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Procurement Terms and Conditions

Let’s start out with a story. A project manager needed to have his team members trained on using some equipment. He contacted a seller to do the work and then proceeded to have his contracts department send the seller a contract. Meanwhile, he arranged to have the team members fly in from around the world for the training.

The contract the project manager’s contracts department sent included terms and conditions that said that the project manager’s company would have the rights to create derivative works and make copies of any handouts from class. Those handouts were proprietary and already copyrighted. The seller could not and would not sign such a contract.

The class had to be cancelled at the last minute, after many people were already on planes to attend the training. Whose fault was this? It was the project manager’s fault. He should have made sure the contracts department understood what they were buying and also taken a look at the contract before it was sent, to make sure that any inappropriate language was removed.

Creating a contract requires the involvement of both the project manager and the contract manager. Do you do this?

The other side of understanding contract language is being able to enforce it. Remember, if it is in the contract, it must be done unless both sides agree and a change is issued!

One day the head of a company called the project manager asking where the seller’s reports were. The project manager did not know what reports the company head was asking about and so had not received them from the seller. It turned out that those reports seemed minor to the project manager when he finally read the contract, but had major legal significance to the company.

Not receiving them cost the buyer’s company an extra $50,000 in costs. The lesson? Know what is in your contracts and why.

In another situation, (tired of stories yet?), a seller did not submit testing information required in the contract to the buyer, and the project manager did not notice it was not received. After four weeks, the company head asked for the testing information and found out it was not received. The project manager then asked the seller to send the information.

The seller argued, “You did not receive the testing reports for four weeks and you did not say anything. You have therefore waived your rights to ever get them.” They refused to give the reports without a change to the contract and additional payment. This issue went to a court of law to resolve.

There is no clear answer with such limited information to say who was right in this story. The lesson? Read the contract and enforce all that is there.

Following are some of the terms and conditions that can make up standard and special provisions. You should be generally familiar with what all of these mean. Don’t get overwhelmed! You do not need to memorize these, just be familiar with the impact they have on you, the project manager.

These will often be used in sentences (e.g., “There was a force majeure,” or “There was a huge flood that caused the seller to not be able to perform”).

  • Acceptance How will you specifically know if the work is acceptable?
  • Agent Who is an authorized representative of each party?
  • Arbitration A method to resolve disputes that uses private third parties to render a decision on the dispute. Arbitration is paid for by the parties and is used because it is usually faster and cheaper than the courts.
  • Assignment Describes the circumstances under which one party can assign its rights or obligations under the contract to another.
  • Authority Who has the power to do what?
  • Bonds Describes the payment or performance bonds, if any, that must be purchased.  For example, a payment bond would protect the buyer from claims of non-payment by the seller.
  • Breach/Default A breach occurs when any obligation of the contract is not met. Watch out, a breach on the seller’s part cannot be fixed by a breach on the buyer’s part, e.g., not completing an item in the contract statement of work (seller’s breach) cannot be handled by the buyer stopping ALL payments (buyer’s breach).
    This is an extremely serious event. The exam will give you questions where seemingly little things in the contract are not done. The response to a breach must always be the issuing of a letter formally notifying the other party of the breach. The project manager must understand the legal implications of his actions. If he does not watch out for and send official notice of breach, the project manager’s company could lose their right to claim breach later.
  • Changes How will changes be made, what forms used, timeframes for notice and turnaround?
  • Confidentiality What information must not be made known or given to third parties?
  • Force majeure A situation that can be considered an act of God, such as fire or freak electrical storm, that is an allowable excuse for either party not meeting contract requirements. If a force majeure occurs, it is considered to be neither party’s fault. It is usually resolved by the seller receiving an extension of time on the project. (See also Risk of loss.) Who pays for the cost of the items destroyed in the fire? If the items were for the project, the risk of loss here is usually borne by the seller and hopefully covered by insurance.
  • Incentives What benefits can the seller receive for aligning with the buyer’s objectives of time, cost, quality, risk and performance?
  • Indemnification (liability) Who is liable for personal injury, damage, accidents?
  • Independent contractor States that the seller is not an employee of the buyer.
  • Inspection Does anyone have a right to inspect the work during execution of the project and under what circumstances?
  • Intellectual property Who owns the intellectual property (patents, trademarks, copyrights, processes, source code, books) used in connection with or developed as part of the contract? May include warranties of the right to use certain intellectual property in performance of the contract.
  • Invoicing When sent, what supporting documents are required and to whom are they sent?
  • Liquidated damages Estimated damages for specific defaults, described in advance.
  • Management requirements Attendance at meetings, approval of staff assigned to the project, etc.
  • Material breach A breach so large that it may not be possible to complete the work under the contract.
  • Notice To whom should certain correspondence be sent?
  • Ownership Who will own the tangible items (materials, buildings, equipment) used in connection with or developed as part of the contract?
  • Payments When will they be made, late payment fees, reasons for nonpayment? Watch out for payment management questions. For example, as a response to inaccurate invoices, the buyer cannot stop ALL payments; this would be a breach. They can, however, stop payments on disputed amounts.
  • Reporting What reports are required, at what frequency, from and to whom?
  • Retainage An amount of money, usually 5 percent or 10 percent, withheld from each payment. This money is paid when all the final work is completed and helps ensure completion.
  • Risk of loss Allocates the risk between the parties to a contract in the event goods or services are lost or destroyed during the performance of a contract.
  • Contract statement of work If not listed separately.
  • Site access Any requirements for access to the site where the work will be performed.
  • Termination Stopping the work before it is completed.
  • Time is of the essence Delivery is strictly binding. Seller is on notice that time is very important and that any delay is a material breach.
  • Waivers Statements saying that rights under the contract may not be waived or modified other than by express agreement of the parties. A project manager must realize they can intentionally or unintentionally give up a right in the contract through conduct, inadvertent failure to enforce or lack of oversight. Therefore, a project manager must understand all aspects of the legal and other contract parts to enforce them, even if a contract manager is available to administer the contract.
  • Warranties Promises of quality for the goods or services delivered under the contract, usually restricted to a certain time period.
  • Work for hire The work provided under the contract will be owned by the buyer.