Supply Excellence — Contracting Principles Revisited

Contracting Principles Revisited

September 25th, 2006 · by Tim Minahan · No Comments · contract management

Last week, I highlighted some of IACCM’s recommendations for defining contracting principles. In this post, IACCM President and CEO reveals additional excerpts from IACCM conference calls on this issue. (A reminder, the full audio transcript of these discussions is available in IACCM’s member library.)

It seems like all the discussion is about the development of the written contract and the negotiation related to that. What about the principles that may apply to Pre-Award phase and the Execution (contract administration) and Closeout phases?

The call was indeed focused on ‘Contract Principles’, but the panel clearly recognized the point when they entered discussion around ‘commitment’ versus ‘contract’. The real issue for a company is how to manage the process whereby business commitments are made; this must include phases other than that of actual contract formation.

We discussed the growing trend by buyers - and the courts - to seek inclusion of a wide range of material in any potential litigation. For example, one panel member highlighted a recent example where the contract, the original tender document, the response to tender and all associated e-mails were defined as incorporated.

Many of us certainly recognize the exposures also from weak post-award controls and ‘ informal’ change management. It is certainly important that training and principles cover these phases in which ‘commitments’ are frequently made.

How do new regulations (in particular Sarbanes-Oxley) impact the requirement to document approval for deviating terms and conditions?

The panel felt that this was an important concern. They referred to ‘material’ commitments as a basis for much regulatory interest - but this is imprecise. It does appear that controls over contract variations will tend to tighten. There was discussion about the interest of the SEC and others (insurance companies, credit rating agencies) in the contingent liabilities that companies may be taking on - and failing to record in their balance sheets.

No matter what type of [agreement] is involved (software / supply / projects / product developments) what is right level of “empowerment” to be given to the sales, contracts, or supply associate?

The consensus seemed to be that companies need to distinguish a limited set of ‘core principles’ related to terms that could cause catastrophic exposure, versus others where there can be controlled empowerment.

The right level of empowerment has several dependencies, but the panel emphasized the importance of achieving internal agreement and buy-in. This means involving business management in the creation of the rules and sharing in the definition of empowerment. The more that the business and relationships can be segmented, the easier it may be to provide specific authorities.

Many do this based around relationship type and / or deal value (but this can be risky and is a very imprecise measure). There was also agreement that some form of training is desirable - but again this will vary by organization.

Many companies delegate ‘alternate language’ for frequently negotiated terms; a few have even made alternates available to the customer (e.g.’ web-enabled selection). The need to make help / support services readily accessible was also discussed - clearly, easy access to information and guidance is itself ‘empowering’. Three principles appear to be:

make help / guidance readily accessible
monitor issues and compliance
update and change guidance based on experience

Should a sale contract bullet proof against poor performance of the delivery team. Shouldn’t the contract also be designed to ensure that the delivery team is accountable to its performance and would not feel that his legal department has developed a bullet proof contract regardless of how the delivery team performs?

It is without doubt very important to ensure there is clear understanding of responsibility to deliver and that this is measured - both by contract terms (e.g., the service level agreement) and by internal reviews. The issue of ‘contract governance’ and on-going change management are increasingly understood to be very important - and indeed, if you have robust governance and review processes, the need for such rigorous ‘legal’ term si sreduced, because you are managing your risks.

We advocate that contract parties require the other side to describe their implementation and on-going management methods and resources; if these are weak, you should not trust the commitments they are making.

Thanks, Tim. IACCM offers a wealth of our research papers, seminars, and forums on contracting and contract management topics. I encourage Supply Excellence readers to join and access IACCM’s member library.

Email Forward & Bookmarks