Week 7

Introduction toCommercial ContractingUnderstandingThe Basics

Commercial Contracts• Contracts help to build relationships between buyers

and sellers• Contracts attempt to allocate risks and responsibilities

between the parties• The professional purchasing/contract manager can

build a bridge between the customer and supplier.• The purchasing/contract manager must understand

and balance the needs of the contracting parties

Elements of a Contract

• Competent Parties

• Consideration

• Lawful Purpose

• Certainty of Terms

• Offer

• Acceptance

Contracts- Written Vs. OralA contract is a promise between partiesContracts maybe written or oralIf the following are present (on a scrap of paper, or even oral), a contract may exist:

The partiesThe goodsTime at which the transaction will occur

Gaps will be filled in by UCC or UNCISG or civil law

Different Legal Systems

Common Law

Civil Law

Islamic Law

Communist law

Laws Governing Contracts

THE PARTIES TO AN AGREEMENT ARE, BY MUTUAL CONSENT, usually FREE TO CHANGE THE RESULT OF THE LAW FOR PURPOSES OF THAT AGREEMENT.

• Uniform Commercial Code

• United Nations Convention on the International Sale of Goods (CSIG)

First Steps- Buyer

Identify Possible Needs•New service offering•Expand market share•Become more cost effective

Next Steps - Buyer

• Identify and Analyze RequirementFunctionalPerformanceDesign

Buyer: Pre Contract Activity

• Establish evaluation criteria

– Attributes of interest

– Price/quality/delivery

– Reputation of seller

– Standards

– Weighting

Match customer requirements to applications, assess opportunities and prepare to assist the customer in the development of the RFP.

Seller: Pre- RFP Activity

• Review opportunity• Review own

capabilities• Assess and prioritize

opportunities• Influence design of

customer RFP

• Review need for development work

• Provide input to customer on how your company can provide assistance

• Create necessary third party agreements

Pre-Contract Activities- Seller

Make Preliminary Bid/No Bid Decision How are we different from competitors Can we make those differences strengths? How much will it cost to win? What are the risks? Are the potential benefits, worth the costs? Do we have the product portfolio? Can we meet the needs of this customer?

Contract ManagementContract Management ResponsibilitiesResponsibilities• Actively participate on the proposal team• Identify customer required terms and conditions• Identify and assess financial impact of customer

terms and conditions• Obtain input from all affected organizations• Determine customer acceptance criteria• Propose seller’s terms and conditions of

response- if appropriate

Develop contracts that contain clear deliverables and contractual obligations and standard terms and conditions, while identifying and mitigating all risks.

Contract Formation

Contract Formation

• Prepare negotiation plan

• Negotiate major issues

• Prepare draft contract

• Negotiate minor issues

• Review and approve contract

• Obtain contract signature

Contract Standards

• Most major companies develop standard contract forms, procedures and clauses

• These standards allow contracts to be processed more quickly, cost effectively and with reduced risk

• Standards also help to assure that agreements entered into are aligned with the company’s business objectives

Usual Contentious Clauses

Pricing and Payment Terms

Liquidated Damages/Penalties

Liability/Indemnification Terms

Warranties (Scope and Duration)

Intellectual Property Ownership

Successful Contract Negotiation

Involves thorough preparation and planning

Effective team planning

Sharp negotiation skills

Understanding the other party’s goals

Documentation of agreements

Buyer and Seller: Contract Buyer and Seller: Contract AdministrationAdministrationEnsure that all contractual obligations are met through communication among all necessary parties; manage contract disputes through negotiation/resolution and review lessons learned throughout performance and at contract completion.• Communicate Contract Authorization• Plan Contract Administration• Manage Contract performance• Review Contract Completion

Buyer and Seller: Contract Buyer and Seller: Contract AdministrationAdministrationCommunicate contract authorization and necessary informationCreate contract administration plan and distribute as necessary

Contract Obligations MatrixResponsibility Assignment Matrix

Manage contract performance:Correspondence controlManage contract changesPrepare final acceptance package Ensure all contractual obligations have been met

Monitor financial and operational performanceReview contract completionClose-out

Buyer and Seller: Managing Contract Performance

• Anticipate problems and take appropriate action• Observe performance and progress and resolve

problems• Manage disputes• Manage contract changes• Resolve payment discrepancies• Escalate unresolved disputes• Confirm that all contract obligations have been

met

Sources of Risk in Contracts• Technical Risks

• Political and Commercial

• Financial and Economic

• Contract Terms and Conditions

• Behavioral Risks

• Project Organization

• Scope and Schedule Risks

The Contract

A well written agreement answers who, what, where, when, and what to do if….

FAQ’s - Who Can Sign a Contract?

Dollar Value/AreaDollar Value/Area Signature AuthoritySignature Authority

Over $1,000,000 Annually

President/Chancellor/Board of Regents

From $500,000 to $1,000,000 Annually

President/Chancellor

Less than $500,000 and does not require BOR

Approval

Respective Division Heads

Up to and Including $50,000 for

Commencement Ceremonies

Executive Director – Office of the President

Up to and Including $50,000 for Presidential

Events

Director of Constituent Relations & Special Events

FAQ’s - Who Can Sign a Contract? (cont.)

Dollar Value/AreaDollar Value/Area Signature AuthoritySignature Authority

Up to and Including $50,000 Cumulative per Fiscal Year for Information Technology

Associate Vice President of Information Technology

Up to and Including $50,000 Cumulative per Fiscal Year for Facilities Management

Assistant Vice President of Facilities Management

Up to and Including $50,000 for All Areas

Director of Contracts and Institutional Compliance

Up to and Including $50,000 for

Sponsored Programs Related

Director of Sponsored Programs

Up to and Including $1,000 for Referees and Fitness

Instructors

Director of Sports & Fitness

FAQ’s - Is Competitive Bidding Required?

• Competitive Bidding is required on all:

– Service prior to execution of the contract if the value of the contract is expected to equal or exceed $5,000 in state or local funds.

FAQ’s - Is Competitive Bidding Required? (cont.)

• Competitive Bidding is not required for:

– Services that cost less than $5,000

– Professional or Consulting services

– Proprietary/Sole Source or “One-of-a-kind” services

– Workshops, training or seminars

– Advertising

– Hotels for special events

– Internal repairs

– Interagency agreements

Questions

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Sources

National contract management association (NCMA) World Congress:

Holly K. Walker, CPCMCorporate Learning Solutions and Contract Mgmt. Consultant