In the heavy asset industry, leaky contracts are a critical challenge that can impact project timelines, budgets, and overall operational efficiency.
In fact, EY estimates that 1% to 5% of EBITA flows unnoticed out of companies because they do not have their contract management and payment follow-up processes completely in order.
Leaky contracts refer to agreements with contractors and suppliers that have gaps, ambiguities, or inconsistencies that lead to disputes, delays, and additional costs. It also occurs when you fail to accurately apply contract terms and conditions.
For example, your contracts may be drafted with well-defined scope, objectives, and deliverables. But if the field supervisor approving invoices is unaware of the finer points of the terms and conditions, your business is likely to end up leaking revenue.
Specifically, terms and conditions set everything from quality standards to schedules, payment terms, and performance. Not to mention—a well-maintained contract can help you avoid vendor disputes and build stronger owner-contractor relationships.
What is Contract Leakage?
Put simply, contract leakage occurs when the expected value of a contract is more than the actual value. It is typically caused by poor contract management. According to the WorldCC (formerly the International Association for Contract & Commercial Management), companies lose an average of 9.2% in value leakage from weaknesses in contract management.
This often occurs when companies fail to consider contract value leakage when creating strategic partnerships with customers, suppliers, and business partners.
To capitalize on these missed opportunities, organizations should start thinking about contract value leakage on a regular basis. The first step is to see if there are any shortcomings with your contract management methods.
What is Missing from Your Contracts?
How you start to identify, recoup, and prevent contract leaks begins by scrutinizing your contract terms and conditions and critically analyzing how you manage your workflows.
Here are some examples of what to look for when digging into your contracts:
- Equipment: Does the contract specify if receipts are required to substantiate equipment charges?
- Invoicing: Does the contract specify a time limit for invoice submission?
- Labor Rates: Does the contract specify if double time is payable?
- Materials: Does the contract specify if mark-ups are applicable?
- Off-Site Time: Does the contract specify when training is chargeable?
- Roles/Schedules: Does the contract specify qualifications, skills, and competencies for each role level?
- Travel Time: Does the contract specify if travel time between sites is payable during shifts?
Now imagine if supervisors in the field are signing timesheets manually with little understanding of what is in the contracts. This lack of contract visibility means there is no insight into how many pieces of equipment, trucks, and welding equipment should be provided by a vendor.
When you identify and tighten up your contractual terms, you will gain greater control and confidence that you are not being overbilled by your contractor workforce. Even better—using software and digital tools to streamline the creation, negotiation, and management of contracts.
10 Ways Your Leaky Contracts Are Costly
It may be challenging to put an exact figure on the costs of leaky or poorly written contracts. It often depends on project complexity, specific terms and conditions, and vendors or suppliers involved.
Here are 10 ways leaky or poorly written contracts can cost heavy industry:
1. Project Delays: Contract ambiguities can result in misunderstandings about project timelines, leading to delays in project completion. These delays can incur additional labor costs, equipment rentals, and potential penalties for missed deadlines.
2. Cost Overruns: Unclear pricing, payment terms, and scope of work can lead to cost overruns, exceeding the budgeted amount for a project.3. Resource Reallocation: Time and effort spent on addressing contract-related issues divert resources from other essential business operations and growth initiatives.
4. Disruption to Supply Chain: Poorly defined terms related to procurement, materials, and equipment can disrupt the supply chain, leading to delays, shortages, and increased costs.
7. Regulatory Non-Compliance: Contracts that do not align with industry regulations or legal requirements can result in fines, penalties, or legal liabilities.
9. Lost Productivity: Unclear responsibilities and expectations can lead to inefficiencies, mismanagement of resources, and reduced productivity.
10. Disputes and Litigation: Ambiguities or inconsistencies in poorly written contracts can lead to disagreements and disputes between parties, which can result in lawsuits.
How to Automate Your Healthy Contracts
Contractor Spend Management tools like the Track Platform allow owners to go deep into the state of contracts and contractors within your site-specific operations.
Previously, contracts had to be monitored and tracked manually — leading to the possibility of errors, safety, and compliance issues, and additional costs. Using an automated approach makes these processes easier. By automating your data collection and analysis process, your business can reduce costs, improve compliance with regulatory requirements, and increase visibility into your contractor spend.
Contractor Spend Management technology focuses on managing spending on contractors and other third-party service providers. It provides tools for managing contracts, tracking and monitoring spend, managing vendors, and ensuring compliance with regulatory requirements.
With the Track Platform, you can:
- Have the confidence that you are negotiating the best possible deals with vendors.
- Know your agreements are accurate and up to date.
- Ensure your purchase orders are correct and fully compliant with your vendor contracts.
- Rest assured the data and tools you need are readily available in the event of vendor disputes or audits.
- Easily enforce the Terms and Conditions of your vendor contracts.
With Track, you can identify and mitigate any contract gaps. Our industry-leading platform ensures that the terms and conditions you negotiated are being brought to life in the field. Terms and Conditions are automatically applied, so you know that you are getting the most out of your contracts.
Ready to combat contract issues? Download our Contract Health Check one-pager to see if your contracts are covering all your labor, material, and equipment needs
