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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