Before knowing about centralized and decentralized contracting first let us know what is a contract. Many times you should have come across the term called contract. We all sign contract, even your employment agreement with your Employer is also a kind of contract, which mentions how long you need to work and how much you will get paid for that work, how many paid holidays you will have etc. A contract always has minimum two parties. The party that provides the goods or service is called the Seller and the party that buys the goods or service is called the Buyer. A contract is a mutually agreed legal agreement that mandates the seller to provide its goods or services to buyer for a pre-agreed compensation. The compensation can be monetary or in some other form.
It’s important to note that a contract must be written and it must have legal remedies. So if either party fails to honor their commitment, the other party can go to the court and appeal against the misdeeds. However, in reality the legal processes are so cumbersome that both the parties in case of dispute should try settling the differences among themselves or through a mutually agreed mediator. Larger Organizations have full time managers called Contract Managers or Procurement Managers. They take care of creating and managing contracts.
There are two way of contract such as Centralized and Decentralized. If all the contracts of the organizations managed by creating a central contracting or purchasing department, in that case it’s called “centralized contracting” and if there can be a separate contract managers assigned to each of the projects, in that case it’s called “decentralized contracting“.
Centralized vs. Decentralized Contracting:
In case of decentralized contracting, the contract manager is assigned to the project and reports to the project manager. Since there are two ways the contracting workforce can be organized, let me ask you what are the advantages and disadvantages are of each type. While centralized contracting helps in standardizing the best practices, in decentralized contracting the project manager has more control and procurement process can be speedup.
In some cases, both type of contracting is used. For example, suppose British Petroleum wants to setup a new Refinery plant in Nigeria and this is a project. In such case, they might procure key machinery through their centralized purchasing department and they can also have a full time contract manager for this refinery project who can procure some items locally in Nigeria. In this case, both the centralized and decentralized contracting methods are being used.