Chapter 1.1Documentation

Parts of a contract: definitions

Estimate versus tender

1. Estimate: a best guess that has no legal standing. This should be avoided in contracts
2. Tender/quotation: this is a proper offer for a price.

Quotation versus tender

1. Quotation: this is used when price is the only variable
   1. The specification and T&Cs may have been fixed through a framework agreement
   2. It would tend to be an uncomplicated procurement
2. Tender: a more comprehensive document. There would likely be multiple variables above price
   1. The response format will be given by the buyer
   2. The bids will be sealed
   3. Contract terms will be specified in the Invitation to Tender (ITT)

Request for Quotation (RFQ) vs Invitation to Tender (ITT)

1. RFQ: for lower-value contracts
   1. There would be a ready-made template, and can be filled out at speed
   2. A supplier response in the form of a quote constitutes an offer
   3. This could be a weaker audit trail potentially
2. ITT: for more complicated contracts
   1. There would be a more formalised template used
   2. ITTs take longer to develop, and to respond to
   3. A supplier response to the tender constitutes an offer

Specifications

This is normally included as an annex or schedule. There are two types of specification:

1. Performance specification: tied to how the product performs, usually using KPIs
2. Conformance specification: tied to whether the product conforms to a defined standard / level of quality

Important things in a specification:

Configuration control is important throughout the procurement process.

1. The final version should be appended to the contract as a schedule
2. There should be measures in place to monitor compliance

A performance management framework may be used.

1. Defines standards to be achieved, through the use of KPIs or standards
2. Defines how success will be measured
3. Defines the consequences based on the results (could be positive or negative)

Contractual terms documents

A contractual terms document contains:

1. Articles: A summary of the agreement and the abbreviations to be used
2. Recitals: Offers context leading into the contract, setting the background
3. Contract particulars: Sets specific parameters that detailed terms and T&Cs may refer back to
4. Terms & Conditions (T&Cs): Contains the detailed set of terms and conditions
5. Schedules: Project-specific details

A contract is formal if…

1. Terms are set out in detail
2. Parties agree to it and want to enforce it
3. There is documented evidence of agreement

However, informal contracts can also happen. For example, a verbal agreement.

Schedules are an attachment to the body of a contract. They can contain:

1. Pricing
2. Specification
3. Performance management framework
4. Contractual management

Contract variations can be set out in the schedule or an appendix, governing how a variation order can be sent. In other words, this allows for changes to the contract.

Chapter 1.2Legal issues

The UK has a common law legal system, using case law. Other countries have civil law, only using statutes and regulations.

Offer

Offer is not necessarily tied to acceptance; both are separate and need to be in place for a contract.

An RFQ/ITT doesn't constitute an offer to buy, but a response to one does constitute an offer to sell.

Invitation to Negotiate (ITN): is the seller inviting the buyer to give a price or start negotiations.

1. This does not constitute an offer.
2. A buyer's response to the ITN is an offer
3. Examples of ITNs are advertisements or catalogues

An offer can end by:

1. Expiry by a time lapse
2. Withdrawal of the offer
3. Rejection
4. Acceptance
5. Not meeting the conditions of the offer
6. Termination of the company, or death

Acceptance

Acceptance only happens when:

1. The offer is open
2. It is absolute
3. There is an intention to accept
4. There is a capacity to accept

Some things could be 'subject to a contract': this is not acceptance.

Acceptance is the mechanism by which a contract is created.

There are some technicalities around acceptance:

1. Acceptance by performance: It can happen if the purchaser uses the goods offered
2. The buyer can't think they own the goods if the seller doesn't communicate the offer
3. The offerer can specify that they don't need formal acceptance, and just instead fulfil the order
4. Mailbox rule: if a letter accepting the offer is posted, the contract is valid from the date of posting rather than when it arrives
   1. This is only for acceptance
   2. This is only as long as there's evidence of posting and both parties knew that this would be the method of communication
   3. It applies to emails too
   4. Doesn't apply in civil law countries
   5. The Vienna Convention rejects it

Consideration

Consideration can be implied, and could be a promise to provide something over and above the existing promise.

Promising to provide something that is already part of the deal is not consideration.

Sufficient versus adequate consideration:

1. Adequate: needs to be seen as reasonable and fair. Authorities won't intervene here
2. Sufficient: there is monetary value attached to the deal, and it can't be too vague. It also needs to meet the condition in (1)

Rights of third parties: Set out in the Contracts (Rights of Third Parties) Act 1999. 3rd parties can enforce a contract if:

1. The contract specifies this right to do so
2. The contract says that there will be a benefit to this 3rd party

It's now common for contracts to say there's no benefit to 3rd parties, in order to avoid this.

Collateral warranty: This is where a subcontractor guarantees that it'll fulfil its obligations to a third party.

1. This is only valid if it is a deed (an agreement to transfer something, without need for consideration in return)
2. A subcontractor will give this to the original purchaser as a guarantee

Intention

A contract needs to have an intent to create legal relations.

1. Commercial agreements are by default assumed to, but domestic agreements aren't (these aren't considered 'deals')

Capacity

Someone who is the following won't have capacity to contract:

1. Under the influence of drugs or alcohol
2. Undergoing mental health issues
3. Under-age

If someone without capacity goes into a contract, it isn't legally binding. But it can be for the other party.

This understanding of capacity doesn't apply to commercial entities, as these are assumed to have capacity.

There used to be something in the UK called Ultra vires (things that a party doesn't have the authority to contract into).

1. These have been removed, due to perverse incentives: an organisation may go into a contract knowing they can't be held to it

Battle of the forms

1. I.e. offer → counter → counter etc
2. Each party will attempt to provide terms that maximise their own benefit

Usually, anything that is stated explicitly (known as express terms) in a contract overrides things that are implicit (implied terms) or previously agreed.

1. The exception to this is when terms are implied by relying on statute / law.

'Full agreement' clause: anything discussed before the final agreement is ignored.

1. Courts will use 'normal rules of interpretation' to uphold this.
   1. This is basically where words have their everyday meanings, unless a specific definition is written in the contract

Hierarchy of clauses: anything in the contract clauses takes precedence over attached documents, such as schedules etc.

Oral contracting

Oral contracts are enforceable.

The issue is, where terms haven't been written down, they are difficult to prove.

1. For example, what did they agree on regarding the specification, or warranties?
2. Both parties might 'remember' terms that favour them

Vienna Convention

This is a voluntary treaty under the UN. Countries under it are known as 'contracting states'.

It sets out a framework for international contracts. It only applies to goods, and business-to-business agreements.

It covers the forming of a contract, not enforcing them.

Countries can exclude terms outlined in the Vienna Convention, and so can the contracting parties. Generally, Incoterms are used instead of the Vienna Convention to govern when risk is passed.

Misrepresentations

This is basically an intentional or unintentional statement that incentivised a party to enter into the contract.

For something to be a misrepresentation it has to be:

1. False
2. Said by a party in the contract
3. Encourages a party to sign the contract
4. It was meant to be a fact

There are 3 types of misrepresentation:

1. Innocent: Where the party genuinely didn't mean to mislead, and it was beyond their control
2. Negligent: Where the party should have been more careful in making the statement
3. Fraudulent: A clear lie

Chapter 1.3Types of agreements

One-off

It's a solitary agreement. This could be for buying one thing, or a basket of goods. It can be for goods, services or works.

Simple one-offs

1. These may not have a contract: could just be invoice-based
2. This may leave a lack of an audit trail, creating a battle of the forms

Complex one-offs

1. There are complex things that may be bought once e.g. the construction of a new facility
2. Good procurement processes need to be followed; for example, rigorous selection of suppliers through tenders

Why would you use a one-off purchase?

1. For simple one-offs, these may just be irregular spot purchases that need to be used immediately
2. For complex one-offs, these may only be required once (for example, a construction)
   1. There may alternatively be a lack of funding for a pipeline, and hence the company can only purchase as a one-off

Even though one-offs can sometimes be less rigorous, contracts may still need to cover:

1. Detailed specifications
2. Quality standards
3. Insurance
4. Warranties / guarantees

Framework agreements and arrangements

A framework arrangement has no legal standing: it's informal.

1. An organisation may set up an internal approved list of suppliers
2. This may limit workers in the organisation to only buy from this approved supplier list
3. There is no guarantee that items will be bought under this

A framework agreement has legal standing, but is not a contract.

1. It is an agreement under which contracts can be formed. It sets out the T&Cs, allowing for quicker contracting
2. There may be some T&Cs that need to be determined when actually contracting
3. The framework may set out an understanding for how price will be calculated
4. For a supplier to get onto a framework agreement, they'll need to go through a tendering process / negotiate
5. Contracts issued from this are called call-offs
6. A proper framework agreement is a 'closed system': people can't join it after it is agreed

Things involved in the agreement would be:

1. The mechanism by which call-offs are done e.g. competition or direct award
2. How long the agreement will last for
3. Specifications
4. The main T&Cs

Types of framework agreements:

1. One-to-one (one buyer and supplier)
2. One-to-many (more than one supplier)
3. Many-to-one (more than one purchaser)
4. Many-to-many

Direct call-off

1. The process for how a supplier is chosen for a direct call-off (i.e. no competition) needs to be defined in the framework
2. There may have been rankings made when suppliers get onto a framework, and direct call-offs could be made on this basis
3. It's more likely that suppliers will be chosen based on past experience or performance, or used in rotation

Mini-competition

1. This is a shortened version of a tender, within a framework agreement
2. It might be price-only: other terms may have been locked into the framework
   1. This allows for more tailoring of price to the work needing to be done, and ensures a competitive element

Call-offs

Call-off / term contract is time-based rather than tied to the purchase of something.

1. This could be used for stock procurements: things that will be bought regularly
2. All terms are agreed at the start (price too)
3. The call-off is the order put in place based on the contract
   1. There doesn't need to be much information in the call-off: could just be the amount and where the items need to be collected from
4. Suppliers are obligated to fulfil all orders placed under this type of contract

How do the differences between goods, services and works feed into contracts?

Location

1. Location could be more important for services, if the service provided is physical. It would be cheaper to contract locally, for example if it is a cleaning service
2. Works are a type of services contract (e.g. construction services), so this would still apply
3. For goods, location may not matter as much since they could be transported worldwide

Conflict of interest

1. This could be a particular risk for services contracts. For example, providing consulting services to an audit client would be a conflict for audit firms
2. Contract clauses need to clearly outline how to avoid these scenarios

Specialised workforce

1. This could be a particular necessity for service contracts, where the people delivering the service make a big difference (there is higher differentiation of output). People might be chosen based on their reputation and past experience
2. Goods, in contrast, may be produced to conformance standards and the workforce isn't client-facing, so there is less differentiation provided by the workers

Regulations

1. Regulations vary depending on type: the Vienna Convention only applies to goods
2. For the public sector, there is a lower financial threshold for service contracts to fall under stricter regulations. This means these will have to be managed more carefully

Lease and hiring contracts

Generally, hire refers to short-term contracts and leasing is for longer-term contracts. These essentially mean the same thing in their effect.

1. There is no transfer of ownership in this case: the item is just rented.
2. This doesn't fall under the Vienna Convention
3. You might take terms from a service contract for a contract for hire

The benefits / risks of leasing versus buying were discussed in L4M1. Things to bear in mind:

1. There needs to be a lease versus buy decision, weighing up the pros and cons (such as lower upfront cost but higher total cost etc)
2. What risks are apportioned between the two parties for management of the item leased?
3. Is maintenance included in the contract?
4. Who takes ownership at the end of the contract? E.g. hire purchase agreements allow for the lessee to take ownership after the lease ends

Hire purchase: The item is hired and at the end of the hire period, is transferred to the party.

1. There may be a buy option, or it may be an automatic transfer
2. Under hire purchase, it's a contract for hire until the final payment (it's then a purchase)

Chapter 2Specifications and KPIs

The specification needs to cover the Five Rights of procurement.

2.1: Analyse content in specifications

Market dialogue to refine specifications

Suppliers may share their specifications / catalogue openly as this is business development for them. This is convenient for procurement teams looking to build a specification.

This also helps procurement professionals keep up to date with developments in the market. It would be good practice to initiate market dialogue early in the sourcing process.

How do you start market dialogue?

1. This can be quite informal, but it's important to have clarity on what you want e.g. why are you reaching out to them? What are your intentions over the procurement?
2. When doing market dialogue, it is good to involve a broad range of stakeholders, since they will have an interest in the product. Bear in mind that there is a risk of leaking of information
3. In the public sector, this could be quite sensitive, given a need to maintain public perception that competitions aren't being biased
   1. It's important to do dialogue fairly and openly
   2. Dialogue stops once the procurement begins, to prevent bias
   3. Generally, procurement professionals in the public sector should frequently engage the market, to keep abreast of developments.

Types of dialogue

1. Networking: more informal and sets up a relationship. It may not provide the information needed
2. Interviews / One-to-ones: the supplier may essentially pitch their service and give you valuable feedback on your specification. However, they may do so with their own personal biases and motivations
3. Site visits and events: can be used to inform both parties as to offerings / requirements, but this could be quite hard to manage and structure
4. Negotiations / competitive dialogues: This can take up a lot of time, but allows for in-depth iteration of a specification

The usual best practices of formal meetings apply i.e. taking minutes and sending these around, following up on questions raised and reviewing progress against these over time.

Drafting the specification

Procurement needs to follow solid project management principles. This starts with project scoping.

1. Who will draft the specification?
2. Do we need to create it from scratch? If not, how can we iterate an existing one?
3. Define the technical bubble / constraints around the specification
4. Stakeholder management plan for the iteration of the specification

Iterating a sample specification: this is basically an existing specification.

1. Some sample specifications might be easily available, but if it's more complex, this might be more difficult
2. There will be sensitivities around the sharing of these; suppliers will use specifications to influence the requirements setting, but may require non-disclosure agreements (NDAs) to prevent loss of IP
3. This sample specification should then be iterated.
   1. Does it fit your needs?
   2. What do other stakeholders in the organisation think?
   3. Does it align with your regulatory and legal requirements?

What methods can enable specifications to be written quickly?

1. Use industry / legal standards e.g. ISO 9001 quality standard.
2. You can narrow the range of possible outcomes by using recognised brands (this isn't recommended as good practice, particularly in regulated environments)

Key parts of a specification

1. Version control table
2. Context / background for the specification
3. Technical requirements: the characteristics of the product required, timescales, location etc
4. Legal and regulatory standards

Ultimately, specifications will go into the contract and therefore be legally binding. This can take a long time, with a lot of input required from various parties, including lawyers.

You might want to standardise requirements. This has positives and negatives when compared to maintaining a range of products.

2.2: KPIs

Why are KPIs used?

Key performance indicators are used to monitor contract performance.

1. It enables performance management, both in a positive and negative sense

KPIs need to be strategic (remember SMART objectives). You would ordinarily only need 5-6 KPIs.

3 types of KPIs:

1. Qualitative: more intangible, opinion-based e.g. through surveys
2. Quantitative: this is a statistic that can be measured
3. Binary: a yes or no measure

You need to be able to measure KPIs with the right data. You might use:

1. ERP or other enterprise system data on supplier or buyer's side
2. Self-reporting data from a supplier
3. A third party monitoring service

Also think about the costs associated with the above: it might be too expensive to collect that data.

For a quantitative KPI, you'll need to visualise what 'good' looks like; for example, you might want to use a ranking system to track whether a given number is good enough or needs redress.

1. It's important that the KPIs align to the specification i.e. that the ranking matches to the expectation of 'good' under the specification

When setting a KPI, you need to think about what's worth measuring, and then the practicalities/governance of this (i.e. regularity of data collection, who reports it and the data source).

Service-level agreements (SLAs)

It would include things like:

1. Levels of service
2. How the above will be monitored and frequency of review
3. Escalation procedures and remedies
4. The responsibilities of both parties to fulfil the SLA

As usual, if a supplier has provided it themselves, this needs to be scrutinised since it would be on their terms.

Benefits of good SLAs (these are similar to KPIs):

1. More clarity on what is being measured and what 'good' looks like
2. Helps focus attention and build transparency in contract management
3. Makes monitoring easier for the buyer since the process has already been defined

How you create an SLA

Chapter 3Terms and Contracts

Recap on T&Cs

• As mentioned before, terms can be implied through statute. Another common way is custom and practice, where it's commonly assumed that things are done in a certain way.
  • There are other everyday ways this can happen, for example the context within which the contract was placed could imply certain terms
• Conditions versus Warranties: conditions are deal-breakers for a contract, warranties entitle a party to claim damages without ending the contract
  • 'Innominate' terms are terms that sit in the middle and may need to be determined in court

An example of express terms: 'Time of Essence' clause. This states that something must be delivered within a timescale, and missing this ends the contract.

Liquidated damages and penalty clauses

1. Basically means the wronged party gets paid
2. They need to be seen as fair, to be legally binding
3. Liquidated damages are compensation, not a penalty
4. Liquidated damages clauses are legally binding, whereas penalty clauses aren't
   1. Under penalty clauses, you don't get extra compensation: you only get compensated for losses

Standard terms

All organisations will have their own standard terms. I.e. their own way of doing things.

1. It'll cover all transactions apart from those that are covered by a contract
2. They might be attached to order forms and can be overarching (generic and not specialised to a transaction)
3. The 'small print' basically

Model form

These are contracts published by third parties, considered experts. NEC is one example for engineering.

Model forms will allow for project-specific documentation that procurement staff will need to fill in.

3.2: Contractual terms

Liability and indemnity

Liability: legally responsible for something

1. Could be addressing potential negligence
2. 'Strict liability': these are things that a party is responsible for no matter what
3. 'Vicarious liability': organisations are held responsible for employees' actions
4. There may be a reference to when liability is transferred between the parties

Indemnity: protecting against loss, and the party will have to offer compensation

1. There may be a financial limit applied to this

There can be an exclusion / limitation of liability clause to omit a party from having to accept liability in certain circumstances.

1. Suppliers would be keen to do this
2. Statutes try to limit this to prevent 'cheating' with small print

There will also be an insurance clause, making sure that the party can pay the costs of claims if they arise. Insurance is essentially transferring the risk.

Ethical Sourcing

This is ensuring that the supply chain is responsible and sustainable, with CSR and ESG considerations.

Some ways they can do this:

1. Commit to legal and regulatory compliance
2. There may be codes of conduct or voluntary schemes that can be signed up to
3. A requirement for a supplier to ensure ethical sourcing of their suppliers

3.3: Types of pricing arrangements

For more complex contracts, you might need to use pricing schedules. This is so that you can offer further detail on price, for example by milestones, labour required etc.

1. A guaranteed maximum price creates a price ceiling to prevent spiralling costs over time
2. Price schedules are different to a schedule of rates, which is a breakdown of the headline price into constituent parts

Fixed pricing

You could instead use fixed-pricing

1. Fixed-pricing: sets a fixed price for a period of time at least, but can be adjusted after some time. This could be combined with a schedule for certain things and be hybrid
2. Firm price: this is more fixed. There is no flexibility at all in moving the price

The benefits of fixed pricing are quite intuitive from experience

1. Who it benefits depends on how the project turns out: if costs exceed the estimation, the supplier loses out and vice versa
2. It helps both sides budget easier, since there's no need for uncertain forecasts.

Disadvantages also intuitive:

1. Inflexibility in price could lead to a more inflexible approach to delivery
2. There is a risk in the estimation upfront being wrong, leaving one party worse off

Cost-plus and cost-reimbursable

Cost-plus: the price is basically the supplier's costs + a defined profit margin

1. Requires suppliers to be transparent about their costings
2. Perverse incentive for suppliers: they don't need to care about keeping costs down
3. But it might be seen as fairer if done right, because there won't be excessive profiteering

Indexation and price adjustment formulae

You could link prices to an index to allow for variation as the contract progresses.

1. A common one is inflation: this could be a general inflation measure (i.e. CPI), or a more targeted one (like a services inflation measure for service contracts etc)
2. Both parties would try to use an index that gives them more of an advantage; e.g. RPI includes housing costs, so tends to be a higher inflation measure than CPI

The benefits and risks of these are intuitive: things like the risk of choosing the wrong index, a sense of inflexibility to contract-specific circumstances versus the benefit of having a neutral way of defining price increases and an evidence-based view of it.

Incentivised contracts

Providing incentives tied to good performance. Some examples are:

1. Target fee: a payment made if suppliers keep costs low (setting a target cost)
   1. This is a bolt-on to cost plus contracts
2. You could provide incentives for other things (think about some of the Five Rights)

Payment terms

Keeping this high-level: these terms will outline when payments are made, when they can be withheld and the payment processes.