Introduction to Commercial Contracting

2. Introduction toCommercial Contracting Understanding the Basics Instructor: Fred Sollish Corporate Learning Solutions NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

3. 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 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

4. Elements of a Contract • Competent Parties • Consideration • Lawful Purpose • Certainty of Terms • Offer • Acceptance NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

5. Contracts- Written Vs. Oral • A contract is a promise between parties • Contracts maybe written or oral • If the following are present (on a scrap of paper, or even oral), a contract may exist: • The parties • The goods • Time at which the transaction will occur • Gaps will be filled in by UCC or UNCISG or civil law NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

6. Different Legal Systems Common Law Civil Law Islamic Law Communist law NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

7. Laws Governing Contracts • Uniform Commercial Code • United Nations Convention on the International Sale of Goods (CSIG) • THE PARTIES TO AN AGREEMENT ARE, BY MUTUAL CONSENT, usually FREE TO CHANGE THE RESULT OF THE LAW FOR PURPOSES OF THAT AGREEMENT. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

8. First Steps- Buyer • Identify Possible Needs • New service offering • Expand market share • Become more cost effective NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

9. Next Steps - Buyer • Identify and Analyze Requirement • Functional • Performance • Design NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

10. Buyer: Pre Contract Activity • Establish evaluation criteria • Attributes of interest • Price/quality/delivery • Reputation of seller • Standards • Weighting NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

11. 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 Seller: Pre- RFP Activity Match customer requirements to applications, assess opportunities and prepare to assist the customer in the development of the RFP. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

12. 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? NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

13. Contract ManagementResponsibilities • 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 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

14. Contract Formation Develop contracts that contain clear deliverables and contractual obligations and standard terms and conditions, while identifying and mitigating all risks. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

15. Prepare negotiation plan Negotiate major issues Prepare draft contract Negotiate minor issues Review and approve contract Obtain contract signature Contract Formation NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

16. 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 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

17. Usual Contentious Clauses Pricing and Payment Terms Liquidated Damages/Penalties Liability/Indemnification Terms Warranties (Scope and Duration) Intellectual Property Ownership NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

18. Successful Contract Negotiation Involves thorough preparation and planning Effective team planning Sharp negotiation skills Understanding the other party’s goals Documentation of agreements NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

19. Buyer and Seller: Contract Administration • Ensure 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 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

20. Buyer and Seller: Contract Administration • Communicate contract authorization and necessary information • Create contract administration plan and distribute as necessary • Contract Obligations Matrix • Responsibility Assignment Matrix • Manage contract performance: • Correspondence control • Manage contract changes • Prepare final acceptance package • Ensure all contractual obligations have been met • Monitor financial and operational performance • Review contract completion • Close-out NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

21. 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 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

22. 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 NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”

23. The Contract A well written agreement answers who, what, where, when, and what to do if…. NCMA World Congress 2005 “Prime Time: Contract Management at the Core of the Enterprise”