CIPS Practitioner Programme Module: Developing … · v.1 Module : Developing Contracts in P&S...

Leading global excellence in procurement and supply

CIPS Practitioner Programme Module: Developing Contracts in P&S

Tutor Name Date

© CIPS, 2014

v.1

Module : Developing Contracts in P&S

Important Issues

© CIPS, 2014

v.1


Practitioner Level Modules and Units

Induction

Module: Driving Value through Procurement and Supply • The Roles of Procurement and Supply • Procedures in Procurement and Supply

Module: Sourcing Essentials in Procurement and Supply • The Sourcing Process and Effective Tendering • Supplier Appraisal

Module: Managing Expenditures with Suppliers • The Impact of the External Environment on

Procurement and Supply • Effective Purchasing • Effective Inventory Control (Optional Unit)

Module: Negotiation in Procurement and Supply • Effective Negotiation

Module: Developing Contracts in Procurement and Supply º Developing Contracts • Developing Specifications • Contract Management

Project in Procurement and Supply (optional Module as clients can opt for an integrated assignment as an alternative)

Structure of Modules and Units

© CIPS, 2014

v.1


• The main types of contracts and agreements • Documentation used to create commercial agreements • Sources of express terms • The creation of commercial agreements • Key provisions of legislation that relate to contracts

In this Unit, we’ll be focusing on:

Developing Contracts

© CIPS, 2014

v.1


Aim - This module underlines sound practices in contracting emphasising procurement and supply's roles in developing specifications, KPIs, contract terms exploring the related legal issues to the formation and operation of contracts. In addition, key aspects of contract management are also covered in this module.

Business Benefits or Organisational Added Value: The contracting in procurement and supply module underlines best practice approaches to the development of contracts and subsequent contract management for externally purchased goods, services or works contracts. The module stresses the contributions that personnel can make to the development of specifications, KPIs, contract terms and other aspects that should be covered in formal agreements to reduce commercial risks and ensure value for money outcomes through approaches to contract management and supplier relationship management. Procurement and supply can:

• Create contractual agreements to control expenditures made with suppliers • Interpret and advise on contractual terms • Advise on the development of appropriate specifications • Create KPIs for contract management • Act with stakeholders to manage contracts and suppliers effectively • Create improvement plans for the performance of suppliers


Knowledge: Will know and understand: Refs Capabilities: Will be able to:

The main types of contracts and agreements including: • The use of spot purchases • Term contracts • Framework agreements (or blanket orders/ panel

agreements)

5.2 D4 5.2 D4

Develop appropriate contractual agreements for suppliers with stakeholders Contribute to the completion of documentation used to form commercial agreements

Refer to the syllabus for further detail:


© CIPS, 2014

v.1


Now score each of the knowledge statements and capabilities statements on a scale of 0-3 with:


Score Classification 0 No real knowledge/ capability 1 Limited knowledge/ capability 2 Some knowledge/ capability 3 Am in my comfort zone!

Identify the gaps a) personally and b) in the group as a whole

These results should help inform us where we should

prioritise our focus

© CIPS, 2014

v.1





© CIPS, 2014

v.1


“A contract can be written or verbal. It is an agreement between two or more parties to perform specific acts and is enforceable by law. Typically, the six prerequisites for a legally binding contract under Law are: agreement (offer and acceptance); consideration (the payment of a sum of money etc.); capacity (being of legal age and sound mind to enter legal relations); intention (the parties to the contract intend to enter legal relations); formalities (representation in writing) and certainty.”

Source: CIPS Procurement Glossary: http://www.cips.org/Knowledge/procurement-glossary/C/

The Essentials of a Valid Contract

© CIPS, 2014

v.1


• In 2000, BSkyB appointed EDS to design and implement a new CRM system. EDS made various claims regarding time, technology and implementation methodology.

• The project soon ran into problems and in 2002, Sky took control back and completed the work at a cost of £295m. Sky sued EDS claiming fraudulent misrepresentation of its ability to perform the contract. EDS claimed the time and cost overruns were caused by a lack of specificity on Sky’s part leading to changes in requirements.

• While the court assessed the damages claim, it ordered EDS to make an interim payment to Sky of £200 million. HP has stated its intention to appeal.

BSkyB v HP Enterprise Services (formerly EDS) (2010)

The Essentials of a Valid Contract

© CIPS, 2014

v.1


• Must be specific in its terms • Must be communicated to the offeree • Will lapse after a reasonable period of time • Cannot impose silence as its form of acceptance

e.g. “If you don’t contact me by Friday then I take it that you have accepted”

• Can be withdrawn at any time during its validity period, or before acceptance

• Can be made to specific individuals or to the public at large • Offers made to a specific individual can only be accepted by that

individual

‘A statement of willingness to be legally bound’

Offers

Presenter

Presentation Notes

principle of being specific in terms to achieve consensus between parties communication - knowledge of offer – cannot accept something you do not know of both offer & acceptance must be communicated – time zones these days an issue see later offers are not unlimited in time Some other points about Offers Revocation An offeror can withdraw their offer at anytime (regardless of the validity period of the offer). Withdrawal is effective from the point at which it is communicated to the offeree. Revocation by postal communication is not effective until the letter is received. (This contradicts the general principles of the Postal Rule) Offers can be made to specific individuals or the world at large. Offers can be made to specific individuals or to people at large. If an offer is made to a specific individual that individual can only accept it. Lapse. An offer that doesn’t carry a statement as to its validity period lapses after a reasonable period of time. A reasonable period of time varies according to the circumstances of the individual case. An offer to buy a news story may lapse in hours. An offer to buy a house may lapse in weeks. It is up to the courts to decide what is a reasonable time having regard to the circumstances of the sale. Failure of a specific condition. An offer, which is made subject to a particular condition e.g. that the goods, which are the subject of the offer, exist, cannot be accepted if this condition fails. Death of the Offeror An offer made by a dead person cannot generally be accepted. Exception is where the offer is not made on a personal basis.

© CIPS, 2014

v.1


• Either verbally, in writing, or by conduct • An agreement to all of the terms of the offer • Must be unconditional • Conditional acceptance is a “counter offer” • Counter offers ‘destroy’ the original offer…

Acceptance must be:

Acceptance

© CIPS, 2014

v.1


• Wrench offered to sell his farm for £1,000 • Hyde’s agent made an offer of £950 and Wrench then asked for a few

days to think about the offer • Wrench subsequently wrote to Hyde saying that he could not accept it • Hyde then wrote back stating that he would accept the original offer of

£1,000, but Wrench had decided that he no longer wanted to sell to Hyde • Hyde then sued on the basis of specific performance • The court held that the plaintiff could not enforce

this ‘acceptance’ because the counter offer was a rejection of the original offer and therefore had the effect of terminating the original offer

In Hyde v Wrench (1840)

Counter Offers

© CIPS, 2014

v.1


Consideration

Purchaser

Supplier

Pays the Price: the Loss!

Receives the Goods/ Services: the Benefit!

Incurs Costs: the Loss!

Receives the Price: the Benefit!

© CIPS, 2014

v.1


• The defendants were the manufacturers of a medicinal product called ‘The Carbolic Smoke Ball’

• They placed an advertisement in a newspaper stating that they would pay £100 to any person who contracted flu after buying and using the smoke ball correctly

• They further stated that, as a token of their sincerity, they had put £1,000 on deposit in the bank

• The plaintiff, Mrs Carlill, purchased a smoke ball and used it according to the instructions but nonetheless contracted flu

• She claimed £100 from the defendants, who refused to pay arguing that the advertisement was merely an advertising puff and that it was impossible to contract with the world

Carlill v Carbolic Smoke Ball Co (1893)

The Carbolic Smoke Ball

© CIPS, 2014

v.1


• It was held that Mrs Carlill could recover the £100

• The £1,000 provided evidence of both consideration and an intention to pay claims

• The advertisement formed an offer to the world at large

Carlill v Carbolic Smoke Ball Co (1893)

The Carbolic Smoke Ball

© CIPS, 2014

v.1


• Offered a free flight to America if you bought a Hoover over £100

• Offer was taken up by thousands • Hoover attempted to renege stating it was an Invitation to

Treat not an Offer at Large

Hoover

The Hoover Case

Held • This was an offer at large capable of acceptance

by many and further reinforced by the legal intent to reward people taking up the offer

• The promotion cost Hoover $72 million and they flew 220,000 customers!

© CIPS, 2014

v.1





© CIPS, 2014

v.1


Terminology

• Requisition • Request for Quotation • Quotation • Order • Order Acknowledgment • Invitation to Tender • Tender • Contract

Discuss the main purposes of each of these documents used in P&S

Documentation used in P&S

© CIPS, 2014

v.1


Purchasing department

Receiving department

Accounts department

Documentation used in P&S

BUYER’S ORGANISATION SUPPLIER’S ORGANISATION

Sales department

Logistics department

Accounts department

User department

Enquiry

Quotation

Order Acknowledgement

Purchase order

Consignment note

Delivery note

Delivery note

Payment

Delivery details

Requisition

Sales order

Copy purchase order

Copy purchase order

© CIPS, 2014

v.1


• Under a framework arrangement, a new contract is actually made each time the buyer places an order on the supplier. There is usually no obligation on the supplier to deliver anything at all! The risk can be limited by paying the supplier a token sum ‘in consideration’ for keeping the tendered offer open until the period of the arrangement expires.

• In London County Council in Percival Ltd v LCC (1918). Percival was awarded a contract to supply goods up to a certain amount to the LCC over a certain period. The LCC's orders did not come up to the expected amount and so Percival sued for breach of contract. The court held in favour of LCC, as they decided that each order made a separate contract. There was therefore, no obligation for LCC to order from Percival the amount specified.

Framework Arrangements

© CIPS, 2014

v.1


Framework Arrangements

Term of the Agreement

e.g. 12 Months

Supplier’s Actions

Purchaser’s Actions

A New Contract is formed each time the supplier delivers the required product or service. There is a new Offer & Acceptance

© CIPS, 2014

v.1


• The defendant invited tenders to operate an airport, to be submitted by midday on a certain date. The plaintiff's tender was delivered by hand and put in the Town Hall letter box at 11am. However, the tender was recorded as having been received late and was not considered. The club sued for breach of an alleged warranty that a tender received by the deadline would be considered

Blackpool & Fylde Aero Club Ltd v Blackpool Borough Council (1990)

Tenders

Held: The council was in breach of the above implied undertaking and liable to pay damages. Where a specified procedure has been identified at the start of the tender process, it must be properly observed

© CIPS, 2014

v.1


JB Leadbitter & Co Ltd v Devon County Council (2009)

Tenders

Cont../

• DCC sent an invitation to tender (ITT) for a framework agreement to J B Leadbitter & Co Limited (Leadbitter). The ITT was clear on the deadline and method of submission of tenders. Leadbitter failed to upload the whole tender to the secure portal and realised its error 15 minutes before the deadline, but was unable to add the missing case studies as only one upload was allowed. Leadbitter emailed the case studies shortly after the deadline hoping they would still be considered. The tender was rejected as incomplete.

© CIPS, 2014

v.1


• The court ruled that by sending the case studies via email Leadbitter failed to preserve the level of security of a secure portal or sealed envelope. A concern over collusion by staff was one of the reasons DCC had specified these secure methods of delivery. DCC was well within its discretion to reject the tender. Not to do so would have been unfair to the other firms who submitted theirs on time.

JB Leadbitter & Co Ltd v Devon County Council (2009) Cont../

Tenders

© CIPS, 2014

v.1





© CIPS, 2014

v.1


Implied and Express Terms

Implied Express

Legislation - Such as: • Sale of Goods Act 1979 • Supply of Goods & Services 1982 • Unfair Contract Terms Act 1977

Precedent- Case Law

Custom

Bespoke Contracts • Purchasers/ Suppliers • Standard Contractual • Terms

Model Form Contracts

© CIPS, 2014

v.1


• Standard terms of business- either the suppliers or the purchasers which can result in the battle of the forms

• Bespoke/ tailored contracts- these have the advantage of being contract specific but have the disadvantage of the timescales and resources necessary for their agreement

• Model form contracts- created by many professional bodies including CIPS, these have the advantage of having terms that have been agreed by committees representing both purchasers and suppliers

These are typically based on:

Express Terms

© CIPS, 2014

v.1


The main advantage for the use of a model form contract is that the execution of the project is based on pre-existing contract terms that are already understood by the parties to a contract. This generally reduces the timescales required in the tendering or sourcing process to agree on the terms, since the parties working on the project or programme will be working to a set template of standard terms and so there will be less need for the negotiation of specific terms.


© CIPS, 2014

v.1



Example: The Institution of Chemical Engineers International Form of Contract Lump Sum contract

© CIPS, 2014

v.1





© CIPS, 2014

v.1


• Often when two companies deal with each other in the course of business, they will use standard form contracts. Often these terms conflict and yet offer and acceptance are achieved forming a binding contract

• The battle of the forms refers to the resulting legal dispute of these circumstances, wherein both parties recognise that an enforceable contract exists, however they are divided as to whose terms govern that contract

The Battle of the Forms

© CIPS, 2014

v.1



© CIPS, 2014

v.1


• Butler quoted £79,535 to Ex Cell-O on Butler’s Contract of Sale which included two important terms:

• Butler’s Terms to Prevail • Butler had a clause covering contract price adjustment • Ex Cell-O ordered the machine tool on EX Cell-O’s Terms of Purchase • Ex Cell-O also included an order acknowledgement stating:

Case: Butler Machine Tool Co v Ex Cell-O Corp (1979)


Cont../

© CIPS, 2014

v.1


• “Please sign and return to Ex-Cell O. We accept your order on the terms and conditions stated therein”

• The slip was returned and signed and was returned with a covering letter making reference to Butler’s terms

• Ex Cell-O Delayed Taking Delivery. Butler Claimed an Additional £2,892 under the Contract Price Adjustment Clause

Case: Butler Machine Tool Co v Ex Cell-O Corp (1979) Cont../


Held: Butler’s quote was an offer. Ex Cell-O’s Order was a counter offer. Butler had accepted the counter offer by returning the Acknowledgment Slip

© CIPS, 2014

v.1


What If:

1. Butler (the supplier) had not signed nor returned the acknowledgement slip but still delivered the machine tool?

2. Same as scenario (1) above, but Butler provided a delivery note which referred to the supplier’s standard terms?

3. Same as scenario (1) above, but Butler had provided an invoice after the machine tool had been delivered referring to the supplier’s term?

4. Assess which party’s terms applied if Butler (the supplier) had not signed nor returned the acknowledgement slip but still delivered the machine tool?

Assess which party’s terms applied


© CIPS, 2014

v.1



© CIPS, 2014

v.1


• Between 1997 and July 2002 Balmoral purchased from Borealis, large quantities of a polyethylene polymer for use in the production of chemical storage tanks. An unusually high proportion of green oil tanks using this material then failed. Balmoral claimed damages of £50 million arguing that each offer was constituted by a purchase order, which was accepted either by the verbal confirmation of the order or by delivery of the goods

• The suppliers terms were included on their invoices and these limited liability to replacement of defective goods or repayment of the purchase price

• Balmoral argued that the invoices came after each contract was made and that each invoice was merely a claim for payment

Balmoral Group Ltd v Borealis Group Ltd (2006)


© CIPS, 2014

v.1


• The Commercial Court held that Borealis had made it plain that its prices were quoted subject to its terms, that by putting the terms on the back of its invoices it intended the contract to be on those terms

• Balmoral knew that invoices had terms on the back, and checked the invoices and paid them without demur. It also continued to do so without demur following changes of Borealis supplier agreements and did not object when given notice of changes in Borealis’ conditions

• The suppliers terms applied

Balmoral Group Ltd v Borealis Group Ltd (2006)


© CIPS, 2014

v.1


• The European Language Centre (ELC) had a long-standing agreement with the University of Plymouth for the provision of accommodation and teaching space at the university for their language courses. In May 2005, the university contacted ELC by e-mail to inform them that the estimated number of beds available for use by ELC was 200. Later, the university informed ELC that only 100 beds would be available.

• ELC sued, claiming that the e-mail exchanges and phone calls with the university constituted a binding contract and the university was obliged to provide at least 200 beds. No communications had been stated to be "subject to contract”.

University of Plymouth v European Language Centre Ltd (2009)


© CIPS, 2014

v.1


• The Court of Appeal held that there was no contract in place. E-Mail communications and phone calls failed to contain the ingredients necessary to establish the presence of a contract - there was no clear offer from the university, and no acceptance from ELC.

University of Plymouth v European Language Centre Ltd (2009)


© CIPS, 2014

v.1


An example of International Law is provided by the United Nations Convention on Contracts for the International Sale of Goods (1980) otherwise known as the Vienna Convention


© CIPS, 2014

v.1



The Vienna Convention Uniform Law for International Sale of Goods (1980) • A reply to an offer which modifies the terms of the offer is a rejection

of the offer and constitutes a counter-offer • Providing an acceptance does not “materially alter the terms of the

offer”, then this will constitute an acceptance • ‘Material alterations’ includes:

• the price • payment • quality

• quantity • place • time of delivery

© CIPS, 2014

v.1


Article 15 • An offer becomes effective when it reaches the offeree • An offer, even if it is irrevocable, may be withdrawn if the withdrawal

reaches the offeree before or at the same time as the offer Article 16 • Until a contract is concluded an offer may be revoked if the revocation

reaches the offeree before he has dispatched an acceptance • However, an offer cannot be revoked

• (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or

• (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.”

The Vienna Convention states


© CIPS, 2014

v.1





© CIPS, 2014

v.1


• The Sale of Goods Act 1979 • The Unfair Contract Terms Act 1977 • The Supply of Goods and Services Act 1982 • The Sale and Supply of Goods Act 1994

(this amends the Sale of Goods and the Supply of Goods and Services Acts)

The are a number of key pieces of legislation

Implied Terms

© CIPS, 2014

v.1


The Sale of Goods Act (1979)

Section 12: Title

Section 13: Description

Section 14(2): Satisfactory Quality

© CIPS, 2014

v.1


Satisfactory Quality

“They meet the standard that a reasonable person would regard as satisfactory, taking into account of any description of the goods, the price and all other relevant circumstances”

• The Implied Term can (and usually is) overridden by Express Guarantees either the Purchasers’ or Suppliers’

© CIPS, 2014

v.1


Satisfactory Quality

For the purpose of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods:

a) Fitness for all purposes for which goods of the kind in question are commonly supplied

b) Appearance and finish c) Freedom from minor defects d) Safety e) Durability

Sale and Supply of Goods Act (1994)

© CIPS, 2014

v.1


The Sale of Goods Act (1979)

Section 12: Title

Section 13: Description

Section 14(2): Satisfactory Quality

Section 14(3): Fitness for Purpose

Section 15: Sale by Sample

© CIPS, 2014

v.1


• That goods will be suited to the buyers intended use

• If the buyer has specified a particular purpose, then there is an implied condition that the goods will correspond with the purpose stated

• It is the buyers responsibility to define a purpose and thereby require the seller to meet that demand

Definition:

Fitness for Purpose

© CIPS, 2014

v.1


• Kelly had purchased 12 dozen boilers for installation into flats that they intended to sell. The boilers operated satisfactorily but the energy efficiency rating of the boilers was not as high as potential purchasers of the flats might expect. Kelly refused to pay for them arguing that it had lost profits and that the boilers were of unsatisfactory quality.

Jewson Ltd v Kelly (2002)

Implied Terms

The court held that the boilers were in breach of S14

© CIPS, 2014

v.1


• The installation into flats for onward sale was relevant • The seller was aware of Kelly’s intended use • The ability of the boilers to pass energy efficiency tests was a factor that a

reasonable person would take into account in determining whether the boilers were of satisfactory quality

• The boilers would not pass the energy efficiency tests. This would have an effect on the price a purchaser was willing to pay for a flat

• Kelly had relied on the skill and judgment of the seller in its selection of the boilers

Jewson Ltd v Kelly (2002)

Implied Terms

Cont../

© CIPS, 2014

v.1


• Kelly had not been advised by the seller to take professional advice from a third party

• The seller had not notified the buyer of the limitation on the boilers’ efficiency

• The seller had not excluded his responsibility for energy efficiency compliance in the contract

Jewson Ltd v Kelly (2002) Cont../

Implied Terms

© CIPS, 2014

v.1


• Mr Lamarra had entered into a HP Agreement with Capital Bank for a new Range Rover supplied to CB by Shields Automotive. L claimed that the car was not of satisfactory quality so he was entitled to reject. L relied on a number of relatively minor defects in the car when delivered as being the grounds for rejection. SA had offered to rectify those defects at their own expense but L refused to allow them to do so L claimed that he was not bound by the HP Agreement on the basis that the vehicle was not of satisfactory quality and that he had validly rejected it and was thereby entitled to repayment of the deposit and the two instalments

Lamarra v Capital Bank (2006)

Implied Terms

© CIPS, 2014

v.1


Part 1 Part 2

Work & Materials

S2: Title S3: Description S4: Satisfactory Quality S4: Fitness for Purpose S5: Sample

Hire of Goods

S7: Title S8: Description S9: Satisfactory Quality S9: Fitness for Purpose S10: Sample

Supply of Services

S13: Reasonable Care & Skill S14: Reasonable Time S15: Reasonable Price

The Supply of Goods and Services Act (1982) as amended

© CIPS, 2014

v.1


Implied Term SOGA 79 Amended 94

The Unfair Contract Terms Act 1977

Consumer Business S12: Title X X S13: Description X YES S14(2) Satisfactory Quality X YES S14(3) Fitness for Purpose X YES S15: Sample X YES

© CIPS, 2014

v.1


• Exclusions/ restrictions of liability for death or personal injury resulting from negligence are ineffective (S2)

• Other restrictions for negligence/ breach of contract must be reasonable

Test of Reasonableness “That the term or exclusion of term shall have been fair and reasonable having regard to the circumstances which were or ought reasonably to have been known to or in the contemplation of both parties at the time the contract was made.”

Regulates the Use of Exclusion Clauses

The Unfair Contract Terms Act 1977

© CIPS, 2014

v.1


• Kingsway contracted with Red Sky for the supply of a software package to manage the hotel’s reservation system, on Red Sky’s standard terms of business. Following installation, Kingsway experienced problems as the software did not accurately show room availability and kept freezing. Six months later, Kingsway told Red Sky it was rejecting the software as it was not of satisfactory quality nor fit for purpose pursuant to the Sale of Goods Act 1979. Kingsway brought a claim against Red Sky for loss of profits and the cost of a replacement system.

Kingsway Hall Hotel Ltd v Red Sky IT (Hounslow) Ltd (2010)

Case Law

Cont../

© CIPS, 2014

v.1


• Red Sky’s standard terms contained a clause excluding statutory implied terms “as to performance, fitness, quality, fitness for purpose, etc”. The terms included a warranty the software would “in all material aspects provide the facilities and functions set out in the operating documents”. Red Sky’s terms also contained a clause excluding liability for indirect or consequential loss, excluding loss of profits.

Kingsway Hall Hotel Ltd v Red Sky IT (Hounslow) Ltd (2010) Cont../

Case Law

Cont../

© CIPS, 2014

v.1


• Under the Unfair Contract Terms Act 1977, a contract clause that excludes or limits a supplier’s liability has to be “reasonable” having regard to the circumstances that were known to the parties at the time of making the contract.

Kingsway Hall Hotel Ltd v Red Sky IT (Hounslow) Ltd (2010)

Case Law

The court held the software was not fit for purpose and was not of satisfactory quality. Red Sky could not rely upon the exclusion clauses within its standard terms as they were unreasonable.

© CIPS, 2014

v.1



In this Unit, we’ve covered:


© CIPS, 2014

v.1



Induction






Module: Developing Contracts in Procurement and Supply • Developing Contracts º Developing Specifications • Contract Management



© CIPS, 2014

v.1


Developing Specifications

• Different types of specifications • Sources of information used to create specifications • The use of social and environmental criteria • The typical sections of a specification • The risks from inadequate specifications • The use of standardisation, VA and VE • KPIs in contracts


© CIPS, 2014

v.1


“The specification stage is a key point at which to consider and address innovation. This is the stage where purchasers define their requirements with a formal written description of the service, works or goods that the authority is looking to purchase. Core requirements are essential parts of a contract that are set out in the specification.”

Specifications

© CIPS, 2014

v.1


Types of specifications

• Technical or design specifications • Specification by chemical or physical properties • Specification by brand name • Specification by sample • Specification by market grade • Specification by standards

© CIPS, 2014

v.1


Conformance Output Outcome Prescribes the methods/ standards/ materials etc

Relies on achieving set levels of performance

Defines the result to be achieved by the procurement

Relies on the purchaser acting as the design authority

Examples: mean time between failures, parts per million, running hours etc

Defines the problem, suppliers then devise methods/ materials etc to achieve a solution

Compliance based competition

Can be geared to achievement of KPIs

Can be geared to achievement of KPIs

Award more likely to be based solely on lowest price

Award linked to technology / solution and lowest total life cycle costs

Award linked to technology / solution and lowest total life cycle costs

Conformance to Outcome Based Specifications

© CIPS, 2014

v.1


Activity • Your commercial director has

asked you to create a short presentation that highlights the roles of the procurement function in the production of specifications.

The Role of Procurement

© CIPS, 2014

v.1





© CIPS, 2014

v.1


Sustainability and Environmental Aspects

Useful reference sites:

Netregs: useful resource on environmental standards

Netregs - Plain English guidance on environmental regulations for your business

The Environment Agency: legislative compliance

http://www.environment-agency.gov.uk/business/default.aspx

WRAP: geared to reduce waste produced by businesses

http://www.wrap.org.uk/

http://www.netregs.org.uk/

http://www.environment-agency.gov.uk/business/default.aspx

http://www.wrap.org.uk/

© CIPS, 2014

v.1


“A document established by consensus and approved by a recognized body that provides for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context”

Sources of Information

Use of standards:

© CIPS, 2014

v.1


International Bodies

Regional Bodies

National Bodies

The Use of Standards

© CIPS, 2014

v.1


• BSI standards cover everything from accounting to zoom lenses • There are approximately 6,000 standards in development at any one

time • The price of a standard reflects its complexity; the price range for

BSI standards is £5 - £1,150 • 6,000 people from 1,800 organisations are involved

in helping BSI to make approximately 1,700 standards each year

The British Standards Institute has published 27,000 different standards


Cont../

© CIPS, 2014

v.1


• The most popular standard in the world (ISO 9001 Quality management systems) is used by over 670,000 organisations in 154 countries- Both ISO 9001 and ISO 14001 began as British standards

• BSI’s oldest standard, still in use today, is from 1927 - BS 275 Dimensions of Rivets - while some of its most recent are for biometrics and business continuity


© CIPS, 2014

v.1


• Scope, terms and definitions • Rationale for preparing a specification • Identifying the criteria • Recording the criteria • Reviewing the criteria • Verifying the service offering against chosen criteria • Service level agreement (SLA) • Checklists, examples and diagrams

BS 7373 Guide to the preparation of specifications


© CIPS, 2014

v.1


• Engineering Flow Diagrams • Representation of Engineering components • Lettering • Units/ quantities • Tolerancing • Geometric Product Specifications • Orthographic/Axonometric representation • Handling of Computer based information • Metrology

BS 8888 Guide to technical product documentation


© CIPS, 2014

v.1


• Awareness: understanding where relationship management fits with your business objectives

• Knowledge: understanding how others have progressed and developing your approach

• Internal assessment: evaluating how your own organisation is positioned to collaborate

• Partner selection: finding the right partner relationship to complement your objectives

PAS 11000 Collaborative business relationships framework


Cont../

© CIPS, 2014

v.1


• Working relationship: building a joint approach focused on mutual benefit

• Additional Value creation: developing additional value from the relationship

• Staying together: ensuring that you measure and maintain maximum benefit

• Exit strategy: recognising the changes both internal and external and preparing for disengagement

PAS 11000 Collaborative business relationships framework Cont../


© CIPS, 2014

v.1


• BS EN 15521 provides a standard for facilities management contracts • EN 15221-1 – Terms and Definitions - provides a constructive

classification for both primary activities and support services and defines FM as ”the integration of processes within an organisation to maintain and develop the agreed services which support and improve the effectiveness of its primary activities”.

• EN 15221-2 – Agreements – Offers guidance on how to prepare Service Level Agreements including constructive Key Performance Indicators for facilities managers


© CIPS, 2014

v.1





© CIPS, 2014

v.1


Social and Environmental Criteria

Rethink Need: eliminate waste at source

Reduce: use less

Re-use: materials, equipment etc

Re-cycle: Materials etc

Energy recovery

End of life disposal

© CIPS, 2014

v.1


Social and Environmental Criteria

Criteria Measure Period 1

Measure Period 2

Measure Period 3

1. Number of projects with commitment to sustainability

2. Projects built to standards such as BREEAM, Social Accountability International's standard SA8000

3. Number of sustainability workshops

4. Energy performance rating

5. Recycled content by value

6. % of waste diverted from landfill

7. Sustainability evaluations

8. Whole Life Costing undertaken

9. Membership of associations promoting sustainability

10. Community projects undertaken

Organisations in the supply chain create numerical targets for improvement

© CIPS, 2014

v.1





© CIPS, 2014

v.1


Activity • In teams, you are required to

produce guidance to your internal stakeholders on a standard structure that should be adopted when creating specifications

• Identify the criteria that should be adopted in this guidance

Structuring a Specification

© CIPS, 2014

v.1


Developing specifications

DEVELOPMENT PHASE

POST DEVELOPMENT PHASE

Step 7: Revising and storing the specification

Step 6: Managing amendments to the specification

Step 5: Issuing the specification, as part of the “invitation to Offer” process

Step 4: Vetting the specification and obtaining approvals

Step 3: Writing the specification

Step 2: Consultation and information gathering

Step 1: Planning and analysis

© CIPS, 2014

v.1


1. Identification - Title / designation / authority / version etc

2. Contents - guide to the document / glossary / definition of terms

3. Objectives - time / quality / cost and other objectives

4. Site - information relating to the sites / HSE / access

5. Outcomes - technical outcomes required

6. Detailed Reqs - asset registers / compliance with existing systems

7. Standards - conformance with standards

8. Other information - drawings / other details / method statements

Specification Structure

© CIPS, 2014

v.1


1. Ensure ‘cross-functional’ input

2. Incorporate early supplier involvement / market sounding

3. Understand the customers needs - can they be involved in the development of the specification?

4. Avoid ‘under’ or ‘over’ specifying

5. Allow adequate time to develop

6. Understand suppliers’ capabilities

7. Adhere to and use standards where possible

8. Adopt ‘open’ rather than ‘closed’ specifications – evaluate variant bids and encourage change and innovation


© CIPS, 2014

v.1





© CIPS, 2014

v.1


Risks from Specifications

RISKS

Legal

Internal

Supplier Market

Environmental

© CIPS, 2014

v.1


• Taking an example of a procurement that you have been involved in, identify the difficulties that you experienced.

• If you could instigate a change to current practice, what would that

Activity

Risks from Specifications

Dilemmas

Under specify Over specify Internally generated

Reliance on consultants

Procurement not involved

Reliance on procurement

Reliance on sole source

High degree of competition

© CIPS, 2014

v.1



Confirmation of Orders/Specs

Checking of Errors/

Ambiguities

Consultation over Spec

Requirements

Teamwork with stakeholders &

suppliers

Creation of Specs

© CIPS, 2014

v.1



• Multi–functional working • Benchmarking • Specification best practice

Organisational

• Teamwork and collaboration

• Market dialogue • Early supplier involvement

Functional

• Market knowledge • Technical expertise • Drafting abilities

Individual

• Standard templates • Provision of

guidance • Support

© CIPS, 2014

v.1


Compliance

• Conformance of deliveries against specification

• To mitigate variations or claims

• With legislation and published standards

Responsibilities


Quality Assurance

• Checking facility for errors, emissions and contract terms

• Ensure compatibility with historical work

Market

• Check suppliers’ capabilities and availability

• Check latest technology

• Create conditions for competition

© CIPS, 2014

v.1





© CIPS, 2014

v.1


As we have seen, the use of standards improves:

• Lead times

• Availability

• Competition

• Costs

• Designs

Benefits of standards

The use of Standards

© CIPS, 2014

v.1


• The purpose of value engineering is to try and reduce costs, and prevent any unnecessary costs before carrying out a project, or producing a product or service.

• Value analysis refers to the process of cost reduction once products or services have been introduced to a project.

• Value engineering is defined as a systematic approach to enhancing the value of a project by seeking optimal design solutions, thereby reducing unnecessary cost, whilst maintaining and enhancing all aspects of quality and function.

VA/VE

© CIPS, 2014

v.1


VA/VE

Unnecessary cost can be considered under five general headings:

A. Unnecessary costs of design B. Unnecessary cost of a component C. Unnecessary cost of a material D. Unnecessary cost of poor buildability E. Unnecessary life cycle cost

• VA/VE is typically implemented through a structured analytical system carried out by a VA/VE Team. The team may be formed from key members of the project team which can include suppliers

© CIPS, 2014

v.1


VA/VE

A generic methodology for undertaking value analysis/engineering is to adopt five phases 1. Information Phase

2. Speculation Phase

3. Evaluation Phase

4. Development Phase

5. Presentation Phase

© CIPS, 2014

v.1


• A Clear Specification • Contractual Performance Measures • Appropriate Contract Terms

We Need to Develop

The Contracting Process

Requirements Gathering

1

Specification

2

Tender Design

3

© CIPS, 2014

v.1


An agreement between the service provider and customers, quantifying the minimum acceptable level of service to the customer • Throughput - the volume of inputs that can be handled within a

specified time • Accuracy - the number of outputs that are error free (usually

expressed as a percentage) • Availability - the time the solution is able to be used as a percentage

of the time is supposed to be able to be used • These can also measure: Quality, Timescales, Quantities, Safety and

Environmental standards achieved

A Service Level Agreement can be defined as:

Contractual KPI’s

© CIPS, 2014

v.1



Induction






Module: Developing Contracts in Procurement and Supply • Developing Contracts • Developing Specifications º Contract Management



© CIPS, 2014

v.1


• Sources of added value • Responsibilities for contract management • Contract management and supplier relationship management • Demand management • Performance management and supplier improvement plans • Payment responsibilities • Creating targets


Contract Management

© CIPS, 2014

v.1


“The activities of a buyer before, during and after a contract period to ensure that all parties to the contract fulfil their contractual obligations. An important aspect of this is managing the relationships between all parties in the most effective way so as to ensure the contract meets the optimum combination of cost, time and quality. “ (Source: Adapted from CIPS definition in the CIPS Position on Practice: http://www.cips.org/Documents/Knowledge/Procurement-Topics-and-Skills/10-Developing-and-Managing-Contracts/Contract-Management/Contract_Management.pdf)

Contract Management

A definition of contract management:

© CIPS, 2014

v.1


“Goods and services bought regularly, with significant aggregate value, are often appropriate for collaborative Category Management. This is the process that brings together procurement professionals, buying organisations, suppliers, industry bodies, and users (the stakeholders) who are engaged in the procurement of a particular category of commodity expenditure.

Category management means applying a structured approach to analyse and review the spend in that category, and to identify and

Contract Management

According to the UK’s Office of Government Commerce

Cont../

© CIPS, 2014

v.1


implement the most appropriate and effective approach to sourcing, supplier selection and contracting, and contract management. The resulting strategy is likely to include the development of strong market and supplier knowledge, a deep understanding of specification and demand, a strong focus on competition, and a drive for continuous improvement – all of which lead to improving VFM.”

Contract Management

© CIPS, 2014

v.1


Value is achieved by a mix of:

The aim of contract management is to achieve better value

Reduced

Prices and Costs

Risks in the SC

Timescales

Improved

Service to customers

Quality

Brand

Reputation through sustainable Supply Chains

Compliance to regulations

© CIPS, 2014

v.1


Task

• Who should take responsibility for contract management?

• Should this be carried out purely by procurement, or should this be the responsibility of user departments?

Responsibilities for Contract Management

© CIPS, 2014

v.1


We should work with our stakeholders to take responsibilities for contract management

Responsibilities for Contract Management

Internal stakeholders

Connected stakeholders

External or secondary stakeholders

© CIPS, 2014

v.1


We can use the RACI framework to agree responsibilities:

Responsibility for Contract Management

Responsible

R

Accountable

A Consulted

C Informed

I

© CIPS, 2014

v.1


According to the UK Government-

Contract Management and SRM

• Supplier Relationship Management [SRM] is the segmentation by buyers of the business relationships with their suppliers. The process involves reviewing the portfolio of suppliers, categorising supply relationships by their significance, devoting resources in proportion to the relationship’s significance and managing processes between the parties to realise the relationship objectives

The activities of a buyer before, during and after a contract period to ensure that all parties to the contract fulfil their contractual obligations.” An important aspect of this is managing the relationships between all parties in the most effective way so as to ensure the contract meets the optimum combination of cost, time and quality (Source: Adapted from CIPS definition in the contracts management position on practice)

Cont../

© CIPS, 2014

v.1


• The focus of SRM is on the overall relationships between the supplier and the buying organisation rather than a focus on a specific contract

• There are a variety of processes to establish supplier relationship management- one that combines contract management and SRM was published by the UK Government’s Office of Government Commerce as relationship management can be seen as an element of approaches to contract management


© CIPS, 2014

v.1



Planning + Governance

People

Administration

Relationships

Performance

Payment Budget

Risk

Contract Development

Supplier Development

Supplier Relationship Management

Market Management Structure and

Resources

Delivery Development

Strategy

Good Practice

Framework

Adapted from OGC ‘Good Practice Contract Management Framework’ (2008)

© CIPS, 2014

v.1


Contract Development • Negotiation of changes/

new terms • New services • VFM testing

Supplier Development • Development plans • Joint improvement teams • Shared training • Innovation


Governance • Transition from tendering

process • Clear ownership • High level visibility

People • Appropriate staff

resource • Training & development • Job descriptions &

objectives • Wider contract

community

Administration • Storage & records • Reporting • Key trigger points

Relationship • Supplier continuity • Supplier liaison • User feedback • Problem resolution

process

Performance • Service management • Service level agreements

and performance metrics • Performance reviews

Payment • Invoice checks • Incentives/ penalties • Forward budgetary

management

Risk • Joint risk assessment

and actions

Supplier Relationship Management • Structured relationship

management programme • Senior relationship

governance

Market Management • Market intelligence • Market capacity and

capability issues • Re-competition

Adapted from OGC ‘Good Practice Contract Management Framework (2008)

Strategy Development Delivery Structure and Resources

© CIPS, 2014

v.1


Customer and business requirements • what do our customers need and what does the organisation need? Spend analysis • historical usage analysis of goods and

services; supplier positioning; supplier historical analysis; transaction cost analysis; criticality of products and services

Future spend analysis • forward/expected usage of goods

and services; trends in the market

Acquiring Data:

Demand Management

© CIPS, 2014

v.1


Types of Forecast Point Forecast

Range Forecast

$1.2 m demand next month

$1.1m - $1.3 m demand next month

Time Series

Time Series/ Range

5% MEAN 95%

Probability Distribution

© CIPS, 2014

v.1


The further into the future we look the less accurate our forecasts will be……

Time and Accuracy

Expected

Best

Worst

VO

LU

ME

T IME

© CIPS, 2014

v.1


• A Moving Average is one of a range of techniques used to analyse time series data

• A moving average series can be calculated for any time series • Moving averages are used to smooth out short-term fluctuations, thus

highlighting longer-term trends or cycles

Moving Average

© CIPS, 2014

v.1


Moving Average

Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Demand 56 64 41 34 49 61 15 38 43 57 62 51 49 55 42 39 53 71 65

Six Week Total

305 264 238

240

263

276

266

300

317

316

298

289

309

325

Forecast 51 44 40 40 44 46 44 50 53 53 50 48 52 54

Six week period that makes up the Moving Average

The total demand from the six week period

The forecast is calculated by dividing the total demand by the number of weeks

Week 19 Current six week period

© CIPS, 2014

v.1


Moving Average

Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Demand 56 64 41 34 49 61 15 38 43 57 62 51 49 55 42 39 53 71 65

Six Week Total

305 264 238

240

263

276

266

300

317

316

298

289

309

325

Forecast 51 44 40 40 44 46 44 50 53 53 50 48 52 54

Week 20 Current six week period

Six week period that makes up the Moving Average

The total demand from the six week period

The forecast is calculated by dividing the total demand by the number of weeks

© CIPS, 2014

v.1


• Frequency

• Who should attend

• Preparation

• Home versus away

• Formal versus informal

• Record keeping

• Follow up

Review meetings

Performance Management

© CIPS, 2014

v.1



To manage performance:

Situational Dependent

Situational Dependent

Collaborative

Hands On

Proactive

Informal

Multi- Level

Competitive

Hands Off

Reactive

Formal

Single Level

© CIPS, 2014

v.1



We can adopt:

Contract Management

Desk Appraisal Site Appraisal 3rd Party Appraisal

Contract management methods can be roughly classified under 3 categories

© CIPS, 2014

v.1



Negotiating Improvements

TIME

PE

RF

OR

MA

NC

E L

EV

EL

Minimum acceptable level of performance

© CIPS, 2014

v.1


Cost category Cost of resources Budgeted cost Actual cost Variance

Direct labour 350 days @ £175 per day 130 days @ £225 per day

90,500 100,250 9,750

Materials 450 @ £12 265 @ £50 140 @ £45

24,950 29,500 4,550

Sub-contracted costs £120,000 120,000 132,000 12,000

Travel and subsistence 480 days @ £150 per day 72,000 82,500 10,500

Indirect overheads 480 days @ £60 per day 28,800 33,000 4,200

Total £336,250 £377,250 £41,000

Budgeting Cashflows

Payment Responsibilities

Actual expenditures should be compared with estimated expenditures

© CIPS, 2014

v.1


• A typical clause for payment may be as follows: • ‘The Purchaser shall pay the supplier the sum certified on the

schedule of interim payments within 30 days after receipt of a correctly produced invoice. If any sum payable is delayed, the Supplier shall be entitled to receive interest on the amount unpaid during the period of delay at a rate of 8% per annum above the Bank of England Base rate.’

• NEC3 states that the Contractor may terminate if the Employer has not paid an amount certified by the Project Manager within 13 weeks (90 days) of the date of the certificate

Standard Clauses

Payment Responsibilities

© CIPS, 2014

v.1


Use the SMART framework

Creating Targets

Achievable

Specific

Measurable

Realistic

Timely

S M A R T

© CIPS, 2014

v.1


• Throughput - the volume of inputs that can be handled within a specified time

• Accuracy - the number of outputs that are error free (usually expressed as a percentage)

• Availability - the time the solution is able to be used as a percentage of the time is supposed to be able to be used

• These can also measure: Quality, Timescales, Quantities, Safety and Environmental standards achieved

SMART targets can be set for:

Creating Targets

© CIPS, 2014

v.1



Induction






Module: Developing Contracts in Procurement and Supply • Developing Contracts • Developing Specifications • Contract Management



CIPS Practitioner Programme Module: Developing … · v.1 Module : Developing Contracts in P&S...

Documents

Transcript of CIPS Practitioner Programme Module: Developing … · v.1 Module : Developing Contracts in P&S...