The fifth article in SmartProcurement’s World-Class Procurement Practice series will discuss the need for Procurement professionals to understand how properly managed contracts can lead to excellent supplier performance. A well developed and managed supply contract is a vehicle for value addition and good supplier relationship management. Many sources of buyer/seller conflict arise from poorly structured contracts and service level agreements (SLAs).
The series is based on Chartered Institute of Purchasing & Supply (CIPS) unit content and on recent research done by Commerce Edge Academy and is penned by Ronald Mlalazi (MCIPS), Commerce Edge Academy’s Education Manager.
This month’s article is based on Level 4, Unit 2, ‘Developing Contracts in Purchasing and Supply’.
Contract management is a term that applies to the events that take place at appropriate times after signing and during the lifetime of a contract.
A well structured contract management process would include the following:
- Identifying and developing key performance indicators (KPIs).
- Initial review of responsibilities, tasks, time-table, ethos and culture.
- Audit process and record keeping.
- Site visits. By who, when and where?
- SLAs and Critical Performance Measurements (CPMs).
- Incentives and penalties for achieving or not achieving SLA standards.
- Motivating the supplier during the life of the contract.
- Dispute escalation and resolution methodologies.
- Regular progress meetings and reports.
- Contract termination, renewal or variation procedures.
- Project hand-over or delivery.
- Joint performance systems.
Conflicts are costly, so they need to be avoided at all costs.
Many supplier relationship conflicts arise during the life of a contract, emanating from contested terms within the contract or from a poorly documented contract. Had these problems been identified during the negotiation stage, appropriate risk aversion and exclusion terms would have been clarified and understood by both parties.
“Ignorance of law is no defence”, still applies even today. It is a fundamental requirement that Procurement professionals know and understand the legal and cost implications of the following procurement processes:
1. Request for quotations (RFQ).
2. Request for proposal (RFP).
3. The specifications.
4. The supplier’s quotation.
5. The tendering process.
6. Crucial contractual terms, like the conditions and warranties.
At what point does a quotation become a legally binding document? Can the buyer rely on the terms and conditions prescribed on the RFQ should there be a conflict? It is one of the key aspects of a Procurement function to lead negotiation meetings that eventually bring about contractual agreement with a supplier. Often unknowingly, buyers have signed supply contracts on the supplier’s terms and conditions. Therefore, World-class procurement practice entails that buyers have a full appreciation of the legal aspects of a supply chain.
The term ‘battle of the forms’ refers to a conflict of terms between the buyer’s terms and conditions of purchase on their RFQ and purchase order and the supplier’s terms and conditions of supply on their quotation proposals and delivery notes. It is important to determine on whose terms the contract will be governed and which and whose documents constitute the offer and which the acceptance?
A contract management process should also provide for performance measurement, which will allow each party to gain a better understanding of the contract’s constraints, deadlines and weaknesses.
Measurement can also highlight problems in both the buyer’s and seller’s organisations, thereby providing opportunities for both parties to review the identified problems and put a mechanism in place to improve performance.
Buyers have a significant responsibility to represent their organisations on the market as the best-in-class, because world-class organisations want to be associated with such organisations.
To achieve Procurement objectives through effective contract management, Procurement professionals need to be trained and skilled in developing effective contracts in purchasing and supply that will bring about added value in the supply chain.
Tools that can enhance effective contract management and lead to enriched supplier relationship management include:
- Achieving a balance between the five purchasing rights and the cost.
- Knowing how to develop specifications.
- The legal implications of an offer and accepting that offer.
- What constitutes a legally binding contract?
- The ‘doctrine of privity’.
- Avoiding the battle of the forms
- The effectiveness of supply agreements.
- When to rely on exclusion clauses?