Is Procurement 'dumbing down' contracts?
Published: 09 May 2019
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Author: Tim Cummins
Twice in the last week I have had conversations with people who think that Procurement functions today are 'dumbing down' contracts. If true, that's a big mistake and will undercut the stated ambition of the function to raise its profile and value. It is also at variance with what we see happening in at least some IACCM member organizations.
Why are they saying it?
One of those who made the comment is a globally respected attorney, who has led multiple complex negotiations, typically working for the buyer. He observed growing difficulty in gaining the attention of procurement teams to discuss contract terms and options. In his view, 'the talent pool in Procurement is shrinking. They just want the contract done quickly, without much caring what's in it, and then ignore it'. This view was in many ways supported during a conversation with the co-founder of one of the top contract management lifecycle systems, who observes a growing tendency for Procurement groups to want a contract agreed prior to the RFx process, so that 'it won't cause delay'. The problem, of course, is that this often means a misfit between the contract terms and the business requirement, including the way that risks and responsibilities are allocated. 'They end up with almost inevitable conflict or disagreement down the line.'
Why does it matter?
Contracts should be critical business instruments for establishing and delivering value. Contracts provide a business discipline, a structure for critical thinking. Far from being just a set of words, they represent a journey, a lifecycle that frames the commercial logic, the required actions and behaviors of the contracting parties and which specify a value outcome. Smart business people don't view contracts as legal instruments; they use them to ensure the right conversations, to test understanding and each party's true intentions and capabilities. Based on this, they agree responsibilities, performance mechanisms, change procedures. Depending on the nature and duration of the relationship, it is the time to decide what's in the contract and what stays outside it – for example, the approach to innovation, supplier relationship management, governance and performance.
By failing to grasp and 'own' contracts, Procurement groups miss an opportunity to achieve one of their greatest aspirations – to be accepted and respected by other functions. Contracts are by their nature multi-disciplinary and integrationist. The function that leads on the contract has to interact across the business and build understanding of the viewpoint of other stakeholders. It also partners with the business not only in establishing agreements, but in ensuring their performance.
Transforming in the right direction
Many Procurement groups are under pressure to 'transform'. Frequently, this is seen as increasing speed, ensuring compliance and expanding activities into supplier relationship management. Technology is playing a big role in achieving these goals, supplemented by a focus on 'soft skills' in areas such as communication, negotiation and relationship management. However, these may not be enough to measurably improve effectiveness, rather than just efficiency. There is a danger that Procurement's traditional view of contracts as administrative templates will indeed lead to a further retreat from this aspect of business – with a negative impact not only for the function, but more generally for the value that is generated from its trading relationships.
So what is your experience? What are your views? Is it the case that Procurement is 'dumbing down contracts'?
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Rider Levett & Bucknall
2019-02-01 22:12:02
Visual contracts to support collaborative contracting
During the IACCM Australasia Conference in Sydney Australia back in 2016, I was introduced to a new mindset in commercial contracts, namely, 'collaborative contra...
During the IACCM Australasia Conference in Sydney Australia back in 2016, I was introduced to a new mindset in commercial contracts, namely, 'collaborative contracting'. And ever since then, I have been an advocate for moving away from using overly complicated and technical contract documents that are full of confusing 'legalese' that could only be interpreted and understood by another lawyer.
During the Conference, we were introduced to a new innovative 'comic contract' developed by attorney Robert de Rooy in South Africa. His new comic employment contract was produced in 2016 and was implemented for use with fruit pickers on farms in the Western Cape province. The resulting improvement to employer/employee relationships and to employee productivity was astounding.
Although, at first consideration this approach is a a hard pill to swallow for the legally trained mind, there are immediately obvious benefits to the pictorial approach. Workers who may have learning difficulties or poor English skills, those people who learn better through visual communication, as well as young workers, could benefit from this novel approach. And other workplace documents that are distributed to an entire workforce, such as workplace policies, if written in such a visual format, could keep levels of engagement higher by capturing the interest of the reader long enough so they might actually read them in their entirety.
The benefits of using simpler, more direct drafting are obviously beneficial. The use of quasi-Latin terms or words like 'wherefore', 'henceforth' and 'herewith' can be avoided, unless you are directly dealing with a judge or want to deliberately intimidate or scare the other party. Don't get me wrong, there are certain complex contracts which require a certain amount of 'legalese' and should be drafted by a competent lawyer. But contracts like employment contracts and simple service contracts should not be intimidating and should be in a format which both parties can easily understand without conferring with a lawyer.
In August 2018, global engineering and infrastructure advisory company, Aurecon started using visual employment contracts, eliminating more than 4 000 words from their standard employment contract template to create a succinct and meaningful visual contract that uses illustrations to complement the text. The contracts were developed in partnership with Law Professor Camilla Andersen from the University of Western Australia. www.aurecongroup.com/about/latest-news/2018/august/aurecon-rsa-visual-employment-contract
A contract is formed when parties agree on terms they intend to be legally binding. Agreement is the basis of any contract. Parties must have the capacity to contract, which means that they must have a clear understanding of the contents of the contract. The object of the contract must be legal and possible, it must be in writing, signed by the parties and must be observed. Lastly, for the contract to be binding, a court must be able to interpret it. Comic contracts can meet all these requirements. And as proponent of collaborative contracting, I feel this new form of contracting could result in a focus on building relationships between the parties.
The examples of Robert de Rooy in South Africa, and of Aurecon in Australia, have motivated me to start working on a new visual construction contract which will combine comics, avatars and text balloons with simplified contract clause narrative. Anyone working in the international construction sector would certainly agree that there is a need to move away from unbalanced, hard to understand contracts which foster adversarial relationships between the parties.
If anyone would like to contribute towards my endeavors, you are most welcome to send me individual commic scenes or avatars with the associated contract clause heading captioned underneath. Your name will be included in the forward of the contract proforma as a contributor.
www.linkedin.com/pulse/visual-contracts-support-collaborative-contracting-jeff-b/
• Telstra
•
2019-08-07 21:30:14
Awesome! Sounds exciting, good luck!
• All of the above
•
2019-02-11 14:32:58
I like this idea. 15 years ago(!) a colleague tried to introduce 'plain English' contracts to a UK Aerospace manufacturer. It had some success, but ultimately didn't take hold. I am guilty of saying "execute" instead of "sign" and "pursuant to" instead of, er, well nothing really.
• KMD
•
2019-02-12 06:02:23
Highly appreciated initiative. Increasing the user friendliness of contracts are, in my view, not prioritized. But you are up against a tradition and practice that is hard to change, even through graphic illustrations are proven to have multiple benefits.
Camilla Andersen gave a presentation on Comic Contracts in the last local DK IACCM meeting facilitated by Ramboll. Where you place yourself in the scale of using graphics (visulisations supporting the text or a full blown comic contract) may depend on the case, audience and "environment" you are operating in..
Camilla also provided this link: www.comicbookcontracts.com/
Good luck with your project !
/Ole
Replies: 3
• ConocoPhillips
•
2018-10-03 10:55:30
I do not think there are any legal roadblock to do so, if the parties agree to make the amendment that should be it.
Replies: 1
• Contract Management Plus
•
2018-03-02 22:54:16
what you need to add to the master agreement are clauses derived from Art. 28. I am also doing the same for my Master Agreements. Here is an example,
Obligations of processors (supplier) in particular include:
- To comply with the GDPR data processing principles and to protect the rights and freedoms of data subjects;
- To demonstrate compliance with the GDPR;
- To maintain records of processing activities and make them available upon request by supervisory authorities;
- To appoint data protection officers or representatives;
- To cooperate with supervisory authorities in the performance of their tasks;
- To ensure a level of security by taking appropriate technical and organisational measures;
- Specific obligations as regards transfer of data outside the EU.
In general, an auditor (DPA) should be able to trace data regarding customers. This also include emails, Excel spreadsheets with links to external systems such as financial and banking, etc.
It is not enough to have a supplier follow the GDPR. It is of most importance that your company/organisation is also GDPR compliant. To start with you need to have a DPO.
• Fujitsu
•
2018-03-20 22:20:03
As mentioned by Amir there are a number of elements to include, and depending on your organisation and the data you are processing you may need to identify a DPO.
Other things you should identify include:
Is the relationship with the supplier a Controller-Processor, Processor-Sub Processor or Controller-Controller.
Is special data being transferred to the supplier?
Will the supplier be exporting data outside of he EU?
You may also want to include an indemnity clause in case the supplier causes you to breach the GDPR regulation.
If you go to the Information Commissionaire's Office website in the UK (ICO.org.uk) there are some excellent guides and information which may assist you (including links to Article 29 Working Party).
Regards
Carl
• ABB
•
2018-05-31 17:01:22
Hi, this is not something to answer without knowing more details. Interesting to know is who is the data processor and who the data controller? What kind of data flows will there be? How sensitive is the personal data involved in this.. etc etc.. You may want to look at the liability limits...
• ERATRUST
•
2018-10-08 12:55:19
Hi,
The question is what this deal is all about. There will be a different approach to just shipping some goods vs. complicated outsourcing contract which you process personall data for. Remember that you need to remeber that even contact details stated in the agreement for e.g. contract managers are considered to be under GDPR scope. What my concern is, you very likely act as processor for your customer. The buyer's organization is the Administrator. Did they raise any particular matter.
It looks like you are outside of Europe. GDPR is not only about the DPA to stay compliant. You as a processor have certain duties to fulfill. If your company is not on Privacy Shield list (which in fact may soon become invalid just as Safe Harbour) according to some media news, it could be better to have Standard Contractual Clauses in place.
The topic is very broad and without more details it is difficult to help you.
Regards,
Piotr
• IACCM
•
2017-10-06 12:15:39
IACCM conducted a Ask The Expert webinar on this topic, featuring James Mullock of Bird and Bird. His session was highly rated. The recording and James's presentation are in the IACCM Library. Plus, there are a few other resources in the IACCM Library which are relevant. If you have trouble finding these resources, please let me know.
Best Regards,
Jim Bergman
IACCM
•
2017-11-13 05:24:25
You can also have a look at the Article 29 Working Party webpage - there is a page setting out draft contract provisions that are in line with the GDPR as it is currently being interpreted. You may not want to use the clauses themselves but can use them as a measure for your own inclusions.
Replies: 6
• Stibo Systems A/S
•
2017-03-29 11:10:20
I guess you need to establish key assumptions and/or minimal functionality or license metrics you need to achieve before you have anything you can benchmark against. Once that is established, you can ask for alternative software solutions which solves your need and then incentivize the best price found. Further you could measure the fulfillment of the key assumptions and have a payment attached to each of them. If the solution is going to introduce a certain workflow you could set pricing according to how fast it is implemented or how much money is saved/earned. If there is a license price and a T&M project, you could say have a differentiated discount scheme based on the number of hours spent. I.e the first X hours are paid at 140%, hours between X -Y are paid at 100% and hours after Y are paid by 50%.
• Cleveroad
•
2017-03-31 13:27:37
I recommend you look at this article "Time and material vs Fixed price: hot discussion of the best pricing model" - www.cleveroad.com/blog/time-and-material-vs-fixed-price--hot-discussion-of-the-best-pricing-model
• BIAL
•
2017-05-22 10:01:09
Firstly, I suggest to draft a SWs Portfolio document, which will list all the required SWs. SW portfolio will consist of details like SW name, description, area of application, criticality, user applicability, SL% requirements and other optional technical details like program language etc. Each of the listed SWs may be given a percentage split of charges between various applications, summing up to 100% (in this case DKK 0,5 M is 100%). This document can be kept open for addition/deletion for SWs.
Whenever Supplier adds/removes a SW this % split can be used for commercials/invoice purpose. For eg: a SW which falls between 10-25% will have 2% incentive, SW with 25-50% will have 5% incentive etc.
Secondly, SLA is completely depends on how you want specific SW to work for you. In the portfolio, for eg: if some SW is impacting critical users or functions you may set the SLA to required higher percentage and flow-down those SLAs to OEM as well. Also, I would suggest to a research on Pass-through charges, in which the supplier charges a fixed % incentive, but this is possible only if the SWs are fixed.
Replies: 3
• Sompo International
•
2017-01-06 14:24:32
Hello Anonymous,
I appreciate your response very much. I do feel that maybe I wasn't as clear as I should have been on the way we currently process the paperwork for these resources or rather the time periods that we are working with. We currently have terms for these resources that range from one week to 12 months. That said, most of them are over 3 months and the majority run 3-6 months. So thankfully we are also only using PO's for anyone working more than 1 month and usually only the 3-6 month range resources are renewing on a regular basis. I hope that helps to paint a more clear picture of the situation.
•
2017-01-05 14:50:23
I would raise a call off PO so invoices can be processed and hours agreed, I wouldn't raise a PO for each person each week
Replies: 2
• IACCM
•
2016-06-01 19:58:11
Carolyn, while we wait for someone else from our community to share with us their "best practices" identified in regards to this point, I wanted to provide this link www.iaccm.com/resources/; where, as you will se, it is covered the matter related to the drafting of enforceable teaming agreements.
Regards
Pablo Cilotta
• Metropolitan Police
•
2016-06-02 05:17:50
I have gone through the process of ensuring flow down of terms from prime contracts to subcontracts and understand your feelings. It is laborious. The contracts that I managed had 'mandatory' clauses to be included in the sub-contracts; hence it was somewhat easy to navigate through. We also put in place a simple tracker listing all the clauses and if the sub-contract had complied with the mandatory term flow-down. We referred the matter to the legal team if there was any discrepancy. What I found was that once I completed verification of a sub-contract, other sub-contracts for the same prime contractor was easier to go through.
You could categorise your sub-contract into high (significant),medium and low groups and could vary the mandatory clauses for flow-down as appropriate.
• Housing New Zealand
•
2016-06-02 06:20:13
Interesting situation, I may be misunderstanding things here...and correct me if I'm wrong, but typically the point of having a Prime is to "manage" subcontractors and they should negotiate back to back agreements that adequately ensure that as a Prime they can fulfill their obligations...it should also reflect the spirit and intent of the agreement...happy to explore this further.
• Metropolitan Police
•
2016-06-02 07:12:40
Hi MC - Agree with you that purpose of the Prime is to "manage" subcontractors... In central Government (not sure if this is required in private sector) sector contracts, it is necessary to ensure that there is a flow-down of the terms to sub-contracts. For example the 'Data Protection' Clause. My response was in this context. The IACCM link given above is a good reference.
• Longsword Solutions Limited
•
2016-06-02 07:59:20
My current approach is to have the subcontractor "aware of" the whole contract (coupled to an indemnity if they cause us to be in breach - if I can get it!)
I then add a detailed flow-down of (i) the mandated flowdowns from client - usually things like anti-corruption and audit and (ii) the terms which are essential for us to ensure that the commercial risks are back-to-back - eg. the specific standard of workmanship that the subcontractor must exercise in their design.
Generally speaking this means 5-6 flowdown clauses, for which I either amend terminology by hand or rely on "mutatis mutandis" if I'm short of time.
For 'awareness of the whole' I think the donor clause was from the CECA Blue Book.
• Accenture
•
2016-06-07 15:38:27
Hi Carolyn,
I have also drafted some subcontracts in which I had to ensure that the subcontractor had the same commitment that the prime; as Girija stands, it is very laborious since you need to understand which of the obligations within the prime contract are transferable to the corresponding subco and also you have to modify the wording. I would never attached the entire agreement because of confidentiality concerns and also because usually prime contractors do not wish to share financial details with subcos in order to seek a more profitable negotiation with them.
Bon courage!
Elena
• Confidential
•
2016-06-09 09:24:57
Elena,
You bring up an interesting point. You as the contractor and the owner do not want to share the details of the contract, but want to subs to agree to them. Doesn't that seem unreasonable? I will never agree to something I have not seen. I do get copies where some details are redacted and that is fine, but the text has to be reviewed in order to be agreed to. I would be interested to hear your rebuttal as the contractor in this case when I say I have to see the prime to agree to it.
Kent
• Housing New Zealand
•
2016-06-09 17:10:55
Some great discussion point coming through - A recent experience - last month our prime contractor needed to conduct a MRO work package at a location controlled by another party (Subcontractor). As the Prime, they commenced negotiation; however this subcontractor only provided 3 months warranty on their work while our agreement with the prime had a twelve month warranty. The prime formally requested dispensation from the twelve warranty and was rejected due to the following reasons:
1) It is the primes obligation to ensure the test and acceptance of standards and quality of the work
2) The prime included in their financial model, an element of risk which they would absorb based on their contractual obligation.
Part the above negotiation included some issues around IP ownership during the work package being conducted. In this instance we accepted the deviation from the standard IP clauses as we deemed the subcontractor clauses to be reasonable as it didn't affect the operation and future requirements to maintain the vessel.
So while the prime is ultimately responsible for the deliverables, we needed to assess on a case by case situation if any deviations were acceptable...and also had to be careful that we don't set a precedence.
• Lendlease
•
2016-06-19 17:24:04
In my experience the Prime Contract is the negotiated version which your company's legal eagles would have negotiated with your client so it would certainly contain more stringent clauses than your company's boiler plates. Usually once the prime contact is negotiated the necessary amendments are made to the the boiler plates to align them with the prime contract. The flow downs are usually attached as "Special conditions" of contract and they take precedence over the 'General Conditions' of contract due to the fact that the GCC are usually amended under SCC and the more stringent approach is adopted. this eliminates any misalignment between the two forms. e.g. 'Limits of Liabilities', 'Indemnification' and 'Insurances' are mostly dictated by Client and the risk must be transferred down to the lower level to protect your company's interest.
Cheers
Asif
• New Zealand Defence Industry Association (NZDIA)
•
2016-06-19 18:20:34
Hi
Australia is about to introduce new legislation about unfair contract terms with SMEs. This is going to make it harder for Primes to push terms down for fear of being void. Hopefully this will start new discussions about getting rid of clauses which are unfair!
• Pretorius Consulting
•
2016-06-20 01:39:53
1. Always remember that if you miss a Clause, it's not the end of the
world, because, as Contractor, you will always be responsible for the
delivery of your contract, regardless of who you choose as your
subcontractor.
2. Check your subcontract template. If your subcontract template and your
Contract and Procurement Principles match, then the Prime Contract
negotiated between you and the Client is much easier to flow down.
3. Semantics. Don't get caught up in the details of the Clause having to be
an exact copy of what you have in your Prime Contract. If it says the
same thing, then it doesn't matter if you use different words or the
words are in a different order.
4. Remember that you are a buffer between you and your subcontractor. As a
company, you do not want the Client getting into your business.
5. The top 8 flow downs (no particular order):
a. Warranty duration
b. Exclusion Clauses
c. Indemnities including pollution
d. Confidentiality
e. Insurance
f. Intellectual Property
g. Benefit Clauses such as paid suspension
h. Days, remember to allow for internal processing as well as Client
processing
There will always be exceptions but number 3 is where most people fail, including the Client.
Don't use the back to back Method unless there are high risks, high value and/or Client appointed Subcontractors and if you plan on using this Method, take that subcontractor's qualifications with you from day one. In addition you need to develop a standard template for Form of Agreement and Exhibits because it isn't possible to just blindly throw your contract at a subcontractor, they are a Third party, and it just doesn't work without some modifications to the Prime Contract.
• Rider Levett & Bucknall
•
2016-09-02 20:27:36
Hi Carolyn. Depending on cooperation levels of your prospective subcontractor / subconsultant, you can 'seal the deal' with an RFP document and a Letter of Acceptance. If you give me your email address, I can send you a template document I created for implementing back-to-back subcontracts to a prime FIDIC contract.
Replies: 12
• Sompo International
•
2018-02-17 01:44:21
I am very interested in this post as I am in the same position. I appreciate that there is a lot of feedback here, but I am particularly interested if David Entriken would be able to share the template he speaks about for "justification" of single source. My manager has asked me to find examples of processes that are best practice in this area and I always have a rough time to find up to date information on IACCM website. It is a great website, but I really find it hard to find what I am looking for much of the time. I Would appreciate any help.
Thank you!
Charlotte
• IACCM
•
2016-05-31 05:43:23
With the multitude of vendors available for supplying any type of services or products, it is clear that a key question to make is, whether to sole-source or rather to use a multi-source approach.
Although we cannot make this as a general rule, the multi-source approach -and therefore the refusal of the sole source justification- seems to have several advantages, such as it provides the client with an exit strategy, if required (in case of a vendor failing to deliver).
In addition, this approach enables benchmarking (comparison of contractor performance against other vendors providing similar services), that is not allowed by an extremely risky sole-source framework.
•
2016-06-01 05:20:17
It becomes a real dilemma when sole-source procurement comes your way and as contract advisor, your position does not provide delegated authority to accept / reject. If there are other suppliers who can provide the same service, it would be helpful if you can give a comparative analysis on the key criteria like price, quality, delivery schedule and value for money, along with your recommendation to the contract signatory. There is also the risk of non-delivery or non-performance by a sole supplier and this could be mitigated by ensuring that there are other suppliers who are capable of meeting the requirements. This will enable contract signatory to benchmark and take an informed decision.
• Halliburton Energy Services
•
2016-06-08 01:51:24
This is a common issue in my field of employment, often the result of persons outside of the supply chain group requesting prices for goods and services and then arriving at the procurement function stating requirement to order from a particular vendor. My employer has in use a SSJ (Single Source Justification) template that must be completed when these purchases are made, these demand explanations why. In past experience and understanding those that have sourced outside of stated policy and process, if time permits the procurement or sourcing function should make all attempts to obtain pricing for the required item. Failing this due to timing an SSJ is completed and we will often as an exercise after this has been done is work on sourcing the item and then providing feedback to requester of pricing obtained and if cheaper using as a lesson learned....My employer expects at least three prices for any goods purchased with a value greater than $10,000. If this is not possible then the SSJ must be used. Annual audits review the SSJ for remarks and reasons why used. Hope this helps.
•
2017-08-28 14:27:43
Enter your message Your company needs to have a single or sole source justification policy for all procurements over a (low) threshold amount. To not have this policy is failure to properly manage and results in excessive costs and leads to collusion. Maybe you need to make a suggestion to your employer.
Many companies establish preferred suppliers and partners for specific goods and services, which is ok as long as these accounts are properly managed.
If you have a procedure and the procedure is not followed, there is no problem with rejecting the request.
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