFLUENCE OF CM ON CONTRACTORS HSE PERFORMANCE ............................. 37
4.5 ASSISTANCE OF CM ON COST EFFECTIVENESS ACHIEVEMENT ............................ 40
4.6 EXTENT CM LEADS TO CONTRACTS REQUIREMENTS COMPLIANCE ................... 42
4.7 DISCUSSION OF FINDINGS ................................................................................... 44
CHAPTER FIVE ............................................................................................................ 54
CONCLUSIONS AND RECOMMEDATIONS ............................................................ 54
5.1 INTRODUCTION................................................................................................... 54
5.2 CONCLUSION ...................................................................................................... 54
5.3 RECOMMENDATIONS .......................................................................................... 56
5.4 SUGGESTIONS FOR FURTHER RESEARCH ............................................................. 58
REFERENCES ............................................................................................................... 59
APPENDIX A: RESEARCH QUESTIONNAIRE....................................................... 64
APPENDIX B: INTERVIEW QUESTIONS ............................................................... 65
APPENDIX C: BUSINESS PERFORMANCE REVIEW MEETING AGENDA ...... 66
APPENDIX D: CONTRACT MANAGEMENT PLAN .............................................. 67
APPENDIX E: KICK OFF MEETING AGENDA ...................................................... 68
APPENDIX F: DATA CODING FOR SPSS ............................................................... 69
APPENDIX G: DETAILED RESPONDENTS SCORE OF CM ACTIVITIES ........ 70

LIST OF TABLES

Table 2.3 Determinant factors for effective contract management ......17

Table 3.1 Sample element....27

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Table 3.2 Reliability Coefficients.31

Table 4.1 Respondents information..33

Table 4.2 Respondents opinion on Contract Management activities...34

Table 4.3 Health, Safety, and Environment Performance.38

Table 4.4 Regression results for Contractors performance.39

Table 4.5 Case companys Health, Safety, and Environment performance record..39

Table 4.7 Cost effectiveness.41

Table 4.8 Compliance to contracts requirements43

LIST OF FIGURES

Figure 2.1 The Kraljic procurement portfolio matrix or relationship matrix15

Figure 2.2 Influencing of risk and spend on level of management required.16

Figure 2.4 Conceptual Model25

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Figure 4.6 Case companys Health, Safety, and Environment performance record.40

ABBREVIATIONS

ACV Approved Contract Value

Admin Administration

ANAO Australian National Audit Office

BPR Business Performance Review

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CIPS The Chartered Institute of Purchasing and Supply

CPSP Certified Procurement and Supplies Professional

CLM Contract Lifecycle Management

CM Contract Management

CMP Contract Management Plan

COMESA Common Market for Eastern and Southern African

C&P Contract and Procurement

DST Drill Stem Test

EPC Engineering Procurement Construction

HR Human Resources

HSSE Health, Security, Safety, and Environment

HSE Health, Safety, and Environment

ITT Invitation to Tender

KPI Key Performance Indicators

LL Lesson Learned

Ltd Limited

LTI Lost Time Injuries

MDA Ministries Departments and Agencies

MPM Masters in Project Management

MOJ Ministry of Justice

MoF Ministry of Finance

NCR Non Compliance Report

O&G Oil and Gas

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OUT The Open University of Tanzania

PCA Policy and Corporate Affairs

PCM Procurement Contract Management

PMU Procurement Management Unit

PPE Personal Protective Equipment

PSPTB Procurement and Supplies Professionals and Technicians Board

SOW Scope of Work

SPSS Statistical Package for Social Science

UK United Kingdom

WCGW What Could Go Wrong

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CHAPTER ONE

INTRODUCTION AND BACKGROUND INFORMATION

1.1 Introduction

This chapter covers background information, statement of the research problem, research

objectives and research questions. It further presents the significance of the study and the

organisation of the study.

1.2 Background of the research problem

In the world of business, it is common for an organisation to involve contractors or suppliers

in one way or another to support in providing service or product to meet its intended

requirements (Kumar and Markeset, 2007). The oil and gas (O&G) industry is one of the

business areas where high level of risk is involved during contractors fulfilment of their

contractual obligations (Nguyen, 2013). It is a main duty for operating company to make

sure contractors perform their duties safely and timely through appropriate contract

management (CM) procedures (Hotteebex, 2013). Effective CM has emerged as a crucial

function to improve profitability, support compliance and manage risk in the O&G industry

(Prosidian consulting, 2011).

Operating companies are responsible for discovering and producing hydrocarbon reserves

from areas as geographically and culturally diverse. A wide range of contractor and sub-

contractor companies support the operating companies by developing infrastructure, offering

engineering solutions and supplying and operating highly specialized equipment (Hotteebex,

2013).These organizations provide most of the workforce for these projects and therefore

shoulder much of the risk associated with finding and developing hydrocarbon reserves

(Mearns and Yule, 2009). East Africa is a new venture for O&G companies, new location for

the industry, should expect challenges possibly different from well-known locations of the
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world, such as North Sea and Gulf of Mexico. While some risks can be transferred to the

contractor/sub-contractors in terms of financial pressure for not completing a project, the

ultimate risk still lies with the operating organisation to deliver positive outcomes which

limit exposure to liability (Limberakis, 2012). This makes the contract management critical

and Operators are expected to monitor service providers performance with regards to safely

and timely delivery of the service for success of the project or drilling campaign. In other

side host countries should play big role in terms of managing the activities associated with

extraction of the natural resource by issuing permits and conducting auditing for compliance

of the regulations on safety and environmental hazards. Given the often risky and potential

dangerous operating environment, O&G companies are making, or should make, contract

management a higher priority (Limberakis, 2012).

Bautista and Ward (2009) recommend that, the entire procurement team should also be

engaged in managing the post award contracting activities. Contract Administration

processes and activities such as monitoring and measuring contractor performance,

managing contract change process, and managing contractor payment process should be

integrated with other departmental core processes such as customer service, financial

management, risk management, schedule management, and performance management

(Hotterbeekx, 2013).

Organisations having established and mature contract management processes are able to

generate a great deal in additional savings and have a distinct competitive advantage over

their competitors (Rendon, 2007 as cited by Nguyen, 2013). On the other hand, inefficient

management of contracts will lead to poor operational control, low customer satisfaction,

high risks and unwanted costs (Saxena, 2008 as cited by Nguyen, 2013). On his study

Hotterbeekx (2013) developed a maturity model for contract management inclusive of the
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following category contract management functions: relationship management, performance

management and risk management to assess CM maturity level of the organisation.

According to Prosidian Consulting (2011), findings of recent international surveys

conducted by supply and demand chain executives on the complexities and risks of project

contracts shows that there is a significant loss of money due to ineffective management of

project contracts. For instance, research firm Aberdeen Group, has advocated that enterprises

lose US$153 billion each year due to ineffective project contract management. A Green

Point Global (2013) reveal that 60-80% of business transactions are governed by agreements

or contracts and more than 10% of all executed contracts are lost.

Although there are a lot of other variables which can influence the contractors performance,

this research will focus on the CM activities which have direct influence on performance

outcome to the project deliverables, particularly on risk management, contractors selection,

CM team competence and roles, and purchasing-supplier relationship. It has not directly

thought to cover the whole phases of procurement process, although some of the activities

like CM plan, contract specifications and requirements, key performance indicators and

performance outcomes will also be referred so that to provide better understanding from the

reader.

1.3 Statement of the research problem

Although every organisation in oil and gas industry put in place a contract management

procedures still there had been shortfall in making sure contractors fulfil their contractual

obligations timely, safely and at acceptable level of quality (Chuah et al., 2010). The

emphasis remains for organisations particularly operators to keep on reviewing the

procedures by identifying the challenges and put forward suggestions for improving the

procedures.
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With all the contract management in place still incidents and accidents happens which after

investigation it found one of the causes is lack of proper CM which had lead to poor

contractors performance (Oil& Gas UK, 2008). These incidences demonstrate an increasing

demand for better contract management in the complicated world of upstream and offshore

projects (Limberakis, 2012).

Due to occurrences of incidents in the oil and gas industry, there had been a lot of effort put

in place to make sure the industry operate in safely manner, which made Operators and

contractors to appropriately meet their contractual obligations through application of

effective contract management (Oil& Gas UK, 2008).

However, no contract arrangement can guarantee a problem free in project execution, it is

the quality of the people, management system of the company and contractor that are the

best guarantor of success (Bhardwaj, 2011). Although there are well documented procedures

on CM in Tanzania, some contractors had not been performing to the agreed level i.e poor

quality works, health and safety incidents and late completion of works (Nassar, n.d; Salim

2013; Mturi 2013; Mkose 2012). On other hand, some members of the CM team especially

the end users, has been not taking ownership of the contract as the result no control of cost,

late invoice payments for service delivered/completed, which causes cost overrun and

complains to contractors which could affect the relationship and contractors performance.

Despite significant research progress, the effectiveness of contract management in terms of

monitoring contractors performance in Tanzania has not been tracked and published widely.

This has motivated the researcher to conduct this study.

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1.4 Research Objectives

1.4.1 General research Objective

The main objective of the study was to examine the effectiveness of contract management on

contractors performance in fulfilling their contractual obligations at a case company.

1.4.2 Specific research Objectives

The main aim had been supported with the following specific objectives.

To examine whether contract management influences contractors Health, Safety,

and Environment (HSE) performance.

To assess if contract management assist to achieve cost effectiveness during contract

execution.

To examine the extent to which contract management leads to compliance with

contracts requirements.

1.5 Research Questions

The following questions did guide the researcher:

Does contract management influence contractors HSE performance?

How does contract management assist to achieve cost effectiveness during contract

execution?

To what extent does contract management leads to compliance with contracts

requirements?

1.6 Significance of the study

The study intend to make contribution through the findings which is useful source of

information for the upstream oil and gas organizations to review the areas which need
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improvements and enhance compliance to the contract management system. Second, the

conclusions and recommendations drawn from this study had come up with suggestions that

do help the company to improve contract management in its project operation environments

more effectively. Third, the study findings is useful in guiding students and other

readers/researchers for further and future referencing as starting point to carry out similar

research on the topic and add to their existing knowledge. They can extend their efforts in

the areas which have not been covered by this study. Lastly, this research paper also serves

as partial fulfilment of the requirements for the award of Masters of Project Management

(MPM) offered by The Open University of Tanzania.

1.7 Organization of the study

The rest of this study is organized as follow: Chapter two describes various literatures

relating to the topic which a researcher had gone through. That includes, conceptual

definitions; theoretical literature review and further discussion on contractors performance

and contract management; empirical literature review, abroad and local studies; conceptual

and theoretical framework. Chapter three discusses various elements of research

methodology. Chapter four presents the study findings and discussion. Chapter five

incorporates conclusions and recommendations with regard to the finding of the study.

Lastly the back pages include references and appendices.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter is divided into two main parts namely theoretical literature review and

empirical review. Theoretical review explains different theories written by different scholars

on the study variables. Definition and discussion on key terms had been covered, on the

other hand, empirical review attempts to explain the gaps identified from different studies

done on similar subject and hence try to bridge those gaps. Conceptual framework, on which

the study is based, also had been developed.

2.2 Conceptual definitions of key terms

This section provides definitions and discussions on various terms used in the study. Further

discussion had been covered under section 2.3 theoretical literature review

2.2.1 Contractors performance

According to business dictionary, Performance is the accomplishment of a given task

measured against present known standards of accuracy, completeness, cost, and speed. In

contract, performance is deemed to be the fulfilment of an obligation in a manner that

releases the performer from all liabilities under the contract. It refers the conformance of

contractor or supplier with contract terms, specifications, service level agreements or Key

Performance Indicators (KPI) and other elements of the commercial agreement (CIPS,

2012a). Performance key outcome priority is cost, quality, speed and flexibility (Ketchen

and Hult, 2006). According to BG Group (2014b) Contractor performance management

include the following areas: Health Security Safety and Environment (HSSE); Operations;

Quality; Delivery; Payment; Receipt; Expediting and inspection. Nassar (n.d) refers
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contractors performance can be measured in main three categories; schedule, cost and

safety.

In this study, the term contractors performance means the accomplishment of contractors

contractual obligations in terms of compliance to contracts requirements, cost effectiveness

and HSE performance. The contracts requirements include, delivery schedule, quality

specifications, regulations and standards. HSE performance refers to assurance of peoples

health and safety, as well as environmental protection. Cost effectiveness means no cost

overruns, project delivered within the budget. This definition provides what a contractor has

to achieve so that to deliver project contract safely, timely and within budget.

Contractor or supplier performance measurement generally implies the comparison of

contractors current performance against the following elements (CIPS, 2012d); Defined

performance criteria such as KPIs, to establish whether the aimed-for or agreed level of

performance has been achieved; Previous performance, to identify deterioration or

improvement trends; The performance of other contractors or supplier (standard

benchmarks), to identify areas where performance falls short of best practice or the practice

of competitors, and where there is therefore room for improvement.

Key performance indicators are used to track and evaluate the Contractors performance in

complying with the contract requirements. Performance indicators measure and evaluate

success against a specific goal. The process begins by selecting performance indicators that

are relevant for the procurement environment. This is followed by identifying and collecting

appropriate data for each performance indicator to establish a baseline on the level of

performance (Path n.d).

For performance indicators to be effective, they need to be SMART (CIPS, 2012c), that

means need to be; Specific: clear and well-defined statement of precisely what the desired
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deliverables are; Measurable: susceptible to monitoring, review and measurement (ideally in

quantitative); Attainable: achievable and realistic, given the time and resources available;

Relevant: performance measures should be relevant to, and aligned to contract needs; Time-

bounded: given defined timescales and deadlines for completion (or review).

A range of performance indicators can be developed to monitor a suppliers performance,

and the exact indicators used will vary according to the contract specifications, the level of

risk associated with contract failure by the supplier, and the value of the procurement (Path

n.d). This has been supported by Miller (2005) who observes that, just because everything

can be measured doesnt mean that everything has to be measured. Performance

measurement is all about measuring the right things at the right time for the right people. Its

about measuring whats important to the business. Its about the quality of the measures and

not the quantity (Miller, 2005)

2.2.2 Contract management

Contract management is the management of contracts made with customers, vendors,

partners or employees. Contract management includes negotiating the terms and conditions

in contracts and ensuring compliance with the terms and conditions. It includes documenting

and agreeing on any changes that may arise during its implementation or execution. It can be

summarized as the process of systematically and efficiently managing contract creation,

execution, and analysis for the purpose of maximizing financial and operational performance

and minimizing risk. (Aberdeen Group, cited by Bhardwaj, 2011).

According to Grimsey and Lewis (2004), cited by Hotterbeekx (2013) Contract management

can be defined as the processes undertaken to maintain the integrity of the contract, and

ensure that the roles and responsibilities contractually demarcated are fully understood and

carried out to the contracted standard. Another definition of contract management is the
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process that ensures that all parties to a contract fully meet their obligations, in order to

satisfy the operational objectives of the contract and the strategic business goals of the

customer (Van Weele and Van der Puil, 2013 cited by Hotterbeekx, 2013).

According to Bhardwaj (2011), contract management is the process that enables both parties

to a contract to meet their obligations in order to deliver the objectives required from the

contract. It is also involves building a good working relationship between company and

contractor. It continues throughout the life of a contract and involves managing proactively

to anticipate future needs as well as reacting to situations that rises.

Rendon (2010), cited by Oluka and Basheka (2012) observes CM as being qualified

workforce, clear processes, relationships, resources, leadership and policies all of which

have direct impact on resulting contractors performance outcomes. Costa et al., (2009)

argue that contract management as far as to Engineering Procurement Construction (EPC)

project, it refers the main six categories; finance management, HSE management, quality

management, schedule management, Human resources (HR) management, and Procurement

management. According to CIPS (2012a) key elements of contract management include:

contract communication; contract administration; managing performance; relationship

management; and contract renewal or termination.

Hence forward in this study the term contract management refers six areas; contract

management team roles and responsibility, risk management, specification preparation,

contractor selection, key performance indicators set up, and relationship management. This

definition chosen since provides the activities which have direct influence in terms of

monitoring contractors performance to deliver the project contract safely, in time and within

budget.
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2.3 Theoretical literature review

To explain the effectiveness of the contract management on contractors performance,

theories are used. These theories are the principal-agency theory, Pareto analysis, and Kraljic

matrix.

2.3.1 The principal-agency theory

According to Chiappori and Salanie (2003) as cited by Salim (2013); and Oluka and Basheka

(2012) the underlying principle of the principal-agency theory is that there should be a clear

understanding of the needs of the principal and ability of the agent to meet these needs

competently. Principal must closely monitor agents performance; create reward structures

that reinforce desired performance (Ketchen and Hult, 2006). Indeed, when procurement

contract is well defined and planned, the principal and agents find it easy to meet needs of

each other in an efficient way resulting into timely execution of the contract (Oluka and

Basheka, 2012). The principal-agent theory can proudly be applied to this study with a case

company as a principal and contractors or service providers or suppliers as agents. The

theory becomes significant to the study as it highlights the need for robust contract

requirements and specifications as well as the objectively process of monitoring contractors

performance. When contract requirements, CM team roles and responsibilities and KPIs are

well defined, the principal and agents will find it easy to meet needs of each other in an

efficient way resulting into timely execution of the contract in predetermined performance

level.

2.3.2 Pareto analysis

The Italian statistician Vilfredo Pareto (1848-1923) discovered a common statistical effect.

About 20% of the population own 80% of the nations wealth. About 20% of employees
 12

cause 80% of problems. About 20% of items account for 80% of the firms expenditure

(Lysons and Farrington, 2006).

This analysis is very applicable to this study in a sense that the operating company has to put

more effort, time and resources on contract management for 20% of contracts to monitor

contractors performance which amount 80% of the whole total contract value in the

organisation. Due to limited resources on contract management function, organisation should

focus and put more effort on key contracts to monitor contractors performance (BG Group,

2014b). In other words is to say company will spend more CM resources on high value and

high risk contracts which makes 20% of whole contracts.

2.3.3 Kraljic matrix

The Pareto approach to segmentation is based on the value and volume of business we do

with each supplier or contractor. However, this is not the only factor that organisations

should consider when segmenting suppliers or contractors (CIPS, 2012a). Peter Kraljic

(1973) developed a tool of analysis that seeks to map two factors, importance of item and

complexity of the supply market, refer Figure 2.1. It can be seen more simply as a tool for

assessing what types of supplier or contractor relationships are most appropriate for different

types of purchases or contracts.

The matrix is useful to this study since it gives the organisation an opportunity how to focus

on level of contract management in terms of relationship management between company and

contractors while monitoring performance should be in place.

The matrix therefore has four quadrants, as shown in figure 2.1 and explained in the

following paragraphs:

For non-critical or routine items (such as common stationery supplies), the focus will be

on low maintenance routines to reduce procurement costs. Action plan for this will include;
 13

arms length, transactional approaches such as blanket ordering (empowering end users to

make call-off orders against negotiated agreement) and e- procurement solutions (e.g. online

ordering or the use of purchasing cards) will provide routine efficiency. The main focus of

management will be monitoring expenditure against regular reports received from vendors,

end- users or e- procurement systems.

For bottleneck items (such as proprietary spare parts or specialized consultancy services,

which could cause operational delays if unavailable), the buyers priority will be ensuring

control over the continuity and security of supply. The following will be part of action plan;

security may suggest approaches such as negotiating medium- term or long- term contracts

with carefully pre- qualified and selected suppliers; developing alternative or back- up

sources of supply; including incentives and penalties in contracts; and performance

monitoring and expending, to ensure the reliability of delivery

For leverage items (such as local produce bought by a major supermarket), the buyers

priority will be to use its dominance to secure best prices and terms, on a purely transactional

basis. Action plan; leverage buyer power may mean multi- sourcing; taking opportunistic

advantage of competitive pricing (e.g. through competitive bidding, tenders or e-

auctions);Standardizing specifications to make suppliers or contractor switching easier; and

consolidating orders or engaging in buying consortia to enhance buyer power (where

necessary) and secure economies of scale.

For strategic items (such as key subassemblies bought by a car manufacturer, or processors

bought by laptop manufacturers), there is likely to be mutual dependency and investment,

and the focus will be on the total cost, security and competitiveness of supply. Part of action

plan will be; develop long term, mutually beneficial strategic relationships and relationship

management disciplines (e.g. cross- functional teams; vendor and account management;
 14

executive sponsorship); collaborative planning; data sharing and systems integration; and so

on.
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Figure 2.1: The Kraljic procurement portfolio matrix

Source: CIPS (2012a)

The Pareto analysis can further be elaborated by using the Kraljic matrix - Figure 2.2 in

terms of level of contract management needed within the organisation. The type of contract

can also be a factor in determining the appropriate level of management. By their very nature

some categories of procurements will require greater level of contract management for a

capital purchase of high-value specialist machinery with an associated long-term

maintenance contract than there would be for supplies of minor generic office supplies.

When examining the different types of contract which an organization can enter into, the

Kraljic matrix which balance the factors of risk to an organization, and the amount spent by

an organization on that purchase, are compared (King and Elliot, 2009). The matrix is very

useful in this study since gives an organisation opportunity to consider CM in terms of risk
 16

management when thinking of which contracts should contract management resources be

located to manage the contractors performance.

High

Category 4 Category 1

RISK

Category 3 Category 2

Low

Low SPEND High

Figure 2.2: Influence of risk and spend on the level of management required for

contracts

Source: King and Elliot (2009)

Category 1-This category of contract is high risk/high spend. Contract management should

be extensive. Requirements in this category are very important to the purchasing

organization and, the emphasis is on value and often evaluation criteria for such purchases

are likely to reflect the whole-life cost approach (life-cycle costing) to find the product or

service which gives the best value.

Category 2-This category of contracts is high spend/low risk. Those contract which fall

within the area of high spend/medium risk will be the same as category 1 with regard to

contract management. Those contracts which are truly high spend/low risk will not require

high levels of contract management but will be treated in a similar way to categories 3 and 4.
 17

Category 3- This category of contract is low risk/low spend. Contracts in this category do

not require high level of contract management. The main focus of contract management with

these contracts is to ensure that goods are received in an undamaged state and to ensure that

service is delivered on time and at an acceptable quality level.

Category 4-This category of contract is high risk/low spend. Contracts in this category are

probably unlikely to require high levels of contract management and likely to be treated in

the same way as those in category 3

2.3.4 Factors for effective contract management

Oluka and Basheka (2012) gives five determinants of effective CM, apportioning of

resources; clear reporting lines; defining of roles and responsibilities; ensuring timely

payments; and managing of risks. Workshop organised by Common Market for Eastern and

Southern African (COMESA) for practitioners came up with the following summary in

Table 2.3 for factors of successful CM.

Table 2.3: Determinant factors for effective contract management

Determinant factor Indicators

Putting in place structure Identifying and defining processes and a clear contract
and resources management plan, with a focus on outputs and
milestones to performance
Ensuring the right people The contract manager has a detailed knowledge of the
are in place contract
Clear roles and Clearly defining the responsibilities of both parties
responsibilities contract manager
Feedback and Regular and routine feedback is given to contractors on
communications their performance
mechanisms
Payment and incentives Ensuring payments are made to contractor or supplier as
per contract
Managing risks Identifying and anticipating risk such as service failure,
reputation damage and additional costs
Source: Oluka and Basheka (2012)
 18

According to Hotterbeekx (2013); Nguyen (2013); ANAO (2012); Bhardwaj (2011); and

Esley (2007), Effectiveness of CM should make sure the following are in place; Recruit staff

with relevant skills; Provide training to address skills gaps; Have monitoring plans or

checklists in place; Ensure all staff understand their responsibilities in relation to

performance management; Establish and maintain a sound relationship with the contractor;

Hold regular meetings with the contractor to discuss progress and any problems; Identify any

problems at an early stage; Only make payments for satisfactory performance; Review the

need to end the contract for breaches of conditions or non-performance and; Seek advice on

when a contract variation is necessary.

2.4 Empirical literature review

The review of literature showed that a number of studies have been done to assess the

effectiveness of contract management in public organisations as well as in the oil and gas

industry organisations. For example, Nguyen (2013) established the sources of risk being

the dangerous settings of operating environment in upstream oil and gas, as the result the

industry is subject to rigorous scrutiny by various bodies of law. In particular, a great

attention of regulatory requirements is often placed on the issues of health, safety and

environment. The study looked on the whole lifecycle of contract, from Pre-award stage up

to post-award stage, contract management being part of the post award stage. The thesis case

study was based on Contractor or service provider side. Data collection is derived from

documents, observations and interviews. The findings revealed that contract lifecycle

management (CLM) is an effective tool to manage risks, compliance and change. The study

considered as an applied research and was labelled as descriptive study. The author did not

provide the contract management aspect on Operators side, also did not provide how CLM

affects the HSE performance of contractor, thus the research filled the gap through one of the

objective which is to find out, how CM influences contractors HSE performance.

 19

Among the major determinants to effective contract management are clear contract

management plan and appropriate methods of capturing key data, others are accurate

definition of roles and diverse CM knowledge of contract manager (Oluka and Basheka,

2012). This exploratory study intended to validate the determinants and constraints of

contract management in public sector organizations of Uganda, a self-administered

questionnaire was used as the survey instrument. Sample was selected based to the relevance

to the focus of and purpose of the study. Population was selected based on their involvement

in public procurement. 120 were sampled out of total population of 200. 80% of respondents

returned the filled survey instrument. The responses were on a five-likert scale (5=strongly

agree, 4=Agree, 3=No comment, 2=Disagree, and 1=Strongly disagree). The study was only

based on public sector, and certainly not touched the HSE as an item to be discussed in their

study. Contractor performance was not addressed as dependant aspect to CM, which is a gap

covered in this study.

Beijer (2012) on his study on design of a supplier performance measurement and evaluation

system, the researcher used different kinds of data collection methods such as: extensive

literature review, desk research, unstructured and structured interviews and group meetings.

He recommended Quality and Delivery as performance criteria to monitor the

operational performance of contractor or suppliers, because these performance criteria can be

used to both monitor and analyze contractor or suppliers. The researcher did not consider

HSE as one of the criteria to monitor contractor performance, hence a gap which addressed

in this research.

Kumar and Markeset (2007) a study on development of performance-based service strategies

for the oil and gas industry: a case study, the study framework considered various

influencing factors and their attributes, as well as performance factors categorized as critical

success factors, performance killers and cost drivers. The study findings were operators of
 20

complex O&G production facilities are becoming increasingly dependent on service

providers to support their efforts to perform according to demands; when developing a

performance-based service strategy one needs to consider influencing factors and attributes:

needs to measure service delivery process performance and the gaps between required and

delivered services, and to periodically reassess the service strategy influencing factors. The

proposed framework can reduce cost and improve performance. Data were collected through

questionnaire, interviews, available documents and literature survey. The study did show the

importance of service performance for involved parties to compete in the market and need

for monitoring of the contractors performance. The study did not discuss whether the

contractors performance can be influenced by CM, therefore a gap addressed in this study.

According to the report by Breedon (2013) on his findings and recommendation on contract

management review on the ministry of justice (MOJ), the report finding revealed the

following: MOJ does not always measure the endtoend service outputs, but rather focusses

on measuring supplier input into service delivery. MOJ does not adequately define and

monitor the KPIs to prevent interpretations by suppliers that adversely impact MOJ. KPIs do

not measure all of the critical elements of the service, or do not reflect areas of known

service deficiency. There are uncertainties over accuracy of some reported KPIs and

uncertainties over the suppliers interpretations of the intent of some KPIs. The report

suggested that MOJ should design KPIs and data requirements which adequately measure

and reflect the benefits the contract is intended to deliver. A performance management

review process is carried out at regular intervals for all contracts in order to ensure that KPIs

remain relevant and deliver measures of contract benefits. KPIs must be designed to be fair

and balanced. The report insists the need of proper KPI and having a staffed and competent

CM team. No HSE aspects were addressed in the study, consequently a gap which was filled

in this study.
 21

The author developed a model which utilises qualitative as well as quantitative measures

about the contractors performance. Nassar (n.d) on his paper titled Defining contractor

performance levels his considered various performance measures for analysis. Quantitative

measures were calculated from a historic database. These quantitative measures can be

broken down into 3 main categories; schedule, cost and safety. Qualitative measures on the

other hand were assessed subjectively using the Analytical Hierarchical Process. Therefore,

a data set containing all the performance measures versus the 21 contractor was compiled.

Eight performance measures were used in all: the average delay, the average number of late

jobs, ratio to average bid, Disabling Injury Severity Rate, the Average Days Charged,

managerial and customer service, environment and sustainability (the last two being the

qualitative measures). The author has shown the importance of using historical data reaching

to conclusion and recommendation. CM was not discussed to show how can affect the

contractors performance, hence a gap which was discussed in this study.

Salim (2013) on his study on the role of procurement contract management in the

effectiveness of project management, a case study at MIC-Tanzania. The study addressed a

need of contractors compliance to contract terms and conditions, technical capability and

contract monitoring towards project management. The study methodology was descriptive

design, purposive non-probabilistic sampling technique was used, data were collected by

using interview and questionnaire. The authors conclusion includes the following, staff

inadequacy in CM function, disputes caused by late delivery by suppliers, poor quality of

works/services, vague specifications, suppliers technical incapability and little attention to

make contract visible to other stakeholders. Also mentioned lack of efficient technical

evaluation and monitoring of KPI. The recommendation from the study among others were,

put in place strong supplier technical evaluation with clear criteria, prepare a supplier

delivery performance report after completion of the project, a case company should

implement automated contract management system, and lastly to recruit and retain more
 22

experienced and qualified staff for CM function. The study did not address HSE as key

component in monitoring effectiveness of the project performance, as a result a gap which

discussed in this study.

The research work by Mturi (2013) tilted Assessment of effectiveness of procurement

contracts management in public organisations in Tanzania, a case study of Kinondoni

Municipal Council The study objectives were to assess adequacy of skills for the key CM

staff, assess the extent of contract variation, and examine on time delivery of goods and

services at the case organisation. Methodology used on the study was exploratory design,

nominal and ordinal scale used to test the data collected, interview, documentary review and

questionnaire used to collect data, researcher used probability method for sampling purpose.

The survey discloses that, there are a problem of late deliveries, un-controlled variations to

contracts and lack of effective professionalism. The study recommendations includes, the

buyer need to calculate a realistic delivery time and question the supplier for his/her if can

meet; use early supplier/contractor involvement strategy in order to identify the expected

problems and solve them before its impact; prompt payment to supplier invoices which will

encourage and motivate contractor or supplier; and lastly CM staff should attend continuous

professional development at least 72 hours per year. The study did not consider the private

sector; no HSE performance was addressed in the research, did not provide how CM

influences contractor performance and therefore, a gap which was discussed in this research

work.

There was effective procurement contract management at ministry of finance (MoF), that is

Ramadhani (2012) conclusion on his study Assessment of effectiveness of procurement

contract management (PCM) in Ministries Departments and Agencies (MDAs), a case study

of Ministry of Finance the PCM is effective when the following aspects happens: good

relationship between the procuring entity and its service providers, suppliers or contractors;
 23

goods and services are timely delivered; timely payments; and quality deliveries highly

appreciated. The methodology used by the researcher was both positivism and

phenomenology philosophy, conceptual structure design, the sample include 8 people from

heads of departments, 9 from procurement management unit (PMU) and 8 from tender board

members. He used both primary and secondary data, interview, questionnaire, document

review and observation to collect data. The study methodology was spot on, although did not

talk about HSE performance as variable, considered a gap and was filled by this research

work.

2.5 Conceptual Framework

The Conceptual framework provides connections and relationships between concepts, should

be sufficiently specific to help answering the research questions (Fisher, 2010); According to

Mbogo et al., (2012) conceptual framework is a basic structure of a research consisting of a

certain abstract ideas and concepts that a researcher wants to observe, experiment or

analyse.

The analysis of contract management has been built on the basis of some factors which

contribute to successful contract management in monitoring contractors performance from

the above theoretical and empirical studies. The variables which build the conceptual model

of this study include risk management, KPI, Contract manager or contract management

team, SOW and specifications, relationship management, contractor selection, cost

effectiveness, HSE performance and compliance to contracts requirements and regulations.

Contract management plan referred as mediating variable.

From Figure 2.4, the model shows the relationship between CM activities and contractors

performance outcomes. According to the model the researcher has developed if the various

variables of contract management activities combined with a support of contract

 24

management plan as mediating variable, then the result on contractors performance was

revealed.

Competent CM team do help to prepare a good contract SOW which stipulates all the details

of the specifications, which lead to no or less contract variations hence cost effective since

no budget overrun caused by missed details on the first contracted specification

requirements. Proper Risk management results on identification of the risks involved,

allocation of risks between contractor and company, level of impact and its mitigation

measures. This enables contractors to include provisional cost for risk coverage in their bid

and provide assurance on good HSE performance for the right contractor selected for the

work. Appropriate and well defined KPI, with penalties and incentives stipulated, agreed by

both company and contractor due to good working relationship, assist to score the

performance and evaluate if contractor is achieving the agreed targets in terms of compliance

to the contract requirements. This includes the delivery schedule, quality specification,

regulations and standards.

A competent CM team with clear roles and responsibilities do conduct a detailed risk

assessment to prepare clear and robust SOW and specifications and contract requirements,

select the right contractor, put together smart KPIs, and have a good relationship to manage

the contractors performance to deliver a project safely, timely and within budget.
 25

Contract Contractor's
Management Performance
Risk Health, Safety,
management and
SOW and Environment
Specification (HSE)
Contractor Performance
selection
Key Performance
Indicators (KPI)
Compliance
Relationship
management
Contract
Cost
management
Effectiveness
team

Figure 2.4: Conceptual model

Source: Extracted from literature

 26

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter presents the research paradigm, research strategy, nature and type of data

required. It also describes the sampling procedures, measurement and data collection,

processing and analysing data, and the expected results.

3.2 Research Design and approach

According to Khotari (2004) research design is the arrangement of conditions of collection

and analysis of data in a manner that aims to combine relevance to the research purpose with

economy in procedure. In fact, design is the conceptual structure within which research is

conducted. It constitutes the blueprint for collection, measurement and analysis of data.

Particularly in this study the researcher did use a case study approach and did make use of a

case company and its staff who represents other companies which are in the industry of oil

and gas. The researcher decided to choose one of the O&G company in Tanzania as a case

study because the prevailing situation are almost the same or similar to most of the

organisations in the oil and gas industry. The design preferred since was possible to yield

maximum information with minimal expenditure of effort, time and money. The researcher

did use a deductive approach whereby the theories and variables lead to what type of data to

be collected for the study (Saunders et al., 2009). The data collected used to test the

conceptual framework of the study and show the relationship between the variables.

3.3 Population and sampling procedures

Population of the study approximately involved 82 people from the selected departments

which are major stakeholders on contract management. This is because of easy accessibility
 27

and they are the ones which get involved in managing contractors performance throughout

the contract period. The study was conducted at a case company, which is in Dar es Salaam

as the head office and Mtwara where the supply base supports the offshore drilling

operations. Table 3.1 shows out of the expected 28 respondents, 25 returned the filled

research instrument, representing 89% response rate.

It is believed that if sample is chosen carefully using the correct procedure, it is then possible

to generalise the results to the whole of the research population (Dawson, 2002). The

researcher did use non probability sampling method known as Judgement or Purposive

sampling technique to obtain the appropriate respondents, whereby whoever involved with

procurement and contract in the organisations departments or sections was considered for

sampling. That means Contract and Procurement (C&P), finance, well engineering, Human

resources and Administration (HR&Admin), legal, Policy and Corporate Affairs (PCA) and

Health, Security, Safety, and Environment (HSSE) were sampled.

The researcher selected respondents for interview that believed to yield the most

comprehensive understanding of the study includes Head of Contract and Procurement, Head

of Well Engineering, Drilling Superintendent, Drilling Operations Supervisor, Logistic

Supervisor, Supply Base Manager and Finance accounting Officer.

Table 3.1: Sample element

S/N Section/Department Population Sample size Return

1 Contract and Procurement 8 5 5

2 Finance 11 3 2
3 Well engineering 32 8 7
4 Health, Security, Safety and Environment (HSSE) 12 4 4
5 Legal 4 2 2
6 HR and Admin 9 4 4
7 Policy and Corporate Affairs (PCA) 6 2 1
TOTAL 82 28 25
Source: Author (2014)
 28

3.4 Variables and measurement procedures

Level of measurement of the data often dictates the calculations that can be done to

summarise and present the data (Lind et al., 2006). Measurement is a process of mapping

aspects of domain onto other aspects of range according to some rules of correspondence

(Khotari, 2004). The mostly used widely used classification of measurement scales are

nominal, ordinal, interval and ratio scale. In this study nominal and ordinal scale were used.

Nominal scale is a system of assigning numbers to the events in order to label them (e.g. top

management-1, supervision level-2, and operational level-3), while ordinal scale places

events in order. The researcher did measure the variables derived in the conceptual

framework using non-parametric measurement. The Contract management variables were

measured using the 5-Likert scale to establish the level of the variable phenomena as per the

respondents opinions. The study did measure; the relationship status with contractors; the

competency level and experience of the CM team; how good was risk management

conducted; the extent contractors performance are monitored by using KPI; level of support

company receive from contractor during the performance review meetings; how robust SOW

and specifications are prepared for the contract and; how fair and transparent contractors are

selected prior award of contract

The study did measure effects of CM variables on each of the contractors performance

variables. The contractors performance variables were measured by number of registered

cases. i.e. non-compliance, Lost Time Injuries (LTI), release to environment, medical

treatment cases and hazardous conditions.; number of contracts delayed compare to the

agreed timeframe; number of contract variations made; number of contracts had overrun the

contract budget and; number of contracts reported to have quality problems.

 29

3.5 Methods of data collection

There are several ways of collecting the appropriate data which differ considerably in

context of costs, time and other resources at the disposal of the researcher (Kothari, 2004).

Research data were collected by using primary and secondary source from various

respondents through questionnaires, interview, observation and documentary.

Data were collected by researcher himself from the field. Data were obtained through,

questionnaire, interviews, observation and documentary. Personal and telephone interview

were used by preparing list of area of questioning and interview schedule, researcher had

opportunity to observe the CM process. Researcher used both closed and open ended

questions, 5-likert scale (5=strongly agree, 4=Agree, 3=Undecided, 2=Disagree, and

1=strongly disagree) with provision for respondents to provide their comments was used.

They were required to answer the questions by filling the appropriate blanks and tick in

appropriate box. The questionnaire sheets were physically distributed to respondents, email

was also used to deliver the questionnaire and receive the responses.

The secondary data are those which have already been collected by someone else and which

have already been passed through the statistical process (Khotari, 2004).Various documents

which are relevant to the study were extracted for the intended purpose. Information were

extracted from various documents relating to this area of study, such as Company standards,

files, minutes of the performance review meetings, and company reports.

3.6 Reliability and validity of data

According to Khotari (2004), validity refers to the extent to which a test measures what we

actually wish to measure. Reliability has to do with the accuracy and precision of a

measurement procedure. Reliability refers to the extent to which the data collection

techniques or analysis procedures will yield consistent findings, while validity is concerned
 30

with whether the findings are really about what they appear to be about (Saunders et al, 200).

To ensure validity of the data, the researcher used purposive sampling to ensure that research

instruments were only administered to individuals who are involved in CM process and

monitoring contractors performance. Researcher ensured case company data base

information was from authoritative personnel. The questionnaire was tested and comments

for the questions which were not clear were reviewed and corrected.

In order to achieve reliability of data, in addition to the 5-likert scale, space for respondents

comments on the particular variables were provided to get respondents understanding on the

matter. The respondents responses from same department were checked for consistency on

some of the questions they responded. Interview was used to crosscheck data collected

through questionnaire. To avoid error in coding, two people were used, one reading and

other entering in the SPSS software.

The reliability of the study data was tested using SPSS to calculate the Cronbachs alpha

coefficient of internal consistency of the ten variables which were used in the questionnaire.

Table 3.2 below, provides the details of the reliability coefficients of the study variables. 6

out of 10 variables on CM activities and contractors performance outcomes have more than

0.70 coefficient of reliability, while only one variable has Cronbachs alpha coefficient of

reliability below 0.50. The coefficient of reliability gives the true score percentage of the

associated particular variable which can be driven from a composite score of the items in

that variable. For example, Cronbanchs alpha of Compliance to contract requirements (item

no. 10 on Table 3.2) is 0.875 that means there is 87.5% internal consistence reliability of the

true score of the compliance variable from the composite of 6 items considered on the

variable.
 31

Table 3.2: Reliability Coefficients

S/n Variable Number of items Reliability

considered coefficients
1 Risk management 5 0.590
2 SOW and Specifications 5 0.767
3 KPI 5 0.740
4 Contractor selection 6 0.847
5 Relationship management 5 0.344
6 CM team 6 0.784
7 CMP 5 0.805
8 HSE performance 6 0.687
9 Cost effectiveness 6 0.558
10 Compliance 6 0.875
Source: Author (2014)

3.7 Data processing and analysis

Data collected were analysed by using both qualitative and quantitative methods, depending

on type of data were collected. The data were coded according to the questionnaire so that

can be entered and processed in the SPSS package (refer appendix F). The SPSS software

and Microsoft excel were used as a tool to analyse the coded research data. Descriptive

statistics technics were used to summarise and present the study data using frequency, tables,

and charts. Percentage, mean, standard deviations, regression and correlation coefficients

were used to present the study data and relationship between different variables.

CHAPTER FOUR

FINDINGS AND DISCUSSION

4.1 Introduction

This chapter presents the findings and data analysis on respondents information, effluence

of CM on contractors HSE performance, assistance of CM on cost effectiveness

 32

achievement, the extent CM leads to contracts requirements compliance, and discussion of

the study findings.

4.2 The information of the respondents

The information of the respondents is described by role in the company, experience and

highest level of formal education. The questionnaire asked a number of background

questions, including education, experience, and respondents role when comes to contract

management process at a case company. Unsurprisingly, as per Table 4.1, 44% (11) of the

total respondents reported to have been involved as demand manager, 16% as sourcing

manager, 12% as budget holder, and 28% as other roles. Of all respondents 24 (96% of

respondents) have experience of at least one year on the subject whereas only 1 (4% of

respondents) has less than one year experience. There were nil respondents with no

experience. The highest number of respondents (56%) 16 out of 25 respondents were

Masters Degree holders, (32%) 8 out of 25 were Bachelor Degree holders and only one

respondent did not respond to the question.

Table 4.1: Respondents information

Cumulative
Frequency Percent Percent
Respondents role in Demand Manager 11 44.0 44.0
CM process Sourcing Manager 4 16.0 60.0
Budget Holder 3 12.0 72.0
Others 7 28.0 100.0
Respondents Less than 1 year 1 4.0 4.0
 33

experience in 1-2 years 4 16.0 20.0

monitoring contractors 3-5 years 4 16.0 36.0
performance More than 5 years 16 64.0 100.0
Respondents highest Masters Degree 14 56.0 56.0
level of formal Bachelor Degree 8 32.0 88.0
education Diploma 1 4.0 92.0
Certificate 1 4.0 96.0
No answer 1 4.0 100.0
Source: Author (2014)

4.5 Respondents opinion on the CM activities effectiveness

To analyse the findings as per the study objectives, the study wanted first to establish the

level of respondents perception on the CM activities within a case company. Table 4.2

illustrates the respondents opinion on the CM activities effectiveness at a case company,

which are risk management, SOW and specifications, KPI, contractor selection, relationship

management and CM team. Respondents were also asked their opinion on the CMP. The

detailed respondents scores for each CM activities statement can found in appendix G.

Table 4.2 under-leaf portrays 68% of the respondents agree that the risk management process

at the case company is good. 20% of respondents dont agree and 12% of respondents in

average are undecided; Row no.2 reveals that in average 18 respondents (72% of

respondents) agree that always the specifications and scope of works prepared for the

contract are good, while 5 respondents (20% of respondents) undecided. No respondent

strongly disagreed on the phenomena; The table tells that in average 18 respondents (72% of

respondents) agree that key performance indicators for monitoring contractors performance

are good, while 4 respondents (16% of respondents) undecided. No respondent strongly

disagreed on the phenomena; Row no.4 infer that in average 21 respondents (84% of

respondents) agree that contractor selection process is conducted, objectively, fairly and

transparently, while 2 respondents (8% of respondents) undecided. No respondent strongly

disagreed; From row no.6 illustrate that in average 17 respondents (68% of respondents)

agree that the CM team is knowledgeable, understand their roles and are involved in
 34

monitoring contractors performance, while 5 respondents (20% of respondents) undecided.

12% of respondents disagreed on the phenomena; the table also portrays in average 72% of

the respondents agree that the relationship with contractors or suppliers at the case company

is good. 32% of respondents dont agree and 12% of respondents are undecided; Table 4.2

demonstrate that in average 17 respondents (68% of respondents) agree that the CM plan is

done as part of the process to manage the contractors performance, while 5 respondents

(20% of respondents) undecided. 12% of respondents disagreed on the phenomena.

Table 4.2: Respondents opinion on the CM activities and CMP

Key: SA-Strongly agree, A-Agree, U-Undecided, D-Disagree, SD-Strongly Disagree, NR-

Number of respondents to specific question, EP equivalent percentage

No Statement SA A U D SD
Average respondents opinion NR 7 10 3 4 1
1
score on risk management EP 28% 40% 12% 16% 4%
Average respondents opinion NR 6 12 5 2 0
2
score on SOW and specification EP 24% 48% 20% 8% 0%
Average respondents opinion NR 5 13 4 3 0
3
score on KPI EP 20% 52% 16% 12% 0%
Average respondents opinion NR 8 13 2 2 0
4
score on Contractor selection EP 32% 52% 8% 8% 0%
Average respondents opinion NR 5 13 3 3 1
5 score on Relationship
management EP 20% 52% 12% 12% 4%

Average respondents opinion NR 5 12 5 3 0

6
score on CM team EP 20% 48% 20% 12% 0%

Average respondents opinion NR 4 13 5 3 0

7
score on CMP EP 16% 52% 20% 12% 0%
Source: Author (2014)

From the interview with senior member of the HSSE team, and case company document

review, before the Invitation to Tender (ITT) sent out to the market, sourcing manager and

demand manager shall make sure the risk assessment session is done, which needs their

participation together with participants from other functions as well, that is, HSSE, Legal,

and Social performance. The session will enable participants to identify risks and mitigations

to be put in place, also level of risk will be established from the four categories, HSSE,
 35

Ethics, Human rights and Social performance. If at least one of the four categories ranked to

be high risk then the contract will be considered as a key contract of which a contract

management plan is a must document to be prepared. The contract risk assessment template

has to be filled and signed and kept as part of the contract records stored in the contract

management system known as ProCon.

Researcher had an opportunity to participate and observe two contractors performance

review meetings. Demand manger is responsible to arrange and invite participants from both

parties to the meeting. Agenda and action plan as per the previous meeting minutes and the

KPI score for the preceding period are part of the invitation documents for participants to

review prior the meeting date. Refer Appendix C for the agenda template. Some action

points were keeping postponed not completed as scheduled with no good reasons, which

pushed demand manager to suggest other alternative to solve a problem.

As per the interview with Head of C&P and reviewing case company documents, potential

contractors or suppliers are required to submit two different folders or packages as bidding

documents, one is for technical and HSSE issues while the other one is only for commercial

issues including tender pricing. Tender evaluation plan is always prepared and approved

prior opening of the tender. Technical and HSSE package is opened first for evaluation, only

the bidders who passed technical and HSSE will be considered for commercial evaluation.

Commercial packages for those did not pass the technical and HSSE are always not opened.

Generally the selection criteria is the lowest technically (including HSSE) compliant bidder,

but there is provisional approval process for not selecting the lowest bidder to award the

contract.

To enhance the relationship with contractors, The interview with head of C&P revealed that,

early July 2014 new system was implemented at a case company, called SAP SRM, SRM

stand for supplier relationship management. The new system enables web interface between
 36

company and contractor system, Suppliers catalogue of the service or products can be

accessed by company employees through internet or web and do the purchasing. Interview

with Accounts Payable Officer revealed that, contractors payment process had been

improved by automating the process the automated system implemented enables invoice

approvals done electronically which leads to timely payment for service, goods or worked

satisfactory completed.

The study did apply document review data collection technique, as per case company

standards, two key people are involved as part of CM team at a case company, demand

managers are responsible for the following; prepare scope of works and specifications; work

schedule; and contractor performance management this include HSSE, operations, quality,

delivery, payment, receipt, expediting and inspection. Sourcing managers are responsible on

the following areas; understanding the market; contractor qualification; contracting process;

negotiations; managing contractor relationship; and contract administration including terms

and conditions, monitoring and reporting, pricing and dispute management.

The interview with Head of Well Engineering and reviewing case company standards,

findings revealed that approved CM plan is a must document for all high risk contracts at a

case company, all key deliverables and milestones are stipulated, agreed KPIs are included

in the plan, all risk identified and mitigation measures are part of the plan. All key roles and

responsibilities for both parties are clearly mentioned. Payment mechanism also included.

The plan needs all key stakeholders to the contract consulted for their inputs. Refer the CM

plan template on Appendix D, all key contracts needs Contractor to use the company system

called PerforMIS to track the KPI, whereby contractor got access to the system to score

itself, then company representative normally a demand manager revise the score for

acceptance or rejection by giving reasons for rejection of the score.

 37

Preparation of SOW and specification revealed to be a challenge in some of the areas within

the HSSE and HR & Admin department; this was revealed during an interview with one of

the department member. They lack the expertise and experience in preparing a robust SOW

and specification for some of the contracts, but they always seek support from other

functions for help.

Finishing presenting the general findings on respondents information and opinion on

effectiveness of CM activities and CMP of the study now the following section presents

findings as per specific objectives of the study as follows;

4.4 Effluence of CM on contractors HSE performance

The findings with regards to the effluence of the CM on contractors performance are

presented in form of percentage, means, standard deviation, regression and correlation

coefficients, and case company data base records. Table 4.3 under-leaf, row no. 7 gives the

average of the entire six statements respondents opinion about the influence of CM

activities to contractors HSE performance. The study findings depict 84% in average of the

respondents agree CM that has influence on HSE performance.

Table 4.3: HSE Performance

Key: SA-Strongly agree, A-Agree, U-Undecided, D-Disagree, SD-Strongly Disagree, NR-

Number of respondents to specific question, EP equivalent percentage, M-Mean, std
standard deviation
No Statement SA A U D SD M/std
Having appropriate risk management process to NR 6 19 0 0 0 4.24/
1
identify risks and mitigation measures put in place EP 24% 76% 0% 0% 0% 0.436
Enhanced good relationship with contractors by NR 2 11 9 3 0 3.48/
2
making sure their payments done in time EP 8% 44% 36% 12% 0% 0.823
 38

KPIs being used to monitor Contractors HSE NR 10 13 2 0 0 4.32/

3
performance through performance review meetings EP 40% 52% 8% 0% 0% 0.627

Robust contracts scope of work and specification NR 2 18 4 1 0 3.84/

4
details all the deliverables and milestones EP 8% 72% 16% 4% 0% 0.624

The right contractor being selected through NR 8 15 2 0 0 4.24/

5
objectively, transparent and fair evaluation process EP 32% 60% 8% 0% 0% 0.597
Competent contract management team with clear
NR 3 19 3 0 0
roles and responsibilities are being involved from 4.00/
6
the initial contract planning phase, managing 0.500
EP 12% 76% 12% 0% 0%
contractors performance until end of the contract
NR 5 16 3 1 0
AVERAGE RESPONDENTS SCORE UNDER 4.00/
7
TABLE 4.3 0.710
EP 20% 64% 12% 4% 0%

Source: Author (2014)

Table 4.4 under leaf portrays the regression results for contractors performance, data from

Table 4.2 were used as independent variables for regression analysis against the dependent

variables data from each of the last rows of Table 4.3, 4.7 and 4.8 for HSE performance, cost

effectiveness, and compliance, respectively. The table illustrates only the CM activities

variables which are statistically significant to the study population (p 0.1). Regression

results for HSE performance show that, there is significant relationship with 5 out of the 6

CM variables. 3 out of them are directly related while 2 are inversely related. The

regression result for Compliance indicates that, 4 out of the 6 CM variables are significantly

related, and one of them is inversely related. As per the study data regression analysis there

is no statistically significant relationship between cost effectiveness with 5 out of the 6 CM

variables. The five predictor model was able to account for 92% of the variance in

contractors HSE performance, while the four predictors were able to account for 87% of the

variance in contractors compliance to contract requirements.

Table 4.4: Regression results for contractors performance

HSE Performance Compliance Cost Effectiveness

Constant 1.330 1.465 1.652
Relationship Management 0.948*** 0.395** 0.567***
Risk management -0.369*** -0.312**
Contractors selection 0.282** 0.237*
Contract Management team 0.496* 0.347**
 39

Key Performance indicators -0.658**

R-squared 0.937 0.893 0.822

Adjusted R-squared 0.920 0.872 0.814
*, **, *** indicates significance at the 90%, 95%, and 99% level, respectively

Source: Author (2014)

Table 4.5 and Figure 4.6 presents case company data for the last three years on HSE

performance as reported out of the existing contracts with various contractors. Non-

compliance refers contractors personnel action that does not adhere to the operating

standards and procedures in place. i.e over speeding, not wearing personal protective

equipment (PPE), and improper waste disposal.

Table 4.5: Case companys HSE performance record

Number of registrations
Incident Category 2011/12 2012/13 2013/14
Asset Damage 23 36 20
First Aid Case 40 30 25
Hazardous Condition 12 10 8
Lost Time Injury 4 2 1
Medical Treatment Case 5 2 1
Near Miss 29 21 13
Occupational Illness 2 1 1
Release to Environment oil spills 5 9 3
Restricted Work Day Case 1 2 1
Non-Compliance to procedures and standards 0 6 2
Source: Case company (2014)
 40

45

40

35 Asset Damage
Number of registration

First Aid Case

30
Hazardous Condition
25 Lost Time Injury

20 Medical Treatment Case

Near Miss
15
Occupational Illness
10 Release to Environment

5 Restricted Work Day Case

Non-Compliance
0
2011/12 2012/13 2013/14
Year ending June

Figure 4.6: Case companys HSE performance record

Source: Case company (2014)

4.5 Assistance of CM on cost effectiveness achievement

Recall that the second specific objective of the study was to assess if contract management

assist to achieve cost effectiveness during contract execution. Table 4.7 depicts the extent to

which respondents agree or disagree on the matter. Row no.7 presents the average of all of

the six statements respondents opinion about the assistance provided by CM activities to

achieve cost effectiveness. 72% in average of the respondents are in support that CM can

assist to achieve the contract cost effectiveness. In average 6 respondents (24% of

respondents) are undecided, 4% of respondents disagreed while no respondent strongly

disagreed on the phenomena.

 41

Table 4.7: Cost effectiveness

Key: SA-Strongly agree, A-Agree, U-Undecided, D-Disagree, SD-Strongly Disagree, NR-

Number of respondents to specific question, EP equivalent percentage, M-mean, std
standard deviation

No Statement SA A U D SD M/std
Appropriate risk assessment in place to for early NR 1 9 13 2 0 3.36/
1 problem identification and put the right mitigation
EP 4% 36% 52% 8% 0% 0.700
in place to avoid contract cost impact
Contractor being selected based on realistic rates NR 1 22 2 0 0 3.96/
2
offered as per contracts specifications requirements EP 4% 88% 8% 0% 0% 0.351
Robust scope of works and specifications sent to NR 2 21 2 0 0
potential bidders to submit their offers, which 4.00/
3
reduce a chance of contract variations due to 0.408
EP 8% 84% 8% 0% 0%
unforeseen details
Cooperation and support are given by contractors NR 1 18 6 0 0 3.80/
4 for early problem identification to reduce the cost
EP 0.500
impact to the contract completion 4% 72% 24% 0% 0%
KPIs scores being used as a tool for payment NR 0 9 10 6 0 3.12/
5
incentive and penalty to Contractors performance EP 0% 36% 40% 24% 0% 0.781
Competent contract management team are involved NR 4 17 4 0 0 4.00/
6 in managing the contract variations when becomes
EP 0.577
necessary to complete the work. 16% 68% 16% 0% 0%
AVERAGE RESPONDENTS SCORE UNDER NR 2 16 6 1 0 3.76/
7
TABLE 4.7 EP 8% 64% 24% 4% 0%
0.66

Source: Author (2014)

Explanation from the interview with member of C&P team and the Mtwara base manager,

reveals that most of the causes for contract variations are extension of the service period due

the business needs; Joint venture partners request to increase scope of work as the need

arises; and unsatisfactory performance by main contractor that leads to prolong the contract

completion of which company has to pay the other supporting contractors (i.e. project

management and quantity survey service providers) so that they can continue providing

service until completion of the contract; the need for contract price changes; no time for

tendering process; and good performance by the current service provider who is familiar

with the company standards. Always there is provision of at least 10% percentage as

contingency when seeking for contract cost budget approval, just to cover unforeseen

circumstances during contract execution.

 42

Another finding of the study from case company data base is that, 51 contracts out of 98

contracts have variance from the original approved contract value (ACV) to the actual

contract spent or additional to the contract total value in the system. Cost overrun of about

7.5 % had been evidenced in one of the construction contract, whereby the supporting

contracts such as quantity survey, designing, and project management have to be extended in

parallel with the completion time of the main contractor.

4.6 Extent CM leads to contracts requirements compliance

Recall that the third objective of this research study was specifically to examine the extent to

which contract management leads to compliance with contracts requirements. Table 4.8

under -leaf offer respondents opinions, it can be said that in average 21 respondents (74% of

respondents) agree that effective CM can lead to contractors compliance to contracts

requirements while 4 respondents (16% of respondents) argue that they are not sure if there

is relationship existence between the variables.

 43

Table 4.8: Compliance to contracts requirements

Key: SA-Strongly agree, A-Agree, U-Undecided, D-Disagree, SD-Strongly Disagree, NR-

Number of respondents to specific question, EP equivalent percentage, M-mean, std
standard deviation

No Statement SA A U D SD M/std
Competent contract management team with clear NR 5 18 2 0 0
roles and responsibilities being in place to check if 4.12/
1
the deliverables and certifications meet the contract EP 20% 72% 8% 0% 0% 0.526
requirements
Robust Scope of works and specifications which NR 7 17 1 0 0 4.24/
2 addressed compliance to legislation and standards
EP 28% 68% 4% 0% 0% 0.523
contract requirements
Good relationship with contractor created from the
NR 2 17 6 0 0
kick off meeting addressing all the contract 3.84/
3
requirements during the contract execution period 0.554
EP 8% 68% 24% 0% 0%
are met
Contractor selection done based on the verified NR 9 14 2 0 0 4.28/
4 contractors technical capability, understanding and
EP 0.614
being able to meet the contract requirements 36% 56% 8% 0% 0%
Continuous contract risk assessment being done NR 2 14 9 0 0 3.72/
5 throughout the contract period to revisit the risk and
EP 0.614
update the mitigation in place 8% 56% 36% 0% 0%
Contractors performance compliance being NR 7 16 2 0 0 4.20/
6 monitored using KPI during the performance
EP 0.577
review meetings 24% 64% 8% 0% 0%
AVERAGE RESPONDENTS SCORE UNDER NR 5 16 4 0 0 4.04/
7
TABLE 4.8 EP 20% 64% 32% 0% 0% 0.61
Source: Author (2014)

From the interview conducted with the member of well engineering team, two contracts were

reported to have major delivery delays as per the contract. The building construction contract

delayed for about 10 months, but still contractor is due to complete the work as per agreed

contract specifications and quality requirement. The other contract was for supply,

installation, and commissioning, completion of the plant was delayed for about 5 months,

some materials were left behind during importation, some were not ordered at first place, and

still the plant was successfully commissioned. Two contractors who have four different

contracts reported to have service quality and relationship issues, the main cause of the

problems mentioned to be the following; Lack of support from the contractors top

management; high rate of personnel turnover; incompetent contractors personnel; non

responsive on issues raised which need improvements; poor delivery time of materials; poor
 44

HSSE support; lack of supporting equipment and; contractors offered low prices during

tender and cant meet the operational cost to support the contract.

One of the interviewees comments is that risk management do cross over all the other five

CM activities. The contract risk assessment session should tell what details has to be part of

specification as mitigation measures, the right people should be assigned to manage the

contract, what selection criteria should be used, what kind of relationship with contractor

should be in place and what details should be included in the KPI so that the contractors

performance can be monitored.

4.7 Discussion of findings

This section presents the discussion in relation to the study findings from the case company

and respondents opinions. The respondents information as per Table 4.1 implies that, at a

case company, demand managers are the focal point for managing the contractors

performance. Majority of people involved in monitoring contractors performance have good

education and experience on the matter of which increases the possibility for every contract

being delivered timely, safely and within budget. From the interview and document review it

clearly evidence that there are a clear roles and responsibilities for people involved in

contract management and monitoring the contractors performance. Observing one of the

BPR meeting, it was evident on how effective since the KPI was discussed and emphasize on

low score with deadline set up to improve and fix the problem.

The study findings reveals that, as per Table 4.2 the CM activities at case company are

generally effective as per the respondents opinions, since the minimum average score on

agreeing various phenomena was 68%. The general answer as per Table 4.3 is yes, that CM

does influence contractors HSE performance. The table stipulate that 84% of respondents

do agree CM has influence on contractors HSE performance. Table 4.7 infer that 72% on

average of respondents agree that applying effectively the CM activities will do assist
 45

organisation to achieve cost effectiveness while executing contract. Table 4.8 stipulate that

84% on average of respondents agree that applying effectively the CM activities will lead to

contractor to comply with the contract requirements.

The multiple regression analysis between the CM activities and the contractors HSE

performance outcome reveals that there is a relationship between the five variables as

stipulated on Table 4.4 with a minimum regression coefficient of 0.282 on contractor

selection variable. This implies that each additional unit of contract selection is associated

with 0.28 unit increase of HSE performance considered all other variables are controlled.

These findings are is support of Salim (2013); author argued that there should be strong

contractor technical evaluation criteria in place to evaluate the contractors technical

capability.

More further there is 0.37 unit decrease in contractors HSE performance with a unit

increase in risk management. On other side since the regression coefficient is negative for

risk management, such finding suggest that, when the risk mitigations becomes too

demanding and complex there is the possibility of contractor fail to deliver since will be

more thinking of safety than completing the work in time. This reminds the need to balance

the risk requirements and completion of the project. Same applies also on relationship

between risk management and contractors compliance to contracts requirements, it is very

possible that, compliance will be achieved but at a very high cost. Hotterbeekx (2013)

observed that, before the contract is agreed or awarded the contract management team should

already have identified where problems could occur and highlighted procedures which need

to be monitored carefully. The argument was also supported by Prosidian consulting (2011),

author argued that, a fundamental part of managing contract risk is clearly understanding the

contract in-depth and getting it right while highlighting what could go wrong (WCGW) as a

risk management initiative. Mturi (2013) reminded the need of risk assessment, author
 46

argued that, purchase organisation to be careful with suppliers or contractors whose provide

offers in order to win the tender but in reality they are unable to deliver the goods, works or

service in time. If this situation not managed, company will experience a lot of unnecessary

variations. This implies the need for company to verify rates against the current market price.

The multiple regression analysis Table 4.4 infer that there is inverse relationship between

KPI and HSE performance, that there is 0.66 unit decrease in HSE performance with a unit

increase in KPI. This finding observe the need of having smart KPI, the KPI should be

measurable and realistic to be achieved by contractor. This phenomenon had been reminded

by Miller (2005), author observed that performance measurement is all about measuring the

right things at the right time for the right people; author argued further, just because

everything can be measured doesnt mean that everything has to be measured. Moreover

Breedon (2013) insisted that KPI must be designed to be fair and balanced. Author findings

revealed uncertainties over accuracy of some reported KPIs and uncertainties over the

suppliers interpretations of the intent of some KPIs. The report suggested that organisation

should design KPIs and data requirements which adequately measure and reflect the benefits

the contract is intended to deliver. According to CIPS (2012c) you dont need to specify too

many KPIs for a given contract: only those that are indicative measures of performance in

areas necessary to achieve critical success factors. Otherwise, it will be too complicated and

costly to monitor and measure performance and the contractor or supplier may find the

pursuit of multiple KPIs too complex and tedious. Eight to ten well formulated KPIs may

be realistic for any given contract period. Notwithstanding the above findings, Path (n.d)

argues that, ideally, the purchaser has to engage the contractor in a discussion on

performance monitoring prior to contract signature. Allowing contractor participation in

defining performance evaluation criteria can strengthen the working relationship with the

contractor or supplier, and it can build supplier commitment to support the monitoring

system by providing early notification of potential performance problems. KPI set up should
 47

involve inputs from other functions as well; this will ensure all the key issues are included

for measuring and monitoring the contractors performance.

Relationship management had been statistically significant to all the three contractors

performance outcomes; it is directly related to all of them. This implies that, each additional

unit of relationship management is associated with 0.95, 0.40, and 0.57 unit increase of HSE

performance, compliance and cost effective, respectively considered all other variables are

controlled. These findings are supported by Carr and Pearson (1999), cited by Oluka and

Basheka (2012), authors did prove a positive correlation between supplier or contractor

relationship and contract performance. This finding agrees with the findings of Ramadhani

(2012). The author observed that CM is effective if good relationship exist between company

and contractor or suppliers. The finding portrays how effective CM can lead to contractors

performance meets the expected outcomes in terms of quality, delivery schedule and

adherence to international, industry and operating country legislation and standards. This

finding agrees with the findings of Nguyen (2013) which argued that CM is an effective tool

to manage compliance, risk and change. Moreover Beijer (2012) recommended that quality

and delivery which are among the contract requirement compliance should be used as

criteria to monitor contractors performance. The importance of relationship management

was observed by Vahrmeijer (2007), on his study one of the reason for non contract

compliance on the case company was poor buyer-supplier relationship, a relation with a

contractor or supplier that has grown throughout the years can result into mutual trust and

respect. Trust and respect can affect the attitude of the internal buyer to keep using the

trusted contractor or supplier that has already proven to supply quality. The author argued

more that, if relationships are not properly managed, these may give rise to all kinds of

disputes and conflicts, and even legal claims, which could have been prevented .It was

further argued that a good contract can never replace a bad client-contractor relationship

(Van Weele & Van der Puil, 2012 cited by Hotterbeekx, 2013). All these arguments provide
 48

evidence how important is the relationship management for making sure contractors meets

the contract requirements.

CM team has direct relationship with HSE performance; in average an increase unit of CM

team will have 0.5 unit increase of HSE performance. This finding observed by Oluka and

Basheka (2012). The authors observed that among the major determinant to effective CM are

accurate definition of roles and diverse CM knowledge of the CM team. Breedon (2013) in

his report insisted the need of having a staffed and competent CM team to monitor

contractors performance. The study finding through comments from respondents reveals

that, some of the SOW is weak and other robust depends on the experience, skill and

knowledge of the demand manager. Notwithstanding the above fact, Bhardwaj (2011);

Oluka and Basheka (2012) observe CM as being qualified workforce, quality of people and

management system of the company in monitoring contractors performance outcome. Mturi

(2013) and Salim (2013) both authors argued the need of adequate skills by recruiting and

retaining more experienced and qualified key CM staff in managing contractors

performance. At case company the cost for well drilling are monitored in daily basis and

there is a position for cost engineer he/she role is entirely responsible to monitor, track and

report the cost for various contracts which are directly involved to the drilling operations.

With all the big number of contract variations (51 out of 98 contracts) only 7.5% cost

overrun in one contract was reported, this implies that contract variation is not a problem

whenever robust contract cost control mechanism as in place.

The company database also revealed that the HSE performance for the last three years had

been improving relatively gives how the CM is effective since majority of the incident

categories (i.e lost time injury, non-compliance, first aid case, near miss, and hazardous

condition) as per Table 4.5 and Figure 4.6 had been decreasing over the period. The HSE

performance being one of the aspects to be monitored was supported by Xiao and Proverbs
 49

(2003). In their study they added aspect of environment protection, health, and safety as

among the performance indicators. Referring Figure 4.6 during the interview with a member

of HSSE department, it was revealed that, year 2012/13 more local contractors were hired

that is why more asset damage, release to environment and non-compliance cases were

reported. The trend was noticed, and company did conduct more HSSE awareness campaign,

training and monitoring through the BPR meeting.

The study reveals that, contract management plan mainly done only to the high risk

Contracts regardless of commitment value of contract. The finding in the case company data

base revealed that out 98 contracts made between January 2011 and June 2014, 22 contracts

(22.4% of contracts) were key contracts. These findings are supported on literature about

Pareto analysis and Kraljic matrix whereby both tells about some contract will require

greater level of CM, the high risk contract (about 20% of all contracts) need more close

attention than the other with low or medium risk (CIPS, 2012a; Lysons and Farrington,

2006). ANAO (2012) argues that, even for relatively simple, low-risk contracts, a contract

management plan (or simple check list) will help to make sure that important obligations are

not overlooked and the intent of the contract is achieved, although the level of planning

should be commensurate with the value and risk of the contract. Author insists that, it is vital

that a contract management plan is drawn up in advance of contract award, most of the work

required for developing a contract management plan can and should be done before the

contract is signed.

There had been different thought from the respondent comments about inclusion of penalties

on KPI. Some do support that penalties should applies for contractor failure to meet the set

target. Some argue incentive mechanism should be in place as part of KPI, that certain

amount will only be payable on achievement to the target, through this contractor will do the

best, making sure receive the incentive payment which in turn assures HSE performance,
 50

cost effectiveness and compliance to all contract requirements, i.e quality, delivery schedule

and legislation. King and Elliot (2009) says, procedures should ensure that the measurement

process is applied and mechanisms should ideally be built into the contract to deal with

failure to perform, while Beijer (2012) observe that, during contract creation, the financial

implications of a failure by the contractor to deliver the contracts benefits must be modelled.

Penalties associated with failures to meet KPI targets and deliver benefits should, where

possible, be proportionate to the costs associated with non-delivery of specific benefits,

subject to there being contractor wiliness to accept such penalties. According to ANAO

(2012), along with performance indicators and standards, arrangements for monitoring and

assessment should have been set out and agreed in the contract and contract management

plan, along with action that would result from underperformance. Hotterbeekx (2013), on his

opinion, he thought, when the contractor is behind schedule, or the quality is below contract

standards, the CM team can decide to postpone payments or to deduct parts of the total sum.

The contract manager must identify effective incentives and penalties to ensure that the

contractor achieves the desired outcomes.

From the interview and company documents, contract cost control system is there, which is

SAP SRM, this means no payment will be done in excess of what had been approved in the

system. Any extra cost should undergo the approval process of the contract variation. Once

approval done, then the extra cost will be added on the system for payment. All of the 13

Deepwater exploration and appraisal wells drilled and five drill stem tests (DST) in

Tanzania; none has gone beyond the approved estimated budget. This implies how good is

the CM team in terms of assessing and analysing the risk involved, putting together robust

scope of work and specification for the drilling and the good relationship with the right

contractors in place, with proper monitoring mechanism through KPI.

 51

The study findings through the respondents comment tells that, better defined scope of work

will reduce number of variations, and variation due to some unforeseen situation is

inevitable, there is a robust process in a company to get the contract variations accepted and

approved. Oluka and Basheka (2012) urges that at times variations to a contract made

during its life may not always be as a result of contract monitoring and control but could be

as a result in slight change to the requirement due to external factors. More further author

argued, it will normally be the role of contract manager to ensure that the need for any

contract variation is recorded and contract is varied in line with the applicable procurement

procedures for variation.

Delay in contractors payment revealed to be one of the finding as per respondents

comments. This was due to poor handling and tracking of contractors invoices. It was

commented that some contractors payment get delayed due to invoice submitted with

inadequate details and supporting documents. To improve the situation and insure timely

payment done, company has introduced the automated system in monitoring and tracking the

contractors invoices. This opinion is supported by Ramadhani (2012) and Mturi (2013),

authors observed that timely payments to supplier or contractor invoices will encourage and

motivate contractor or supplier performance.

The study finding via interview with respondents in C&P department reveals that, The oil

and gas industry operates such as way that some of the contracts are on rental or lease basis,

charging mechanism are based on daily rates. Operational day rates and standby day rates.

The difference between the two rates it goes up to minimal as much as 5%, keeping idle the

rented machine it cost almost the same as if is operating. That means it pushes the company

to make sure utilizes the equipment/tool/plant/rig as much as possible to insure the benefits

realised to the business needs and achieve cost effectiveness. Another area of interest in the

industry is mobilisation and demobilisation cost for some of the contracts. Mobilisation costs
 52

are cost associated with a contractor being able to bring materials/equipment/personnel at the

beginning of the contract to perform the work. Demobilisation costs are the cost associated

with the ending of the contract, depending with the negotiation it could end on sale out or

buy out of the equipment/materials/plant used during execution of the contract.

Researcher observed one of the kick off meeting for the new contract to be executed, (refer

Appendix E for sample). It is crucial meeting to put on table all the contract requirements to

be met by the contractor, HSSE plan, KPI, and other operating procedures made clear to the

contractor, communication and reporting mechanism , contractor given chance to ask

questions for clarification. All documents which had to be submitted by contractor as part of

the contract requirement. Invoicing procedure was among main emphasize to the contractor.

The interview with Head of well engineering revealed that, out of the ninety eight (98)

contracts for the three years period, two contracts had major delivery delays while other four

contracts had major service quality and relationship problems. The impacts of these four

contracts were well managed by the competent CM team through the routing performance

review meetings and non-compliance reports (NCR). Mturi (2013) observed the need of the

buyer to calculate a realistic delivery time and question the supplier for his/her if can meet.

Kumar and Markeset (2007) recommended the needs to measure service delivery process

performance and the gaps between required and delivered services, and to periodically

reassess the service strategy influencing factors.

The study findings summarised as follows, to have effective CM process in terms of

managing contractors performance the following has to be in place; appropriate contract

risk management; robust contract SOW and specifications; objectively, fair and transparent

contractor selection process; smart KPI to measure critical success factors to the organisation

business; good relationship management with preferred contractors or suppliers; and lastly

competent and experienced CM team with clear roles and responsibilities. This study
 53

argument is supported with other authors such Nguyen (2013) and Hotterbeekx (2013);

where they argue that the following are among factors have to present to support effective

CM; The CM team must have the required responsibilities and freedom to perform their

activities; Document and information management systems/mechanisms provide easy access

for employees to all contract documentation; relationship management is essential; visibility

into contracts storage and tracking of contracts process through automation; organizations

technological capability and; risk management and compliance to various industry

requirements. As a compliment to the CM activities to monitor contractors performance, the

case company evidenced to be supportive in use of computer systems for such as SAP SRM

for contract cost control; ProCon for contract management and; PerforMIS for contractors

performance management. This concur with Salim (2013) observed the need of

implementing automated contract management system.

 54

CHAPTER FIVE

CONCLUSIONS AND RECOMMEDATIONS

5.1 Introduction

This chapter presents conclusion and recommendations on how effective contract

management can effluence on contractors performance outcome. The research objectives

were addressed during the course of the research and will therefore be properly concluded.

The recommendations with regards to the effective contract management on contractors

performance will be made.

5.2 Conclusion

The main objective of the study was to examine the effectiveness of contract management on

contractors performance in fulfilling their contractual obligations at a case company,

specifically to examine whether contract management influences contractors HSE

performance, to assess if contract management assist to achieve cost effectiveness during

contract execution and to examine the extent to which contract management leads to

compliance with contracts requirements

The study findings reveal that the CM activities at a case company are effective and there is

a relationship between CM activities and Contractors performance outcome. Although the

study findings reveals that not all the CM activities are statistically significant related to the

contractors performance, effective relationship with preferred contractors revealed to be the

key success driver for contractors performance. Relationship Management, Contractors

selection, and Contract Management team are directly related to the contractors HSE

performance while risk management and KPI are inversely related, while as per the study

findings statistically there is no relationship between SOW and specification and HSE

performance; Relationship Management, Contractors selection, and Contract Management

team are also directly related to contractors compliance to contracts requirements, while risk
 55

management is inversely related, also there is no statistical relationship between contractors

compliance to contract requirements and KPI as well as SOW and specifications. These

means risk management, KPI and SOW has to be well balanced to achieve the overall best

outcome on contractors HSE performance and compliance; and only relationship

management is directly related to contract cost effectiveness. That means most of the CM

activities can little assist to achieve contract cost effectiveness, it more depends on how

strong is the relationship between company and contractor exists.

The CM activities at a case company proved to be effective on monitoring contractors

performance, since the HSE performance records shows very low number of registered cases

in different categories compare to number of contracts in place. Cost effectiveness has been

good, since robust contract cost control mechanism measures are in place. With all the

contracts variations reported, only one contract out 98 contracts had major cost overrun of

about 7.5%. In terms of cost per well, out of 18 drilled wells no well had cost overrun.

Compliance to contract requirements, reported to be good, since only two contracts out of

ninety eight (98) contracts happened to have delays in completion compare to the agreed

timeframe, and four contracts reported to have problem on service quality and relationship

due to poor communication from the contractor.

This study conclusion is supported by the findings which revealed how the workforce is

knowledgeable, skilled and experienced in managing the contractors performance, the CM

process is very good, this fact is supported by the existence of automated systems (i.e SAP

SRM, ProCon, and PerforMIS). The findings on every aspect of the CM activities revealed

to be satisfactory, although the level of relationship of each element of CM to contractors

performance outcome differs as portrayed in the study findings. This variation depends to the

attributes considered in each CM activities in the questionnaire.

 56

The recent introduction of automated payment process it is a good effort which is expected

to improve the relationship with contractors which was poor due to delay in payments, on

other hand when the SAP SRM become fully utilised expected to add more value on how the

company interact with contractors or suppliers to enhance the relationship. It is

commendable that, a case company has a good use of automated systems to manage

contracts, contract cost, and contractors performance, which makes much easier to monitor

and track the CM activities. With all the positive findings, still there is an opportunity for the

company to improve in some of the CM activities as suggested in the next section for

recommendation.

5.3 Recommendations

The study raises a number of implications that have to be addressed to improve the contract

management so that achieve more of the contractors performance good outcomes. Among

the CM activities which need more attention is the preparation of robust scope work and

specification; risk management process need to be a continuous process during the contract

period; and improve the relationship management with all the preferred contractors or

suppliers especially in terms of timely settlement of contractors payment for successfully

delivery of service, work or product. The KPI aspect needs improvement to add element of

sanction with intention to make the contractor more compliant to the agreed contract

achievement targets. The CM team must identify effective incentives and penalties to ensure

that the contractor achieves the desired outcomes.

Referring to some of the respondents comments during the study, the following are the

researchers recommendations; Emphasize should be done to contractors to review and

understand the contract requirement including the case company invoicing requirements

during kick-off meetings. This will act as reminder for contractors to meet the contract

requirements ;Company or the international O&G companies together should find a way to
 57

organise training form of workshop to all local potential contractors on HSSE issues

including risk assessment and method statement, so that to bring them to the international

and industry standards; Company should review and produce intuitive template of CM plan

and Business performance review which will suit the purpose and meet the business needs;

Respondents acknowledged the importance of training which was recently conducted, it has

been argued more training should be arranged for those did not attend the session especially

to demand managers and sourcing managers on how to manage contractors performance;

Company top management should put more emphasize making sure lesson learnt sessions

are done at least for all the key contracts and kept where can be accessed by all key

stakeholder in the organisation for future reference; To improve objectivity, transparent and

fairness, where possible at least three people should participate on tender technical

evaluation. To start with should be for high value and key contracts. Before contract awarded

to a new contractor, company should get recommendation from their previous clients for

their capability in delivering service or goods; Physical site visit to the shortlisted potential

bidders should be done to verify what had been submitted in bidding documents prior to

award of contract; Whenever there is significant difference in total contract amount offered

by bidders, then the rates for the lowest technically compliant bidder has to be checked and

verified if they are within the market range. This will assist the company not falling into trap

of contractor just wanted the contract but will fail to deliver since wont be able to meet the

operational cost to complete the contract; Company top management should emphasize

improvement on KPIs set up, KPIs should be SMART, Company dont need to specify too

many KPIs for a given contract, only those that are indicative measures of performance in

areas necessary to achieve critical success factors. Whenever possible, Company should

involve supplier or contractor in the joint development of KPIs - KPIs rather than simply

negotiating their agreement with KPIs already formulated. Contractor or supplier may be

able to contribute valuable expertise and experience to the process, this can strengthen the
 58

working relationship with the supplier or contractor; More emphasize should be made on

planning phase of the project, which includes contract risk assessment and scheduling, this

makes the other phase of the contracts management much easier if a first place a proper

planning phase was done; Contract management plan should be done well in advance prior

kick off meeting and shared with contractors prior to contract commencement; To maintain

consistency during a contract execution, Company should emphasize contractors to

maintains a stable and well-trained workforce, and establish long-term partnerships with

their subcontractors ;Company should have a proper system in place for demand managers

having access to previous SOW and LL sessions for similar contracts, this will assist to have

robust SOW and technical specifications during tendering process.

5.4 Suggestions for further research

Time constraint was the most important limiting factor, collecting more data from more than

two O&G companies could lead to more precise representation of the real situation on the

topic. Given the study was conducted only in one organisation further studies suggested are

for researchers to study in more details, to represent insight details on the matter, explicitly

address the issue of risk management and KPI on contractors performance, future research

should involve more O&G companies.

 59

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APPENDIX A: RESEARCH QUESTIONNAIRE

Dear Sir/Madam;

This research questionnaire aims at collecting information regarding the effectiveness of

contract management in oil and gas industry organisations in managing contractors
performance.

The questions are presented to you by a research candidate of the Open University of
Tanzania (OUT), who is conducting a research as part of his partial fulfilment of the
requirement for the award of masters of project management (MPM).

Being one of the people that is employed by a case company, information from your
practical experience about managing contractors performance is very important in making
this study a success. I kindly request you to spend few minutes responding freely to the
questions based on your knowledge. The information gathered will be used solely for study
purpose and not otherwise

This questionnaire will be collected in one week from the day delivered to you.

Your assistance in this endeavour will be appreciated,

Yours truly,

Rajab Shiwa

MPM Candidate.
 65

APPENDIX B: INTERVIEW QUESTIONS

1. Please explain briefly how contract risk management done in the organisation

2. How do you select the contractor for award of a contract?

3. How do you manage relationship with contractors/supplier?

4. What are the key reasons for contract variations and how are they approved?

5. How do you manage the contract cost?

6. How many contracts do you know in a company happen to have a major issue on
complying to the contracts requirements?

7. What is your comment on contract scope of work and specification preparation with
the company?
 66

APPENDIX C: BUSINESS PERFORMANCE REVIEW MEETING AGENDA

BUSINESS PERFORMANCE REVIEW (BPR)

Contract no. Company Representatives

Title
Contractor

Date Contractor Representatives

Time
Location

Item Action Responsibility Close By Remarks

1.0 Introductions
2.0 Performance
2.1 Presentation of Contractors Scorecard
2.2 Performance Overview (Highlights,
lowlights, Corrective Actions)
2.3 Performance, Feedback and
Recommendations
3.0 Contract Administration
3.1 Variations
3.2 Rate Reviews
3.3 Invoicing and Payments
3.4 Notifications of audits
3.5 Updates to Contractors Plans
3.6 Other ( e.g. Insurance certs)
4.0 Action Tracking
5.0 Forecasting & Planning
5.1 Demand Forecasting
5.2 Supply Constraints
6.0 Issues and Opportunities
6.1 General Issues and Opportunities
(Contractor)
6.2 General Issues and Opportunities (Compa

6.3 Continuous Improvement, Best Practice

7.0 Any Other Business
Date and Time of Next Meeting
 67

APPENDIX D: CONTRACT MANAGEMENT PLAN

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APPENDIX E: KICK OFF MEETING AGENDA

Meeting: Onshore Security Services Contract Kick off

Objective: To jointly review the approach to the contract execution in line with the contract
to ensure all risk are understood and effective controls are in place for their management.
Require items: Contractor to bring contract copy and written conformation letter,
supporting documentation of risk mitigation.
Agenda:
Agenda Who Time
(minutes)
Safety moment Company 3
Introductions All
1. Identification of Company and contractor HSSE focal All 5
points
2. Company HSSE expectations for new contracts and Company
5
contractors
2. Ethical Conduct Company 20
3. Formal confirmation of receipt, understanding and Contractor
acceptance of the Company HSSE, Ethical Conduct and
Social Performance obligations as per KPIs. The
Contractor confirmation that such information has been or 2
will be in place by contract start date and disseminated to
all personnel covered by the contract. (Delivered in
writing by contractor).
4. Confirmation that contractors HSSE Plans are Company
accordance with HSSE Exhibit. Review of any progress
actions on the HSSE plan required for pre-mobilization.
Discuss of relevant Company HSE policy, security policy 20
and HSSE standards. Reinforcement of minimum PPE
requirements to manage risk accordance with HSSE
exhibits.
5. Operations Issues Scope of Work Company 30
5. Contractor agreement of entering HSSE performance Contractor
5
data in PerforMIS.
6. Contract Management Plan Review Company 15
7. Review schedule for regular performance review All
10
meetings, inspections and audits-confirmed
8. Q & A and Summary All 5
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APPENDIX F: DATA CODING FOR SPSS

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APPENDIX G: DETAILED RESPONDENTS SCORE OF CM ACTIVITIES