Contracting Best Practices - Institute for Supply Management · •Mob/Demob for labor &...

Contracting Best Practices

Agenda

• Introduction• Contract Goal• Contract Ambiguity

• Auditors Perspective

• Keys to Best Practices

• Common Issues by clause

• Common Issues by spend category

• Implementation

• Why implement best practices

What is the goal of a contract?

A) To slow down Operations and make them mad

B) To give Supply Chain practitioners something to do so they don’t have to become Engineers

C) To establish a legally binding agreement between two or more parties that clearly define each parties obligations and responsibilities.

Contract Ambiguity

From Tails Magazine… “Rachel Ray finds inspiration in cooking her family and her dog”

Are there flaws with these contract clauses?

MRO ContractRebateA rebate of 5% shall be credited to Client once $1,000,000.00 shall be invoiced by Supplier annually.

EPC Contract1.A. Offshore LaborProfessional Office Services hours for all offshore personnel actively engaged in project work… shall be charged at the following all-inclusive labor rates, without additional allowances for fringes, benefits and overhead:

1.A.1 EPC Supplier IndiaThe EPC Supplier India rate for Client Project is $55/hr.

Auditors Perspective

Why is an audit firm talking about contracting best practices?

An auditors job is to:

• Ensure the client is receiving the “deal” they signed up for

• Identify non-compliance to the contract – both overbills and underbills

• Interpret contracts that may have been written decades earlier

• Interpret contracts written by people who no longer work for the company

• Interpret contracts without any history/bias

•Must add “structure” to sometimes fluid contracts.

Keys to Best

Not every clause needs to be perfect, until it needs to be perfect

1. Inclusionary, Exclusionary, and Silent Language• Inclusionary: Licensing agreement• Exclusionary: Insurance clause• Silent: Per diem

2. Examples or Scenarios• Volume discount

3. Validation• Contract kick-off meeting• Invoice validation

4. Incorporate Lessons Learned

Common Issues (by clause)

Labor Rate Build-Up

• Insufficient documentation of overtime, double time

• Improper / Insufficient information regarding build-up

• Overhead definition/ambiguity

• Insufficient wage classifications/ definitions

Travel

• Per diem qualification

•Mobilization vsDemobilization

•Definition of allowable expenses

• Billable hours for travel related time

Audit Rights

•Missing or limiting audit capability

• Insufficient time to perform audit

• Limits audit to at supplier site without data removal

•Does not allow for audit support

Cost Plus

• Vague / missing definition of overhead costs

•Missing reconciliation clause for statutory drop-offs (SUTA/FUTA/FICA) and Insurance

• Included/Excluded labor costs (roles, time, Exempt/Non-Exempt)

Common Issues (by spend category)

Construction/Maint

• Statutory drop-offs

•Wage classifications

• ST/OT/DT/Holiday

• Small tools and consumables

•Mob/Demob for labor & equipment

• Administration

MRO/Material

• Non-catalog/ Description purchase

• Economic price adjustments / CPI / Index

• Credits and Rebates

• Freight charges

Corporate/Staff Aug

• Statutory drop-offs

• Mark-ups

• Warranty work

• Managed assets fully deployed and billed

• Labor rates

• Rebates, discounts, and program compliance

Veg Management

• Idle equipment

• Straight time / overtime

• Crew makeup

• Wage classifications

• Adders

• Incentive (KPI’s) compensation

ImplementationHow to systemically implement best class language into standard operating procedures

• Clause Library

• Contract Quality Program• “Peer Reviews”

• Formal classroom training

• “Informal” training (Lunch and Learns, CPO Forums, Roundtables, Audit feedback)

• Monitor progress

• Training, Training, and more Training

Why Implement?An Aberdeen report states “Industry estimates are that 30% to 70% of negotiated

savings are lost due to poor contract management and non-compliance”

AMS-PAR has helped clients recover over $1.4B in lost profits

614-634-3396

Russ.Steward@ams-par.com

Russ Steward

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