Posts Tagged 'vendor'

Contracts and Contracting

Contract Definition
“A mutually binding agreement that obligates the seller to provide the specified products, services or results, and obligates the buyer to provide monetary or other valuable consideration.”
PMBOK Guide – 4th Edition, p. 315

A contract creates a “formal relationship between two organizations.”  A contract is like a marriage certificate (which is a form of contract) only with a lot of details about how exactly each party is expected to behave.

Like a marriage certificate, the terms of a business contract can be enforced through legal action if the parties involved are not able to settle their differences on a private basis.

Contracts exchange obligations and responsibilities.  One party pays the other for taking responsibility for delivering goods or services.

Other names, such as agreement, MOU, SLA, understanding and purchase order may be used in place of the term contract. However, only a contract is a legally-binding agreement.

Documents do not need to be labeled as a contract in order to be legally binding. Whether or not a document constitutes a binding contract depends on the presence or absence of well-defined legal elements, the so-called “four corners.”

A legally binding contract typically must contain mutual consideration and legally enforceable obligations of the parties. There cannot be any barriers to the legal formation of the contract, such as fraud, duress, insufficient age or mental incapacity.

An agreement, understanding, MOU or purchase order may not have all the legally required ingredients, and therefore, is not necessarily a “legal” contract.  In other words, a contract may be a purchase order, agreement, or understanding, but the reverse may not be true.

Also, if an agreement cannot be enforced through the courts, it is not a contract.  Instead it is a “non-binding commitment,” sort of like a promise.

Essential Ingredients

  • Capacity or legal capacity: The parties entering into the agreement must have the legal authority to enter into the agreement on behalf of their organizations.
  • Consideration: Something must be given in exchange for something else.
  • Offer: There must be an invitation to make a deal, typically within a time limit.
  • Legal purpose: The deal must be legal; the contract obligations cannot violate the law.
  • Acceptance: An exchange of commitments must take place, possibly within a given time limit.  If there is a counter-offer rather than an acceptance, this condition has not been met.

Notice that a signature is not listed as a required element to have a legal contract.  If both parties behave as if a contract is in place and meet the other requirements, then a legal contract exists between the parties and a signature is not required.

For example, when you order products over the Internet, you provide a credit card number but no signature. Nevertheless, you and the vendor have still entered into a contract where the vendor agrees to provide the product you ordered, and you agree to provide consideration by credit card payment.

Related Contract Terminology

  • Duress: Refers to a contract being signed under pressure where the signatory’s actions are constrained by threat.
  • Minors: Refers to the minimum age under which a person is not considered to be capable of signing a contract.  The courts cannot be used to force minors to live up to contract commitments.
  • Estoppel: Refers to a decision by an authoritative body that prevents someone from denying the truth of a fact that has already been settled.
  • Privity: Refers to the limitation that a contract cannot confer rights or impose obligations on any person or organization except those who have signed it.
    • If you hire a company and they hire subcontractors, you have no legal relationship (rights or controls) with the subcontractors as a consequence of having a contract with the primary contractor.

The Procurement Team

The procurement team manages the creation and oversight of legally binding contracts.  The team is made up of representatives from all areas of expertise that are necessary to ensure that contracts are properly structured to protect the interests of the organization.

Procurement Team Players

  • procurement department
  • project team
  • legal
  • finance
  • marketing (optional)
  • IT (optional)
  • manufacturing (optional)
  • Others?

Contract Manager
The person assigned by the procurement office to take management responsibility for specific procurements is called a ‘contract manager’ or, in PMI terminology, a ‘procurement administrator.’

The contract manager is the team captain.  He or she provides administrative oversight for the steps and stages of ‘conducting’ procurement.  The contract manager controls ‘official’ communications with vendors based on feedback from members of the procurement team.

Promoting Bids
After procurement documents (bid packages) have been prepared in the planning stages, the procurement team take responsibility for the distribution of those documents to potential vendors.

Initial interest is generated by advertising in newspapers, industry publications, and/or on internet sites.

For complex procurements, advertising generally leads to a bidder or vendor conference.  At these conferences the buyer makes a presentation about what is being procured and why, and then remains available for questions.

The object of bidder conferences is to quickly and efficiently make vendors aware of requirements and conditions.

The managers of bidder conferences are obligated to ensure that questions are not answered in confidence.  The answer to every question that is asked, before and after the conference, must be made available to all bidders.

The next submission will discuss proposal evaluation techniques.


Conduct Procurements

In PMI terminology, ‘conduct procurements’ takes off where ‘plan procurements’ ends.

Planning produces ‘bid packages.’  Conduct procurements takes these packages, publicizes and distributes them to potential vendors, and then manages the responses (bids).

Conduct procurements is complete when contracts have been awarded to vendors.

Multiple Rounds
It is not uncommon for there to be more than one round of bid documents distributed for the same procurement. Multiple rounds of bidding will occur if the preliminary documents were ‘research oriented’ (EOI, RFI) or if the buyers are surprised by bidder responses (e.g., price too high) and are  forced to revise their procurement plans.

Enter the Procurement Department
Most organizations have a procurement department of some form.  The role of this department is to protect the organization from the outside world.  Procurement professionals manage procurement risk.  They manage and monitor commitments being made to outside organizations.

Normally, projects are effectively separated from direct contact with the outside world (from a procurement perspective) by the procurement department.  Most project managers do not have the authority to spend their budget directly; instead, the procurement department acts as the intermediary between the project and outside vendors.  The objective is to ensure that the organization (and the project, indirectly) is treated fairly and does not create any unnecessary liabilities or obligations.

Even though there is a separation between project and vendor, project staff are encouraged to communicate directly with the vendor delivery teams. However, these communications are on a casual basis and do not result in legally binding commitments.  Discussions between the project team and vendor team are therefore ‘unofficial.’

When it comes down to the creation of legally enforceable commitments (contracts), the procurement department takes responsibility for managing the communications.

The procurement department’s role is to ensure that legally binding commitments are structured so as to serve the interests of the organization in terms of minimizing risk, sharing responsibility, and reducing liabilities.

A liability is a financial obligation, debt, claim, or potential loss.  It is an obligation to pay to another party an amount in money, goods, or services.

In my next submission I will discuss the ‘procurement team.’


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