Contract Writing and Management For Procurement Professionals
Ernest G. Gabbard, J.D., C.P.M., CPCM
Ernest G. Gabbard, J.D., C.P.M., CPCM, Allegheny Teledyne Inc., Pittsburgh, PA 15222
84th Annual International Conference Proceedings - 1999
SUMMARY. A key characteristic that distinguishes a true purchasing professional is the ability to handle complex transactions that require contractual coverage beyond the basic/standard P.O. This paper will propose a comprehensive, practical approach to the writing and administration or management of contracts in the procurement environment.
CONTRACT WRITING. Volumes have been written on this subject, and it is impossible to adequately cover such a complex subject in this limited space. However, the following are a few of the key elements of contract writing which provide a solid foundation for virtually any contract.
- Understand the elements of a "contract". This is a complex subject, and is replete with potential legal ramifications. At the risk of being labeled a blasphemer by my attorney colleagues, let me propose that the practical aspects are reasonably straightforward. An excellent summary of the important elements of contract formation is provided in NAPM InfoEdge, dated March 1997. You should review this even if you are a seasoned veteran, as it is a good overview or refresher for anyone.
- Consider the circumstances/requirements for each transaction. There is really no "boilerplate" which will provide appropriate language for the majority of your substantive transactions. While I would certainly encourage the use of templates and some standardized clauses, I propose that such templates and clauses can be a "trap" if utilized indiscriminately. The procurement professional should therefore custom tailor clauses for all significant issues that must be addressed in the contract. Assistance from your Law Department may be necessary to adequately cover some of the more complex issues. However, never incorporate specific language provided for one contract into another contract without consulting your Law Department
- Use a checklist. There is a common misconception that checklists are for the novice, rather than the seasoned contracts/procurement professional. With 20 years of contracting experience and a law degree, I would never draft a contract for a significant transaction without a checklist to ensure that all substantive issues are addressed. The important aspect of this recommendation is to find the "right" checklist for your contract drafting. While there are many such checklists available in the commercial market, the author recommends that you consider the "Purchaser's Formbook of Contracts and Agreements" published by Business Laws, Inc. This one is especially valuable, because it provides a discussion of each item for consideration, rather than just a title for each recommended clause. As with any checklist, you should be careful to not automatically utilize any/all recommendations without some consideration of the necessity and/or language for each transaction.
- Don't overlook the specification/statement of work. My experience has been that a substantial majority of the problems experienced during the administrative phase of a contract result from inadequate attention to this portion of the RFP and resulting contract. While most of us consider the specification or SOW to be the primary responsibility of technical departments, it is incumbent upon us to determine if this document is clear and comprehensive. Even if you don't completely understand the technical aspects of the procurement, you must learn enough about it to ensure that the supplier is receiving unambiguous direction on how to satisfy your requirements.
There are many other aspects to contract drafting. However, I would propose that the vast majority of "issues" which create contracting and/or legal problems can be traced to the foregoing items.
CONTRACT ADMINISTRATION. Although this is also a complex subject, the following summarizes the key elements of contract administration/management which should be applied to ensure effective contract performance. For clarity, this discussion will be separated into the primary phases of contract administration/management. As may be noted, the author proposes that a substantial portion of your efforts should be placed on pre-contractual activities.
- PREAWARD PHASE
- Source List. The first opportunity to ensure selection of a responsive, responsible contractor is in the development of the list of prospective offerors. In order to ensure that award is not made to unreliable sources, the procurement professional should: a) check supplier records in all Departments, (Program Management and Quality Assurance), and with other Companies for their experiences with prospective sources; and b) obtain a Dunn & Bradstreet (D&B) report, if procurement is anticipated to be over a defined dollar threshold. This is the stage at which to eliminate all questionable sources. Don't wait until offers have been received to eliminate questionable sources. It is difficult to disqualify a supplier after they have submitted the lowest offer.
- RFQ. This stage of the procurement process also presents an excellent opportunity to ensure that contract award is meaningful, and contract administration is not unduly burdensome. Development of a comprehensive RFQ is a very broad subject; however, certain significant steps should be taken, as a minimum:
- As noted above, the technical specification/sow must be as comprehensive as possible. A balance must be made between restrictive specificati ons which eliminate valid competition, and loose specifications which entertain offers from marginally qualified sources. Management review of this element of the RFQ is perhaps the most critical in the procurement process.
- The most frequently overlooked area of the RFQ from the contracting perspective is the area of Quality Control Provisions. The Contract or Procurement Manager may not be technically capable of determining the correct Quality Control Provisions, but can "raise a red flag" during management review of the RFQ to ensure adequate attention is given to this critical element. The Contract/Procurement Manager can also ensure that all appropriate QC provisions from your company's sales contract(s) are incorporated into the RFQ and any resulting purchasing contract.
- While the terms and conditions may not seem to be critical to contract administration and management unless the supplier encounters performance problems, they can actually be an effective tool for assuring supplier performance. Most companies' standard contract terms and conditions are quite comprehensive, and should provide generally adequate protection. However, as noted above, some elements may require careful review and/or customization to fit the circumstances.
- Pre-Award Survey.
- On-site surveys of prospective suppliers for important procurements should be made prior to final source selection. While there may be special survey needs such as Quality surveys or Security surveys, there should also be a requirement for a business survey.
- The pre-award survey should be made only after receipt of the RFQ response and only to suppliers determined to be responsive.
- During the survey visit, claims made in the proposal (such as number of engineering and shop employees) can be visually verified. The manufacturing facility can also be observed to compare the actual operation versus written capabilities contained in the proposal
- SOURCE SELECTION AND AWARD. The award stage is often taken too lightly because company policies and "common sense" seem to dictate award to the lowest offeror. If the pre-award stage is optimized through utilization of only qualified, responsible offerors, and a comprehensive RFP, award can likely be made to the lowest offeror. HOWEVER, a close look at the proposals may reveal that award to the low offeror is not in purchaser's best interest, due to lack of responsiveness to critical elements of the RFP. Award of the contract to the offeror with the lowest proposal price should only be made if you have a completely responsive proposal from a completely responsible supplier.
Once again, a BALANCE must be maintained between price, technical approach, and the contractor's capability to perform. While technically incapable companies should have, hopefully, been eliminated during the development of the source list, one can often not determine technical competence until a proposal/quote is received and/or an on-site survey is conducted. A comprehensive review of proposals is therefore critical at this stage to ensure against performance problems after the award is made.
- ADMINISTRATION / MANAGEMENT. There is considerable controversy among purchasing and contracting managers as to what is the most important element of contract management. However, the following are what this author considers to be the most critical elements, in descending order of importance:
- Effective written communication between purchaser and its suppliers is the KEY to effective contract management. All outgoing correspondence should be logged and suspensed to ensure timely response is received from the supplier. All incoming correspondence should likewise be logged and suspensed to ensure a timely response is sent to the supplier. In the latter case, timely support from other company organizations (Program Office, Engineering, QA, etc.) is essential.
- Early commencement of regularly scheduled Performance Reviews can be instrumental to early identification of performance problems. Supplier performance schedules should provide sufficient detail for the Contract/Procurement Manager to identify critical milestones to track the performance of those milestones.
- Early identification of performance problems is paramount to avoidance of schedule delays which would ultimately impact your company's performance on its sales contracts. The first indicators of supplier problems are generally:
- Delayed response to correspondence - particularly correspondence requesting or confirming performance schedules.
- Supplier requests for delays in scheduled performance reviews.
- No visible progress on supplier plans and charts at performance reviews.
- When percentage of progress payments exceeds percentage of performance completion. When this occurs, your company loses a significant tool with which to obtain timely contract performance.
- Immediate written response to any indications of performance/schedule delays is imperative. A supplier must be clearly held accountable for any identifiable delays, up to and including "show cause" and "termination" procedures.
- Senior management should be exposed early to any supplier performance delays which might impact your company's performance on its sales contracts. Such exposure may include escalation of significant problems to senior management - where executive level pressure might be applied to executive levels of the supplier. Early exposure may also permit development of a back-up or alternate source before it is too late to meet your sales contract commitments.
- Notwithstanding the need for a well-documented trail of correspondence and reports, it is important to stay in contact via telephone. Using discretion, the supplier should neither feel forgotten nor unnecessarily "bugged."
- If a detailed milestone schedule is incorporated in the initial purchase contract, it will be easier to withhold progress payments when milestones are missed; thereby maintaining adequate leverage to ultimately ensure performance.
As may be concluded, effective contract management is an active, rather than a passive, task. Implementation of these principles makes the difference between managing the supplier and merely administering the contract.
- NAPM InfoEdge, March 1997, National Association of Purchasing Management
- Purchaser's Formbook of Contracts & Agreements, Business Laws, Inc., Chillicothe, Ohio
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