The First Five Things I Look for in a Contract
We teach contract terms at CIPS Levels 3 and 4 and most students want to know how it applies in real life.
Our wonderful tutors will give their examples of why contract terms matter in Procurement contracts, and this article is here to supplement that conversation.
These are my top priorities for any contract.
Specifications
The main reason I include a specification in a contract is to avoid disputes in future.
When I’ve had to repair a supplier relationship that’s gone sour, the root cause is often a difference of opinion of what the supplier should or shouldn’t be doing. A clear specification that’s included in the contract helps mitigate this.
It means that both parties can point to a document that says exactly who is doing what and when. This can clarify roles and responsibilities, even if personnel change at either the Buyer or Supplier side.
Another advantage is that it makes it obvious which version of the specification is ‘live’. In a complex project, the specification might change several times through the conversations with the supplier. Putting the correct version in the contract ensures that both parties know what specification to work to.
Specifications can be included as an annex of the contract and there should be a change control process in place to ensure it stays up to date.
Key Performance Indicators
Similarly to specifications, KPIs should be in contracts to check the ongoing performance of the buyer / supplier relationship.
It keeps the communication on track between both sides and makes sure that everyone involved knows what is expected. To that end, make sure that KPIs are relevant!
I used to work somewhere that had a KPI in place with a PPE supplier for deliveries to be made within 48 hours of the PO. We would place an order for blue hard hats, and they would send green ones within 48 hours. This frustrated the Stores team no end as they had to deal with returns!
It turns out, what was really important to us wasn’t the delivery turnaround, but making sure that the PPE was exactly what we ordered. Hard hats in different colours might be fine for a lot of organisations, but we colour coded them for different roles in the business, so we needed the colour we ordered.
When writing your KPIs, turn them into SMART targets that reflect the needs of your stakeholders.
• For example, “deliver on time” becomes “95% of standard products delivered within 48 hours of the PO”;
• “Be responsive” becomes “Technician appointed within 4 hours of issue being raised”
WTF is ‘liability’??
Now we’re into certain contract terms, and these are the ones that I check first.
Liability can be read like ‘responsibility’. If you are liable for a certain event happening, then you’re responsible for putting it right.
The general rule of a contract is that you and the supplier are each responsible for carrying out your obligations in a contract. However, it’s important to understand what else you might be responsible for.
· If you don’t want to be responsible for a certain event happening, you can use an “exclusion” clause.
· If you want to take responsibility for a certain event happening, you can use an “indemnity” clause.
Contracts are basically risk mitigation, so when negotiating a contract, always think about what could go wrong and how you would want that situation to be handled (and how to avoid it in the first place!).
Speak to your legal team, solicitors and internal stakeholders about what risks might arise in the contract.
Subcontractors
Why should you care about subcontractors?
Your contract is between you and your supplier. Third parties generally don’t have any rights or obligations under it. That means, if something goes wrong, your port of call is the supplier.
If they subcontracted some of the work out and that third party does something wrong, your main grievance mechanism will still be your contract with your supplier. You have very little right to go to the subcontractor directly.
When you’re agreeing a contract with a supplier, think about “why did I award the contract to this supplier?”
· Do you really want someone else to do the works?
· What sustainability concerns could there be if the supplier subcontracted the work out?
More and more, we’re responsible for what is happening in our entire supply chain, regardless of whether we have a direct contract with those companies. That means, you could be held responsible for human rights or environmental abuses that are happening in your supply chain, whether you know about them or not.
So, why should you care about subcontractors? Well, the works are your responsibility, so you should make sure you know who is carrying them out!
Payments and Title
And finally, something to check in your contract is your payment terms and when title passes from the supplier to you.
Payment terms are important because they can be a good negotiating point with you and the supplier. They’re generally quite important to both parties, so always check what the contract says because it may not be in your favour.
Check that the payment terms work well for your project and they are as you’ve intended in negotiations. For example, if you have negotiated stage payments, make sure these are accurately reflected in the contract because misinterpretation can result in disputes.
Title can be thought of as ‘ownership’ and it describes when the buyer will own the goods purchased. The default is generally that they transfer when payment is received. This is probably fine for most simple orders, but you might want to consider a different time for title to pass if:
· Your organisation resells or transforms the goods very quickly
· You are making payment before you receive the goods
Contracts help you mitigate risk
All through the contract negotiation process you should be considering what could go wrong in relation to the goods and services that are being provided. You can use the contract to help mitigate these risks, whether that’s with a clear specification and KPIs to communicate what is required and how the supplier should behave, or with strict liability clauses on what to do if the worst happens.
ABA Procurement are not solicitors, so you should always speak to your legal team if you have a concern. This article is here to advise you as a Procurement professional of some things to look for when you’re working with a supplier.
This information was in one of our recent webinars – make sure you check out when the next ones are!