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CHAPTER
7
CONTRACT ADMINISTRATION, ENFORCEMENT
AND LEGAL REMEDIES
OVERVIEW
The procurement process does not end with the award
of contract. The contractor’s performance must
be appropriately monitored, the contract itself may
be amended in response to unforeseen problems and the
contract must be eventually closed-out or terminated,
if not renewed. In performing these tasks, the department
shall:
- Assure
a mutual understanding of the rights, obligations
and responsibilities of both the contractor and the
department under the contractual agreement;
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Initiate any contract changes desired by the department;
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Protect the City’s interests in the event of
default by the contractor or contract termination;
and
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Evaluate the performance of the contractor for future
use by other City departments.
CONTRACT
MONITORING
Contract monitoring allows the department to diagnose
problems that may lead to work change orders, schedule
slippages, cost overruns or unacceptable product quality.
Four steps shall be taken to guard against these problems:
(1) designate a Contract Administrator (in some instances
this may be Purchasing); (2) establish administrative
controls; (3) monitor work progress regularly; and (4)
establish cost controls (these may have already been
established as a part of the bid specification).
It has been demonstrated that the City receives the
greatest benefit from certain contracts when the engagement
is considered a joint undertaking and City personnel
are active participants.
This provides the employees with useful training opportunities
and valuable knowledge of what the contractor has done,
why it was done, and how the agency can benefit by it.
This often represents knowledge that could never be
derived simply through the analysis of the end product.
City personnel, working with the contractor, can give
the project continuity at the operating level in subsequent
months. Also, these individuals can lend "in-house
acceptance" to the project and broaden its chances
for an enduring success.
CONTRACT
ADMINISTRATOR
One person shall be given the responsibility for administering
the contract. This individual (Contract Administrator)
shall be the single contact person and shall be responsible
for the following actions:
- Coordinating
the flow of information between the contractor and
the department.
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Responding to requests made by the contractor.
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Monitoring disbursements against the contractual budget.
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Monitoring the procurement progress against the work
scheduled.
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Coordinating the delivery of data or services to the
contractor.
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Approving all contract deliverables.
The
Contract Administrator shall have a technical background
to promptly diagnose problems in the development, testing,
implementation and operation of the product or service.
The department head or his designee shall formally designate
the Contract Administrator by name and clearly define
his or her responsibilities. If not designated in the
contract, this designation shall be sent, by letter,
to the contractor and user department.
Administrative
Controls
The Contract Administrator and the contractor’s
project manager shall review the rights, obligations
and responsibilities of both parties soon after the
contract is signed. During this review, they shall again
discuss all issues that were difficult to settle during
negotiations since these issues are the most likely
points for future disagreement. They shall review the
following items:
- Communication
channels between the department and the contractor,
designating specific personnel by name, title, responsibility,
address and telephone number.
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Major milestones, including the due dates for all
contract deliverables and the provision of all property,
material and manpower by the jurisdiction to the contractor.
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Administrative and technical requirements for reporting
work progress.
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Administrative requirements for reporting expenses
and procedures for progress payments or other financial
arrangements.
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Administrative and technical procedures for inspecting
and accepting contract deliverables.
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Administrative procedures for authorizing modifications
to the contract.
Work
Progress
Written progress reports are essential if the Contract
Administrator is to maintain control over the project
and shall be required in the contract. Regular progress
reports shall describe actual progress during the current
reporting period, deviations from planned progress and
problems anticipated in the next reporting period. Information
shall be maintained and accumulated for future use.
Progress reports shall also explain any reasons for
these deviations (current and expected); outline what
is being done to correct them; and indicate what assistance,
if any, is required from the department.
Control is facilitated by requiring the contractor to
submit: (1) a schedule for approval by the Contract
Administrator and (2) a comparison of actual progress
to the schedule with each written progress report.
Cost
Controls
Cost controls are another means of determining whether
the procurement is proceeding as planned. Cost controls
warn the Contract Administrator of any problems the
contractor may have in completing the required work
within the contractual cost limits by showing the relationships
between actual and expected costs. Cost controls are
also used with cost-reimbursement contracts as a means
of noting deviation from target costs. The Contract
Administrator can then suggest actions that will reduce
those and future deviations, thereby keeping actual
costs as low as possible.
Cost control is maintained by requiring the contractor
to submit: (1) a cost plan for approval by the Contract
Administrator and (2) a cost status report with each
written progress report.
A cost plan is a task-by-task budget of direct labor
costs, fringe benefits, overhead, direct materials,
direct services, other expenses, as well as general
and administrative costs. The requirement for a cost
plan will depend on the size and complexity of the contract.
If the department feels a cost plan is required, that
requirement and related conditions shall be specified
in the contract.
A cost status report shall provide information using
the same cost elements found in the cost plan and for
updating the department on actual costs, cumulative
cost-to-date and variances between actual and planned
cost-to-date.
The following are examples of cost control criteria:
- Estimated
costs at completion - the latest estimate and original
planning estimate.
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Variances between estimated and planned costs at completion.
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Explanations of the nature of any variances between
actual and planned costs-to-date or estimated and
planned costs at completion.
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Descriptions of the actions proposed or taken to avoid
or minimize any impending cost overruns
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Ensuring the timely submittal of all progress and
cost status reports.
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Comparing these reports with the schedule and cost
plans.
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Ensuring that the contractor receives the governmental
support promised him in a timely fashion.
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Ensuring the timely delivery of all products, services
and documentation required of the County by the contract.
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Ensuring the timely performance of tasks required
of the City.
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Ensuring that all quality control procedures (i.e.,
tests and inspections) are followed by the appropriate
requirements and technical support specialists immediately
after the receipt of each contract deliverable.
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Reviewing the results of tests and inspections before
closing out the contract.
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Coordinating all other contractual controls.
AMENDING
THE CONTRACT
Unforeseen problems, circumstances and events may make
a contract amendment a necessity. To protect the City’s
interests, the Contract Administrator or department
head shall supervise all discussion with the contractor
regarding amendments, but only after doing so with the
Purchasing Agent. All amendments must be in writing
and signed in the same manner
as the original contract. The dollar amount of the amended
contract must not exceed the signatory’s limitations.
For purposes of approval, a copy of the original contract
and any amendments must accompany the proposed amendments.
All change orders, amendments to contract and supplemental
agreements must be signed by the Purchasing Agent.
RENEWAL
OF CONTRACTS
Contracts for services shall not usually cover a period
of more than one (1) year, although longer periods may
be approved. Unless exempted from competitive bidding
procedures, contracts for goods and service should not
extend, either by original contract or by extension,
beyond five (5) years unless competitive bids/proposals
have been sought or approval is obtained from the Purchasing
Agent.
Contracts shall not be renewed without thorough consideration
of contract performance, availability of new or better
contractors, changing circumstances and other factors
which could affect the existing contract to determine
whether its renewal is the most appropriate and cost
effective option.
Any decision to renew a contract must be made prior
to the termination date of the existing contract. It
is recommended that planning for renewal or a new contract
begin not later than sixty (60), nor earlier than one
hundred twenty (120) days prior to the existing termination
date depending on the complexity of the contract and
renewal. Prior to any renewals, department heads or
Contract Administrators shall consult with Purchasing.
Renewal shall not be used to circumvent any required
bidding processes.
CLOSING
OUT OR TERMINATING THE CONTRACT
All contractual relationships must eventually either
be closed-out upon completion of all the work or terminated
prior to completion. A contract closeout is an administrative
procedure involving formal acceptance of all contract
deliverables and payment of the contractor’s final
invoice. A contract termination is generally a unilateral
action that stops work on all or part of the contract
for cause or convenience. A contract can also be terminated
by mutual agreement in the same way that a contract
is amended.
Termination of a contract consists of three steps: (1)
close out the contract; (2) issue a Stop Work Order;
and (3) settle all claims. Step 1 is performed only
upon satisfactory completion of all work. Steps 2 and
3 are performed only to terminate a contract for cause
or convenience.
How
to Close Out the Contract
A contract should not be closed out until the City is
satisfied that all contractual obligations have been
met by the contractor. This occurs when two conditions
have been met:
- The
required products or services have been delivered
and tested/inspected; and
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The results of these tests and inspections indicate
that the required products or services comply with
the technical specifications.
Where
appropriate, the City shall formally notify the contractor,
in writing, of the department’s final acceptance
of the work, as soon as these conditions are met. The
contractor’s final invoice can now be processed.
How
to Issue a Stop Work Order
All or part of the contract may be terminated for cause
whenever the contractor refuses or clearly fails to
meet contractual performance requirements. Common causes
for default include; failure to deliver acceptable products
or services; failure to meet scheduled delivery dates
or contractual milestones; failure to resolve disputes
or offer explanations on disputed terms, conditions
or requirements; or demonstrated lack of progress that
is harmful to the jurisdiction.
Prior
to terminating a contract for cause, consult with Purchasing.
The
contractor shall be warned that he/she is in default
before work is actually stopped. This warning shall
consist of a formal letter from the City specifying
how the contractor is in default and suggesting that
these problems be corrected within a specified time
frame. This warning provides the contractor with an
opportunity to correct the problems or dispute the City’s
claims before a Stop Work Order is issued. Depending
upon the response the City may:
- Authorize
the contractor to proceed under the original or a
revised schedule.
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Allow the contractor to continue if he/she agrees
to subcontract specified portions of the work to a
reliable outside source.
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Issue a Stop Work Order.
If
a Stop Work order is required, it shall be a formal
letter signed by an authorized City representative and
reviewed by the City Attorney. The letter shall state:
- The
effective date of the Stop Work Order;
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The portion of the contract covered by the Stop Work
order;
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Instructions for stopping work and canceling any purchase
orders; and
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A request that the contractor acknowledge receipt
of the Stop Work Order.
If
the contract provides for termination without cause,
notice shall be given as provided by the contract. A
formal Stop Work Order is not necessary.
Outstanding
Contract Obligations
When a contract is terminated, the contractor may or
may not be due any money and the City may or may not
be due any monetary damages, materials, equipment or
partially complete work. The City should make every
effort to determine the status of contract obligations
prior to terminating the contract.
VENDOR
REQUESTS FOR CHANGES OR CANCELLATIONS
General
Policy
When a vendor requests a change or cancellation
to a purchase order or contract that will result in
additional cost to the city, Purchasing’s policy
is to deny the request for a change or cancellation
unless such denial will cause documented undue hardship
to the vendor or unless there is no reasonable alternative.
If the vendor refuses to perform according to the original
contract, he will be in breach of contract.
"Price
in Effect at Time of Shipment"
In the rare case where Purchasing accepts a "price
in effect at time of shipment" offer, the purchase
order should so state and the quote or bid file should
document the necessity of accepting such an offer.
If the price increases between the date of order and
date of shipment, the vendor should supply the buyer
with documentation, generally in the form of old and
new published price lists.
BREACH
OF CONTRACT - DEFINITIONS
Actual
Breach
Actual breach of contract is defined as a failure to
perform on time and in a manner required by the contract.
This includes failure to perform at all, as well as
delivering the wrong goods or defective goods.
Anticipatory
Breach
Anticipatory breach can be defined as the statement
by one party, made prior to the time performance is
required under the contract, that it does not intend
to perform when performance is due, or the intentional
act by one party to disable himself so that he is unable
to perform.
In the case of anticipatory breach, the City must have
actual evidence of the breach before employing legal
remedies.
It is Purchasing’s policy to document the vendor’s
statement in writing either by asking for a letter from
the vendor stating his position or by issuing a letter
to the vendor confirming the vendor’s verbal statement
to Purchasing and setting forth a deadline for the vendor’s
written reply if Purchasing’s letter is incorrect.
If the City does not cancel the contract, materially
change its position (i.e. orders substitute goods) or
otherwise indicate that it considers the repudiation
final, the vendor may retract its repudiation. Retraction
must occur before performance is due.
ENFORCING
CONTRACT PROVISIONS
Vendor’s
Right to Cure
The vendor has a right to cure improper tender
or delivery as follows:
- Where
the City rejects delivery of non-conforming goods
and the time for performance has not passed, the vendor
may notify the City of its intention to cure and then
within the contract time make a conforming delivery.
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Where the City rejects a non-conforming tender which
the vendor has reasonable grounds to believe would
be acceptable, he may notify the City of his intent
to cure and have further reasonable time to substitute
a conforming tender.
Enforcement
The following steps shall be followed when breach of
contract has occurred:
- 1.
Notify the vendor and Purchasing verbally that the
vendor has breached the contract and in what way breach
has occurred. Reach an understanding with the vendor
as to what he/she intends to do. If a vendor intends
to remain in default, advise the vendor of the City’s
legal rights, the right to obtain comparable goods
(known as "cover") elsewhere and charge
the company with the difference between the contract
price and the "cover" price if the "cover"
price is higher. The City may obtain this reimbursement
for damages by deducting it from any money due the
vendor or by accepting another form of vendor payment.
Note: Barring a vendor’s substantiated anticipatory
breach, the City may not take action to obtain cover
until the promised time for performance (delivery
date) has passed or the goods have been rightfully
rejected.
- Document
the verbal understanding, including a summary of the
City’s legal rights, as appropriate, in writing,
and mail to the vendor; send a copy to Purchasing
and attach a copy to the Purchasing Document. The
letter should set forth a date by which the vendor
must reply or cure his default in order to avoid legal
action by the City. It should also state that a failure
to resolve this problem may result in removal from
Purchasing’s bid list. Preparation of this letter
must be coordinated with Purchasing and must be approved
as to form by the City Attorney prior to mailing to
the vendor.
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If the vendor fails to fulfill contract requirements
and has not replied in writing with an alternate proposal
which is acceptable under the circumstances, Purchasing
shall issue a written cancellation, signed by Purchasing,
and approved by the City Attorney citing the vendor’s
breach of contract and shall proceed to obtain comparable
goods elsewhere. It is assumed at this point that
the City has exhausted all reasonable expectation
of obtaining contract performance and cannot wait
any longer for the goods.
CONTRACT
ADMINISTRATION - FILES
It is imperative from a legal perspective that contract
files, especially those pertaining to construction projects
are detailed and complete. The following is a list of
the types of correspondence and documents that should
be kept, as originals or copies depending upon the circumstance.
This list is by no means exhaustive and merely reflects
those documents that would be critical in the event
of litigation or disputes.
- Copies
of All Contracts Pertaining to the Project
- Architect
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Construction
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Consultants
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Interlocal/Cooperative Agreements
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Grants
- Notice
of Award Letters
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Copy of the Purchase Order
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Requests for Insurance and Bonds
- Memos/Letters/Reports
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Field Reports
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Meeting Notes
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Correspondence
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Daily Diaries
- Orders
of Materials
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Copies of Bonds and Insurance Certificates
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Change Orders and Changer Order Correspondence
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Notices of Breach
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Notice of Completion
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