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Contract terms - Indemnity - IPR
security or protection against a loss or other financial burden.
In an indemnity, one party assumes the primary liability for an event. Situations where indemnities are likely to be relevant arise in many contracts and are often included in standard terms.
Another option would be to sue under the Sales of Goods Act, but an indemnity is much more simple and predictable.
- Intellectual property rights - IPR
These are used to protect ideas e.g. patents, designs, copyright and trademarks.
The company who owns the IPR relating to the indemnity is likely to want to be notified of any alleged breach immediately, require the party not to make any admission of guilt, and to have control of any negotiations or court action.
There are various acts that provide protection but it is important that there is provision in the contract as well to ensure indemnity is given in respect of infringement of IPR.
contract/express terms in commercial
Express terms are written or orally agreed in the contract. There are many common terms that can be seen in many contracts. These are sometimes referred to as boilerplate clauses.
examples
Indemnity terms;
Dispute Resolution terms
Guarantees;
Price terms;
Delivery terms;
Quality terms,
Confidentiality terms
If information is so vital it can be seen as a trade secret, then the company can take steps against any third party who unlawfully receives it, to stop disclosure eg contain a clause that information enclosed is technically or commercially confidential and must not be disclosed or copied.
often a restriction which runs past the date of the end of the contract, to protect information from being passed to rivals etc.
Business Case Structure
- summary
- Reference - project name background
- Context - how does it fit into current strategy objectives
- Value - desired outcomes - costs of implementing
- Resources required - funding / manage time / team requirements / outsourcing / external parties
- Impact - Internal functions affected , key stakeholders, external stakeholders , relationships
Options- what was considered and why were they rejected
- Planning - map stages / critical path analysis / schedule/ workloads
- Scope - limitations and assumptions - scale and complexity
- Commitments Initial spend - schedule of expected outcomes - gate points
Costs - costs/ risks/ implications of current situ, proposed solution
Recommendation - assessment f optimum solution
- Deliverable’s
- Risk Management - contingencies, how to reduce, eliminate, manage - Performance - measures to evaluate
Specifications - Primary Sources : price information
- speaking to supplier - meetings, trade fairs, rfq
- internal info on performance - transactional data, previous prices, SWOT
- commissioned reports - 3rd party research not available in house
- advisory services / professional institutions specialist knowledge providers - legal services
- networking - speaking with colleagues / informed external parties - stakeholders
Conformance specs
a statement of attributes of a product, service or process
can require many pages of information including design, drawings and detailed instructions to the supplier e.g. the car engine.
But the purpose of both is to ensure that all parties are clear what is required from the product or service
and to act as a benchmark against which proposals and contract performance can be measured.
5 rights should be considered -place, time, quantity, quality, price
communication - clear specs allw easy cmmunicatin and understanding f what is required
Evaluation - allows an accurate comparison f supplier bids and provides a standard t which the performance f the contract can be measured
Conformance
Conformance (aka technical, input or design) –
strict, technical specifications using a description of the physical attributes of the product and possibly the manufacturing process.
Thus it emphasises inputs and limits supplier’s freedom.
This can limit the potential supply base.
Confrmance may be used where samples are needed, chemicals, engineering
dis
It can be very expensive to draw up detailed information about every aspect of the item required. The buyer simply may not have enough knowledge and may require third party assistance which adds to the cost.
All the supplier has to do is create the product or service exactly to the specification, even if this produces a product or service that does not work. The supplier may highlight problems, but is not legally required to do so, and would still be able to claim the agreed price for the contract
A very specific specification may limit the potential supply base, which can mean that suppliers push up the price knowing the buyer will struggle to go elsewhere.
The supplier knowledge and skills are not being utilised to their full potential. The buyer may be an expert in their field, but by not tapping into the supplier innovations and market awareness, they
specifications services vs physical specs x 5
- Products are tangible, and so are more easily assessed for compliance with the specification. Services are intangible and it is therefore more difficult to define the level of quality required.
- Products tend to be uniform, whereas service provision is likely to be variable in output.
- Assessment of compliance with a specification for products is likely to be more objective than for services (e.g. ‘cleanliness’; or ‘politeness of staff’).
- Many products can be purchased ‘off-the-shelf’ with minimal input to the specification. Most service specifications require some form of bespoking.
- Service contracts may be longer duration, so the specification must allow for future change
Specs - Standardisation
adv
- ease of specification
- economies of scale/reduction of transaction costs
- reduced transportation
- ability to use standard sized loads
- reduction in inventory and asssoc risks/costs
- easier quality management
- reduced supplier base - large supplier base and assoc costs
KPI - adv - purpose - examples
measures used in business to quantify objectives to reflect performance,
measures / measurements / factors
starts with development f spec, negotiation of contrcat with performance measures put in place, agree kpis with stakeholders
obtain information to check the performance is at satisfactory level, decide n improvements and perhaps compare suppliers,
factors can be identified which have a numerical value
should be focused n core activities, focus n key things and identify CSF
KPIs should align with business needs and reflect objectives
consider costs of performance management, do costs outweigh benefits
qualitative measure often used assessment of services
difficult to develop objective measurements
should be flexible and not rigid
two way so buyer gets feedback
measures f both efficiency and effectiveness
should not be t many as you need time t review and monitor
where possible data collection should be automated
KPI examples / adv / purpose
- increased communication - esp if set jointly - - strengthen supplier communication and mutual benefits
- supplier motivation to achieve targets
- focus on key results - cost reduction
- identify problems early and set process to correct performance - clear goals reduce conflict / confusion
- identification of high /low performing suppliers,justify continued trading or need to change - make improvements, manage supply chains- - measure performance and establish improvement targets
- provide information to support contract management which can help ensure contract performance is satisfactory, - manage supplier improvement programs
- used to provide clear longterm objective for each party
- drive continuous improvement
Strategic Level ——
lead times
risk management
Tactical Level
Operational——-
OTIF delivery on time in full
willingness to collaborate how many meetings they attend %
response time to callouts
responsiveness
accuracy and timeliness of invoicing
technical support
Business Case Costs
- price/acquisition of items req.
- costs to mange new suppliers
- costs to manage internal changes/training
- maintence and operations costs
- disposal costs
- warranty and servicing costs -
- downtime costs -
Specs - dis
Expensive – so there would have to be a balance between cost and benefit - other methods may be more suitable for low cost items
- They can encourage over specification and increase stock variation as requisitioners take advantage of the ability to state exactly what they would like rather than being forced to consider current products or the commercial benefits of standardisation
- There could be extra inspection costs that could have been avoided if brand names had been used
- They require updating regularly which also adds to costs, but if they are not updated the can soon be out of date. There can also be questions as to who is responsible for updating them, especially where the changes are not specifically technical aspects eg delivery, packaging etc
Model Form Contract
These are contracts that contain standard terms and conditions;
the purpose of which is to make the process of contract formation less time consuming and
they are prepared in plain language for
easier understanding by all parties to the contract.
There can be industry standard (model form contracts), or prepared for a specific company (standard terms and conditions).
two examples
New Engineering Contract - NEC
Joint Contracts Tribunal - The JCT cntracts
adv
the process of contract formation less time consuming
- easier understanding by all parties to the contract
- They are often written in reasonably plain English so are easy to understand. This should mean that both buyer and supplier understand their responsibilities better and anyone who is managing the contract can easily check what provisions are covered in the contract
- They are much quicker than negotiating every clause in a contract as they can be printed onto the back of current documentation and attached to emails
- They can provide the basis of a negotiated contract, most of the clauses can be left unaltered, with some amends as required.
Incentive pricing
Gain Share - each keep a proportion of savings
Faster Payments if they reach KPIs
Bonus payments
reducing prices -supplier must find efficiencies in order to make profit - could cut corners so need good inspections
liquidated damages = negative incentive will reduce payment if kpi not met
Rebates - appealing for buyer and supplier - could be volume based
adv
- can be win win
- can be bespke t suit a situ
- fcuses n supply chain
- create pp fr supplier invlvement
dis
- needs t resurce t manage
- can be cmplex
- need t have business systems t manage the imprvements
- may lead t resentment r fustratin
Incremental budget
Incremental budget – starts with previous period figures which are adjusted to give figures for current budget
When creating an incremental-based budget you take last year, or last period’s, budget and adjust it up or down according to what the expectations are for the future period.
For example, raw materials cost £10,000 last year but due costs have risen by 5% so the budget will be £10,500.
The budget may take into account seasonal adjustments like a higher trading period such as christmas. There may be inflationary costs or priority projects to be budgeted for. Staff costs could reduce if there are cut backs and redundancies
Business Case risks
purchase might not achieve desired outcome
- operational disruption as part of the change
Specs - characteristics
clear and unambiguous;
concise; comprehensive;
compliant with laws/international standards;
not biased towards a particular brand or supplier or nation; logically structured; Not discriminate against or be biased towards any supplier.
Contain sufficient information for potential suppliers to submit credible and realistic offers
free from jargon;
it would have proper version control.
Guarantee Terms
These are used where one person (the guarantor), promises to be answerable to the other party for the debt, default, or miscarriage of another person
A guarantee has to be in writing. If the agreement is oral, the creditor cannot sue the guarantor to make them pay.
Business Case - commercial obj / why procurement
- create profit
- create shareholder return
- create competitive advantage
- create market share/leadership- low price / high quality / most innovation
- to have a good image as customer / employers / supplier
- reduced costs through time savings
- increased revenue produce higher quality goods
- increased profit from lower costs or higher revenue
- innovation -competitive advantage, improve brand image
- enhanced shareholder value - increase profits shareholders will gain more dividends
- increased manufacturing capacity - working with suppliers for JIT/reduce stock holding
Procurement is more involved in processes inv- 1. changed from administrative and transaction (buyer processes orders) 2. strategic and integral 3. part of commercial success f a company.
- increase in streamlining and lean ideas (AUTOMATION). —————————–
- more costs lie within the procurement function.
- Savings n input costs.
- increase profit contributions
- be more agile as and when, not big store of inventory - Communication between internal departments and with external parties - which can mean———-
improved supply
win - win aspects creates better value
reduced costs
this leads to joint objectives
competition through supply chain instead f just market rivals/competitors
- Financial considerations————————–
- improved liquidity - covering payment terms, cover assessment f suppliers, cover liabilities
- while life costing - waste reduction —————-
working with the supplier and internal dept to reduce inputs in supply chain and reduce costs/improve quality
maybe new legislation to zero waste
- it reduces costs -packaging
- might involve esi - built into tenders
Procurement Cycle
- Identify the Need
- Define the Need
- Source the Market
- Develop the Contract Terms
- Appraise Suppliers (value & quality)
- IFQ and RFT
- Analyse Quote/ Select Suppliers
- Negotiate Best Value
- Award the Contract
- Contract Supplier Maintenance
Post Contract
Contract Maintenance
Supplier Maintenance
Payment / Expediting Payment / P2P
Contract review and learning lessons
Spec - IT Risks
Risk to the integrity of the data - mistakes, uncontrolled changes, corruption etc eg where specification changes are incorrect or not made in a timely manner
•Inefficiencies in the system &Technological malfunction poor retrieval systems, lack of integration, system breakdown eg where it is difficult to find information, degradation of data; poor backup arrangements;
- Loss of knowledge - loss of key staff, loss of data, outsourcing etc eg where the category manager leaves and other staff have limited knowledge of those items
- Fraud
Solutions
Data protection. Limiting access to those who need it eg having online specifications as read only for most staff
Staff training requirements - use of data, security, legislation requirements
Inefficiencies - e.g. having copies of all specifications off site/on separate servers/in cloud system
Having a formal specification approval process, segregation of duties to reduce fraud
External risks
- Risks to intellectual property - misuse by those who gain information eg suppliers deciding to produce the product themselves
- Risks to commercial information - information could be passed onto rivals, customers or suppliers that causes problems for the company eg information that shows a high profit margin on a product may encourage a supplier to demand a higher price for the raw materials
- Virus, hacking data, poor arrangements for transfer of data
Solutions
•External risk e.g. use of passwords, encryption, firewalls etc
•securing Intellectual property rights eg registering designs, stating in contracts who will own the intellectual property (especially where suppliers have been involved at the specification stage) etc the use of Non-Disclosure Arrangements (‘NDA’s);
•Variant management, valid protocols for specification changes and version controls;
•and accreditations required for IA from potential suppliers, such as ISO27000,
Insurances
• Employers liability
Every employer must have this. It protects employees who sustain injury through employment.
• Public liability
This is not a legal requirement, but it frequently demanded by buyers. This protects the supplier/buyer for claims made by third parties due to injury or damage to property
• Professional indemnity
This provides cover for claims when the failings of the supplier result in economic loss to the buyer. E.g. a software failure means the buyer’s company has lost revenue.
• Product liability
This covers claims made as a result of injury or damage of property due to goods supplied, repaired or tested.
Specifications - Information assurance
This is the practice of managing risks related to the use, processing, storage and transmission of information and the systems and processes used. It considers:
- Corporate governance - compliance with regulatory standards, internal standards and auditing with regard to data protection, IT and fraud
- Contingency - plans in order to recover from key system risks eg data loss or security breaches
- Strategic development of IT systems in order to manage current and future needs whilst minimising risk
OUTSOURCING _ WHEN
decision should have clear obj and measureable benefits
sourcing of supplier rigorous
Contracting should be clear - liabilities, expectatations, responsibilities
not core - better to start with support functions
supplie s can provide better provision
savings outwieigh costs - all costs
are skills specialist or labour intensisve would be expensive to develop
is it succinct - eg cleaning rather than management which is an activity which is spread into all areasa
fluctuating demand - best with company with more custooer to even out demand
however
only core functions kept in house but assumes no other funstions shape strat or functions dont impact each other
design and manufCTURING SEPerable - should production not be involved in design
a series of outsourciig can make econmoc sense - collectivly you surrender competetive advantage
Specs ESI
adv
- It can be a catalyst for developing long term relationships which can result in more efficient and effective collaboration in future initiatives
- It can improve the ability of the organisation to differentiate products and thus gain competitive advantage
- There is improved understanding of the suppliers technological advances which may be of strategic importance in the future
- Companies can align future technology strategies with those of key suppliers to exploit future product and market opportunities
- They can obtain inputs from suppliers before the design is frozen
- They can capitalise on the latest technology
- It helps to make the supplier feel part of the organisational team
Service level agreements
different to product specs as services are intangible or hetrogeneous
These should be comprehensive to allow both parties to clearly understand the contents and their obligations.
They are often separate to but paired with a signed contract document
- The types of services to be provided and any exclusions
- Performance measurements/KPIs by which the service will be evaluated
- Legal structure e.g. dispute resolution,
- Terms and conditions under which the service will be provided
- Penalties e.g. related to sub-standard/late/failed delivery
- Remuneration for core services
- Specifications of any assets provided to the service provider e.g. canteen equipment
The level of service performance should be realistic.
Too high and there could be frustrations on both sides and conflict could occur.
Too low and the output will not fulfill the performance requirements of the contract.
advantages
- allows supplier to provide an accurate quote
basis t measure performance - increase trust and understanding and lead communication relationships
- forces consideration f customer needs and service levels
dis
- they are time consuming to prepare
- they made need altering when contract is running
- It can be difficult to recover charges made for poor performance, partly due to the subjective nature of service provision and partly due to contract law stipulations
- may be difficult t predict all provisions required
- lack of commitment from buyer/supplier; lack of support/governance;
- SLAs too detailed and burdensome to monitor - lead to low morale;
SLAs not ‘SMART’;
SLAs not understood;
staff not trained in SLAs.
Make or Buy
decision factors
buyers have links with supply market
well placed to provide commercial information on costs and benefits - cost benefit analysis - what value is gained
they can assess the suppliers capabilities and capacities
well placed to negotiate, source, contract and manage supplier
is activity or item a core
internal vs external capacities/capabilities
risks of allowing third party to manage - confidentiality,
buy in - could lead to redundancies
make - could require extra staff and training
adv
extract value from idle resources/capacity
cost of work is known in advance
exert control over production/quality
protection of confidentiality / ipr
less supply risk or supplier risk
maintain a stable workforce
Budget - Purposes
Budget is a plan expressed in monetary terms
It shows expenditure and income:
budgetary control consists of :
Planning - setting budgets, co-ordination, ensure depts are aligned
Monitoring
comparison with actual results achieved, differences are called variations and need to be explained, reported and actioned
The principle budget factor needs to be identified - this is the limiting factor - often sales forecast. Also need to be accurate
- It provides framework for planning _ where problems can be identified and steps taken to avoid or reduce them.
- such as cashflow difficulties
- the need to raise additional finance; - set of objectives and views objectives as operational targets;
- Approval of the budget authorities the policy represented by the budget and therefore allows responsibility for implementation to be delegated
- measure by which performance can be assessed and corrective action planned
- Preparing budgets increases communication between stakeholders and project managers which can encourage better relationships and knowledge sharing
- control by being the benchmark to which actual costs can be compared. Any variances can be assessed and corrections can be taken or mitigating reasons recorded.
- motivate and reward staff
- to communicate plans and targets to stakeholders;
OUTSOURCING _ Dis / risks
establishing scope and specification
preliminary costs - bus case, identifying supp sourcing, supplier selection, negotiation, drawing up / developing contract
ongoing contract management
contractual price/cost of service
costs of amending service as future arrangements change
costs of getting in wrong - supplier fails to perform
staff costs eg redundancy
opportunity costs - what else could the money be spent on
costs of getting it right - changes to systems and processes, communication, contract management costs
costs of teething problems
hidden costs - resources spent on implementing the contract, over spec
- failure to distinguish non and core activities - hospitals being clean
- poor choice of supplier
- contract contains inadequate or inappropriate terms and cond
- contract does not contain well defined kpis or service levels
- org gradually surrenders control of performance to supplier
Brand Names
implicity – the buyer knows exactly what they will receive and can easily compare quotes
The manufacturer will invest in building up image/quality so the goods are more reliable
It may be a feature of the finished goods e.g. Intel inside
If an item/material is patented there may be little choice
Subcontracting
use of an outside organisaton to do work tht cannot be done in house because of temporary shprtage of resources
- generally for specific role
- short term contract
- no transfer of employees
- easy to switch supplier
- distant relationship
eg producing 10000 containr made using a mold - because buyers company has received large order and needs help to produce
Pricing Arrangements - Cost Based Strategy Advantages
advantages of the cost-plus method are simplicity and predictability
.Simple. It is quite easy to derive a product price using this method, though you should define the overhead allocation method in order to be consistent in calculating the prices of multiple products.
Assured contract profits. Any contractor is willing to accept this method for a contractual agreement with a customer, since it is assured of having its costs reimbursed and of making a profit. There is no risk of loss on such a contract.
Justifiable. In cases where the supplier must persuade its customers of the need for a price increase, the supplier can point to an increase in its costs as the reason for the increase.
Pricing Arrangements - Cost Based Strategy Adv/dis
Pricing Arranagements - Cost Based strategy disadvantages
ignre elasticty f demand
Ignres cmpetetin and their prices
csts may be inaccurate and then csts wuld be wrng
potentail profit culd be lst - cnsider premium pricing
if cmpany cuts csts then price wuld follow and profit reduce
advantages of the cost-plus method are simplicity and predictability
.Simple. It is quite easy to derive a product price using this method, though you should define the overhead allocation method in order to be consistent in calculating the prices of multiple products.
Assured contract profits. Any contractor is willing to accept this method for a contractual agreement with a customer, since it is assured of having its costs reimbursed and of making a profit. There is no risk of loss on such a contract.
Justifiable. In cases where the supplier must persuade its customers of the need for a price increase, the supplier can point to an increase in its costs as the reason for the increase.
Fixed Price
prices agreed at bidding or negotiation stages and remains fixed for duration f contract
only where both [parties are expressly agreed changes would the price alter, if buyer want additional requirements
it means both parties are ASSURED f price
supplier would be liable t bear any cost changes whether a gain or loss.
example if raw materials fall the supplier would gain more profit, if they rise the supplier would less profit
or possibly where prices are fixed to some specified index;
Firm Fixed Price - remains fixed for duration, supplier bears risk of cost increases
Fixed price with contract price adjustment - adjustment clause allows fr variation in contrcat for example legislative changes
Fixed Price with review - review at certain points, annually
Example - might be for an off-the-shelf, well-specified item, such as stationery, in times of low inflation
Fixed Price
prices agreed at bidding or negotiation stages and remains fixed for duration f contract
only where both [parties are expressly agreed changes would the price alter, if buyer want additional requirements
it means both parties are ASSURED f price
supplier would be liable t bear any cost changes whether a gain or loss.
example if raw materials fall the supplier would gain more profit, if they rise the supplier would less profit
or possibly where prices are fixed to some specified index;
Firm Fixed Price - remains fixed for duration, supplier bears risk of cost increases
Fixed price with contract price adjustment - adjustment clause allows fr variation in contract for example legislative changes
Fixed Price with review - review at certain points, annually
Example - might be for an off-the-shelf, well-specified item, such as stationery, in times of low inflation
