Using word to manage exchange of electronic documents

As electronic documents are exchanged during Contract Management I’ adding this duplicate post here

Using the functionality of Microsoft Word™ in Negotiating Contracts.

Word™ has certain functionality that everyone that negotiates contracts should know about and be able to use.

First, under the Tools pull down menu you do two things
1. Select protect document. Click on changes and then password protect it.
2. click on “track changes” to establish how you want changes shown. You have three options on how the changes will be shown. One uses the Balloons that appear in the margins showing the change. A second provides a red line version of the changes with items inserted highlighted and items deleted showing strikethroughs. The third option is to use the Balloons only for comments and formatting, where all other changes are shown as red-line. This is my preference.

Once you receive a document with changes the easiest way to work with that depends upon the version of Word that you have. For Word 2010 you should have individual pages called "Home" "Layout" "Document Elements", "Tables", "Charts", "Smart Art" and "Reviewing" Click on the reviewing page and you will see the buttons I describe below. For prior versions of Word you do
it by adding the “Reviewing” pane to your Word™ Buttons. To add the Reviewing Button you click on the Toolbar Options Button that is dark and has a downward facing triangle on the bottom. Select “Customize” and click on the Button “reviewing”. When you turn on the reviewing functionality it will add a number of buttons to the toolbar that help you navigate through the changes.

To use the functionality you highlight the word, words or section you want to accept or reject. You can do that several ways:
• By clicking on your mouse and holding it down and dragging it over the change.
• Double clicking on an individual word will highlight the word

The Button that looks like a sheet of paper with a Pen with a left facing arrow when clicked will move you back to the last change.

The Button that looks like a sheet of paper with a Pen with a right facing arrow when clicked will move you forward to the next change in the document.

The Button that looks like a sheet of paper with a Pen with a check mark on it when clicked will accept that change.

The downward arrow to the right of the Accept Change Button provides additional functionality in accepting changes. For example, if you highlighted a paragraph with multiple changes in the paragraph you can click on accept all changes shown.
If you want to accept all changes to the document, it allows you to do that such as when the document with all the changes represents the final agreement of the parties and you want to produce a clean document for signature.

The Button that looks like a sheet of paper with a Pen with a RED X on it is the Reject Changes Button and when clicked will reject that change.

The downward arrow to the right of the Reject Changes Button allows additional reviewing functionality.

The Yellow button that looks like a file folder with a star on it is the Comments Button and allows you to insert a comment in the document such as why the change is not acceptable.

The Button in the Reviewing Pane that includes an upward arrow is the reviewing pane. If you click on that it will provide a split screen of the document that highlights the change and who made the change and when it was made.

There are additional things that you do need to be aware of in using Word™. For example, if you sent out the contract internally for review all the changes made will still be retained by Word™ even though you have used the reviewing tool to accept or reject them. To prevent the Supplier from seeing those internal changes, simply do a save as on the document to another file name and that will eliminate the history.

Word™ has several other tools that you can use as part of the negotiation process.
On the tool bar there is a “display for review” Button that allows you to view the original, the original showing markup, the final and the final showing mark-up. If you want to see all the changes that have been made, click on original showing mark-up.

In the Print functionality you can also decide which version of the document you want to print. For example sometimes there could be a dispute over who made a certain change. If you click on Print and in the area that says “Print What” if you select “List of Mark-up” what will be printed is all the changes that were made, when they were made and who made them.

The last tool you can use to make sure that you are seeing all the changes that have been made can also be found on Tools pull down menu. If you click on the Compare and Merge Documents it allows you to electronically compare the documents for changes.

Here’s how to do it.
In the current document that is under negotiation click on accept all changes and do a save as to a new file name. This keeps your original document untouched.
Open the new document; make sure track changes button is off. Then click on Compare and Merge documents and Select the Original document that was sent to the Supplier before any changes were made. Word™ will show the differences between the two and will show any changes that may have been made to the document with the track changes functionality turned off. Print out that document and use that to compare to your current document in negotiation to ensure that it represents a correct picture of what has been agreed to be changed.


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Protecting Against Unethical Parties

In a discussion on LinkedIN someone asked me how to protect themselves against the potential unethical party that may want to change or substitute pages within the contract documents. Here was my response:

A good customer or supplier will also want to be protected. When you deal situations like you describe here are several things you can do.

1. On each page make sure it lists the contract number, page number and total number of pages. That way pages can’t magically disappear.
2. When you incorporate documents by reference into the agreement always include the document name or reference number and the number of pages.
3. If you incorporate drawings list every drawing, its title or reference number and revision number.
4. Have the documents permanently bound before presenting them for signing.
5. Have every page sealed by impression.
6. Have the parties initial each page at the seal.

I've also had one time when I had a previous problem with a negotiator for a supplier where I had a Notary Public be in attendance at the contract signing to also have them sign and seal the documents. My counterpart didn’t like it but I made my point that the game he played in the past wasn’t going to ever happen again. I also had a time when I negotiated a contract for construction for an office in Manhattan. My counterpart who was also employed by the lessor balked at having to initial every page of my twenty-five page document stating we should trust them. I was prepared for that and pulled out a copy of their ninety-nine page lease we had to sign that had every page initialed by both parties. That ended the discussion.

Each of these approaches will make it more difficult to tamper with the document. You can't just pull one page out and replace it with another. To replace a page the other party would need to unbind the document, duplicate the seal, forge the initials and have it rebound in a way that shows it wasn't tampered with. If the documents were sealed and signed by a notary public, they would also have to forge that seal and signature.

Any time you consider potentially using soft copy documents for later changes to the contract, you first should determine whether the courts accept soft-copies. If they do you should include language in the contract that legitimizes the use of the soft copies. I also recommend establishing a control on what items may be added or changed by soft copy to limit the potential exposure. I also prefer to periodically execute written amendments that capture the soft copy changes that had been agreed during the interim period so I also have a writing of exactly what was agreed at that point in time. Most of the time the initial agreement contains the real liability and money related provisions. Addendums or appendixes that get added later are usually changes to the scope of work.

Let me give you an example of limiting what may be changed by soft copy. I had a group that managed thousands of different part numbers where there would be frequent changes. New products would be added, older products would go end of life, there would be negotiated changes to pricing or changes in lead-time. Rather than do a written amendment for each of those changes, I added a provision to our contracts that legitimized the use of an E-tool to make those types of changes. The supplier had controlled access to the system so only those that had the authority could input new or updated information. Their input was an offer to agree to make that change. We accepted that by e-mail or by issuance of orders for the new item or changed term. For each supplier we would periodically have a print out off all items that were in effect, their price and the lead-time and we would have both parties sign that print out. We limited the use to only those items. I didn't want changes to any of the other terms to be made using that approach because of the potential risk in changing other terms. We had proof of their access and inputting the data. They had either our e-mail or order showing we accepted the change. Both of us agreed that the use of that tool served as a written amendment to the agreement.


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Dispute Resolution

In managing contracts a common activity of a contract manager is attempting to resolve disputes. If a dispute arises the first thing the parties should do is determine what the contract established for a dispute resolution process. In my negotiation blog I included a post “Alternative Dispute Resolution” that describes alternative processes that may be agreed by the parties. If there is no alternative dispute process established, the parties have two options. They can seek to come to mutual agreement or they can decide whether to litigate.

A dispute may exist only because one party has dug in and refuses to move or make any concessions. It may have become a personal issue for them. There may be no rational or logical reason for their actions. When that occurs it is best to have the matter reviewed at higher levels where the matter is no longer personal. You don’t need to have a right to have issues escalated through a formal process in the agreement. If there is a dispute and its not getting resolved either party may seek to escalate the dispute to a higher level. The best way to do that is to escalate the issue to your manager and have them escalate the issue to the other party’s manager.

The value of an escalation is it becomes a review of the facts only. It’s strictly business and will be conducted without the emotion of the day-to-day battles. The fact that either party can request that the the dispute matter be reviewed by a higher level within the other party’s organization adds a subtle pressure to come to agreement or have all their facts in order. Subordinates don’t want to look bad in the eye of their management.

Escalation is the same approach you would use to get past those people whose job it is to tell you no or to place roadblocks in the way of you getting what you want. In business everyone has metrics that they are measured on. If you escalate the dispute to a manager, they frequently are not measured on the same metrics. They can look at the matter from a broader perspective. They can look at the impact as part of the overall business or from the perspective of customer relationships and customer satisfaction as they may want to retain you as a future customer. You have a better chance of reaching agreement.

If they parties continue to disagree, they would need to decide if they wanted to invest the time and expense to proceed to court. If they feel that they have had their matter heard and have been treated reasonably, they are less likely to sue.

As a Buyer the escalation process may buy you critical time you need to complete the work, or to identify alternative sources and plans in the event that the dispute is not able to be settled in a reasonable manner.

If an action proceeds towards litigation the contract manager will need to pull together all the necessary information about the dispute to provide that to the lawyers.

In a dispute you will always need to know:
1.What is the subject that is in dispute?
2.What is the basis for the dispute?
3.What are the applicable documents and specific sections involved with the dispute?
4.At the time the dispute arose what were the terms in effect?
5.Identify any information, instructions, that may have caused the dispute.

As disputes can arise outside of the contract, make sure you can identify the applicable 5W’s & an H.
a)Who was involved?
b)What was the obligation?
c)Where did it occur?
d)When did it occur?
e)Why did it occur?
f)How were each of the parties impacted?

For disputes involving the contract, always refer to the specific section of the contract, specification, drawing etc. that established what was required that wasn’t completed, performed correctly or that remains in dispute.


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Managing the last five percent of the work.

When I managed construction contracts I always said that managing the last five percent of the work was always the hardest. That was not because the activity was difficult, it’s because the parties want to move on to the next project and much of the remaining work was small. It can be cleaning up a “punch list” of items that needed to be corrected or it was more administrative in nature such as pulling together all the required documentation. To the buyer that information may be critical so before getting to that last five percent I would always go through all the documents that made up the contract and generate a list of everything that was required to be provided and their quantities.I would provide that to my counterpart as a checklist of all the things they needed to deliver.

Examples of the types of documents that might be required are:

1.As constructed drawings that reflect all the changes that were made to the work. These are needed for the owner to understand what actually exists and where to find things. It also provides the basis for the owner to further document any changes they make going forward.

2.Copies of all equipment warranties from the original equipment manufacturer.

3.Copies of operating manuals that explain how to use equipment that was included.

4.Copies of maintenance manuals so the owner can perform routine preventative maintenance.

5.Training materials and documentation on use of any equipment provided.

6.Contact information for any warranty or service on third party equipment.

7.Contract information for any warranty claims with the supplier.

8.Spare parts or supplies that were requirement to be provided.

9.Tools to be provided to perform maintenance.

10.Source and cost to obtain additional copies of materials.

11.Source and cost to obtain training on operation or maintenance.

As you can see from the listing, the majority of these last minute deliverables are things you need to be able to effectively use and maintain what you just purchased or had constructed. Not getting them delivered in a timely manner can cause problems or inefficiency.

I always recommend retaining a significant amount of the final payment until all of the required deliverables have been provided and are accepted as meeting the requirement. I find that withholding money keeps significant attention focused on the other party providing what was required.


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Managing Insurance

While a contract may require one of the parties to carry certain types of insurance, do contract managers need to manage the collection and checking of policies or certificates of insurance? The answer to that question is usually determined by two factors. The first is do you also have an indemnification provision in the agreement where the supplier will indemnify you against certain third party claims including those of their employees? The second is how financially stable is the other party?

If the other party is financially stable and has significant assets if they were to breach their obligations to carry the required insurances, you could still sue for the damages you sustain and they may be more than the required insurance amounts. If you are dealing with a high-risk activity or companies that are not highly stable financially or that don’t have sufficient assets to stand behind the commitments of the contract you should be managing insurance requirements.

What does managing insurance include?

1.Getting certificates of insurance or actual copies of the required insurance policies before any work is commenced.

2.Reviewing the insurance policy or certificate to ensure that the insurance meets the requirements set forth in the contract:
a.Do the coverage limits match the requirements in terms of 1) the amounts and 2) the way the limits are expressed such as total liability, total liability within a limited term or liability on a per incident basis?
b.Does the insurer meet the requirements stated in the agreement for financial stability of the insurer such as an AM Best rating?
c.If the contract required you to be named as an additional insured does the certificate or policy reflect that?
d.If the contract required you to be named as a loss payee, does the policy or certificate state that?
e.If the contract required the insurance to be primary & non-contributory, is that stated in the policy or certificate?
f.If the contract required the insurance to include a waiver of subrogation, does the certificate or policy include that waiver?
g.If the contract required that there be severability of interests, does the certificate or policy state that?
h.If the contract required the coverage include subcontractors, does the certificate or policy include that?
i.What is the insurance coverage period listed in the policy? Is it effective during the contract term? Do you need to manage getting copies of new insurance or renewals during the contract term? If you do, make a note of that and add that to your calendar to manage.

3) Ensuring the policies are current and in effect during the term of the contract, and

4) Filing copies of all policies or certificates in the contract file. .

It is extremely important to collect and keep copies of all insurance policies or certificates in the contract file, even those that may no longer be effective. That is because potential claims may occur well after the completion of the contract. Suppliers or contractors may no longer still exist. If you have a claim, you need to identify insurance policy and issuer who provided the insurance at the time the injury or damage occurred.

An insurance company is only responsible for insurable events that occur during the term their policy was effective. For example in a jurisdiction that had a statute of limitations on tort claims of six years, the injured or damaged party has six years from the date on which they were injured or damaged to bring that claim. As long as they bring the claim within the allowable period they have met the requirements and final litigation of the claim could take years. A supplier or contractor could have gone through a number of different insurers during the period. It is the insurance company that issued the policy that was in effect at the time the injury of damage first occurred who is responsible. The current insurer is only responsible for injuries or damages that occur during their coverage period. As long as that insurance company still exists, and you have proof of the insurance, you can make claims against them.

For more on insurance see my post “Insurance” on my KnowledgeToNegotiate blog.


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Managing Acceptance and Testing

In a contract there may be a number of different times when testing and acceptance may be required. For example:

In an agreement that had major milestones there may be acceptance and test requirements for the completion of the milestone.

For production of an item in volume they may be an acceptance and test of the “first article” produced to ensure that meets the expected requirements.

Prior to the completion of performance there may be a formal acceptance and test required to prove the item meet all the requirements of the agreement.

There can be performance testing that occurs after installation of a software program of piece of capital equipment as part of final acceptance that the item performs as committed.

Whenever there are an acceptance and test requirement several things be included.
1.The party whose work is subject to test and acceptance needs to either delivery the to the other party or provide notice to the other party that it is ready and available for testing and acceptance.
2.The parties should have agreed in advance upon where and how such testing will be performed.
3.For any discrepancies found in testing they parties should have agreed in advance what the impact will be. How long do they have to correct it? Does the test start from the beginning or from some forward point? Who pays the cost of any subsequent tests>
4.The party who has the acceptance and test rights will usually have a time period imposed during which the test and acceptance must be performed. That period should be extended by any discrepancies and retesting required.

Contract managers would be seldom involved in the actual testing and acceptance of the item delivered.Their role is to manage the documentation that surrounds the process and making sure people are aware of times required to complete acceptance and test activity.You retain copies of notices for the test to commence and verify that those meet the requirements of the contract.
You notify individuals that the time period for test and acceptance has commenced and when it needs to be completed by.You manage documentation highlighting and problems or discrepancies and advise the other party of your rights to have the period extended in accordance with the terms of the agreement.Upon final test and acceptance being complete, you provide a formal notice that it has been completed or provide a list of requirements that must be completed with any conditional acceptance.

It is the other party’s responsibility to manage their actions that may be triggered by acceptance such as invoicing for milestone, progress or final payments. The two most important things the contract manager does during this activity is:
1.Ensure that your right to test and accept the item has not lapsed by failing to act within the committed time frame.
2.The contract manager must document when final acceptance has occurred. That is because final acceptance is frequently a trigger for when the warranty period commences.


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Manage meeting minutes and correspondence

In contracts a common practice is to include what’s called a “merger” term where all prior contracts, meetings, and correspondence on the subject matter is considered to be merged into the agreement. In doing that the clause states that the agreement represents the entire understanding of the parties. What that does is eliminate other correspondence that may have existed at the time of the agreement from being considered in the interpretation of the agreement. The only problem is that term only addresses correspondence that existed prior to the execution of the agreement, it does not limit correspondence that happens after the agreement is signed. In many contracts there will substantial correspondence that occurs between the parties. If there is a problem that occurs and the contract itself isn’t clear, a party may seek to introduce these documents as evidence of what the parties agreed or understood.

I wrote a blog post about documents "signed for record purposes only" that is appropriate to share as part of this post.

Signed for record purposes only is a qualifying statement that is most commonly used in construction contract documents. For the owner, having a contractor sign a document “for record purposes only” is simply not something you want to accept. The reason for that is the statement isn’t making any representation that the information is complete and accurate. The contractor wants to have the document be part of the records under the agreement where they could potentially use that to bill or make a claim against. What this does is place the burden of proof on the owner as to its accuracy to ensure that what was included is accurate. If a supplier is preparing a document that is the basis for them wanting to be paid or for them to potentially use in a claim, I want a representation that the information is complete and accurate.

For the owner using “signed for record purposes only” on documents they acknowledge makes sense. If I was allowing a clerk of the works or site engineers to sign contractor documents, I would want those signed for record purposes only. For example a contractor may want a record of the materials that they brought on site as part of documenting that as an additional cost. When the clerk or site engineer signs that for record purposes only, all they are doing is agreeing that the activity occurred. They are not agreeing they were needed or required. This leaves it up to the owner to determine what should or shouldn’t be covered under the agreement.

In a claim the contractor would use that document as proof of what they had delivered to the site. In defending against the claim the owner would do a number of things. Normally if you have a clerk of the works or site engineer you require them to maintain a daily site log of all the activities that are occurring on site. You would review that site log to see all materials brought on or taken off the site. They would also review the architect or engineers instructions to the contractor about its operations and protection of the materials. The owner would use all of that information to determine whether they supplier did anything to cause the problem that required the additional soil. Based on that they would determine what, if anything, the supplier should be paid.

Having a record of an action and agreeing that the owner is responsible for costs associated with that action are two different things.

This one example highlights the need for contract managers to make sure that all correspondence they send to the other party is both a clear and accurate understanding of the facts. This also means that they need to review all correspondence, meeting minutes, generated by the other party to also ensure that what they are saying is both clear and accurate. If something is wrong or was not agreed, you can’t sit by and do nothing. You need to document what you believe is the fact or agreement. If you do nothing, only their side of the story becomes part of the contract record and may be introduced into evidence.

I’ve worked on programs where I agreed the contractor or supplier would publish meeting minutes of all meetings. I had one condition to agreeing to that. They were required to send me a draft copy of any minutes for my review and that they only be published and be made part of the contract record after we both agreed the content was the complete, accurate, understanding of both parties.

If the other party sends you correspondence that's not clear of accurate always provide a response to clarify or correct it.That does two things. First, you make it clear that you have not accepted what they have said as true or accurate. Second, if a claim or lawsuit occurs at a later point in time when you aren't around, the contract file will present an accurate record of the activity.

If you learned from this post, think about how much more you could learn from the book.
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Managing Terminations

The main things that impact how you terminate a contract are the termination rights reserved in the contract and whether the termination is being done for cause or without cause.

Termination without cause.
If you have the right to terminate a contract without cause, in most cases all that’s required is a notice of termination as provided for under the contract. That notice of termination can be in the form of a letter where you reference the contract number and specific section of the contract that allows termination for convenience. You inform the other party that the agreement is being terminated in accordance with that section on a specified date. As that letter is functioning as a notice or formal communication between the parties for it to be effective it must be communicated in the manner agreed in the contract for parties to provide form notices or communications to the other party. As termination may create liability for materials or work in progress its best to communicate the termination using a method that shows proof of delivery.

Aside from potentially providing the notice of termination without cause, the contract manager will be responsible for managing the negotiation of any liability associated with the termination. The scope of the negotiation will be dependent upon the language included in the termination without cause section. For example assume that section says:
“Buyer may terminate without Cause effective immediately or as otherwise specified in such notice, and will compensate Supplier for the actual and reasonable expenses incurred by Supplier for work in process up to and including the date of termination, provided that:
(i)Supplier uses reasonable efforts to mitigate Buyer’s liability under this Subsection by, among other actions, accepting the return of, returning to its suppliers, selling to others, or otherwise using the canceled Products (including raw materials or works in process), and
(ii)Such expenses do not exceed the Prices.
Upon termination, in accordance with Buyer’s written direction, Supplier will immediately:
1. Cease work;
2. Prepare and submit to Buyer an itemization of all completed and partially completed Products and Services;
3. Deliver to Buyer Products satisfactorily completed up to the date of termination at the agreed upon Prices; and
4. Deliver upon request any work in process.”

With that language the contract manager would be responsible to:
1.Determine that the amounts being charged are actual and reasonable. This would include performing a detailed review of all costs being charged to ensure that each charge meets those two criteria.
2.Review whether the supplier used reasonable efforts to mitigate those costs as in this case mitigation of the liability was a condition of payment. Understand what efforts they took to mitigate the liability and whether those efforts met the standard or “reasonable” efforts.
3.Verify if the amounts being charged to ensure that the total of those charges do not exceed the price of the item being cancelled.
4.Review whether the work was ceased immediately as work performed after the effective date to the termination is not to be performed.
5.Review the inventory of all completed and partially completed work, potentially determining to have certain work completed.
6.Ensure satisfactorily completed work is delivered and inspected to ensure compliance with acceptance procedures.
7.Determine internally whether any partially completed work should be shipped to the buyer or be scraped or disposed of paying the supplier for those scrap or disposal costs.
8.You would manage the return of any buyer owned materials or products being held at the supplier under separate agreements and withhold any final payments until the receipt of those.


Termination for Cause.
In terminating for cause you normally would have two letters. The first is a cure letter notifying the other party that they are in breach of the contract. In those notice you provide the objective reasons for the other party being in breach of the agreement. This is usually a list of all the things that they were supposed to do or deliver which have not been performed. In that you reference the obligation they had, when they had to meet that obligation and what their actual performance or progress was. Next in the cure notice you need to tell them they need to cure the breach (if they have the right to cure) within the specified cure period. If there was no specified cure period a reasonable cure period would be required and you would still establish the date by which you want the breach cured.

If the other party can’t cure the breach (such as would occur with a wrongful disclosure of confidential information), or fails to cure within the allowable time frame. The second notice is the actual termination notice. Below is a simple example of each.

If they didn't have the right to cure or the breach was something that isn't curable, I would combine the content of the two letters into one listing the specific breach or breaches that occurred and notifying them of the termination. The key is to terminate for cause it must be a material breach and you need to tell them what their obligations were and how they failed to meet those obligations making it a material breach of the agreement.

NOTICE TO CURE LETTER

ABC Company
One Main Street
Anytown, Anystate Anyzip


ATTENTION: John Q. Public

SUBJECT: Notice to Cure of SOW 49xxxxxxxx / PO 500xxxxxxx / Customer XYZ

Dear Mr. Public:

This letter is being sent as formal notification that Buyer considers Supplier to be in material breach of its agreement for failure to deliver the required quantities of acceptable Work Product by the scheduled delivery date.

Facts:
1. Supplier is required to deliver _____ units and has delivered __________
2. Of the ____ units delivered by Supplier, ____ fail to meet the quality requirements set forth in the Specification .
3. Attempts to address the quality problems have continued to fail to provide acceptable work product.
4. The agreement required delivery of ______ units by _________and Supplier has failed to delivery the required quantities of acceptable work product.

You are hereby notified that you have until _______ to cure such breaches. If you fail to cure these breaches by this date, Buyer may terminate the Agreement for cause in accordance with Section __ of the Agreement by issuing a notice of termination.

Sincerely,



TERMINATION NOTICE

ABC Company
One Main Street
Anytown, Anystate Anyzip


ATTENTION: John Q. Public

SUBJECT: Notice of Termination of SOW 49xxxxxxxx / PO 500xxxxxxx / Customer XYZ

Dear Mr. Public:

On ___________ you were provided with Notice to Cure for the following Breaches of the Agreement.


As you have failed to cure those breaches within the cure period, this letter is formal notification that the Agreement (has been/ will be) terminated for cause in accordance with Section ___ of the Agreement effective ___________.

Sincerely,


The contract manager’s responsibilities when there is a termination for cause will depend upon what the agreement says. I’ve run into Suppliers that want to be compensated for costs they have incurred prior to the date of termination. While that may be a reasonable price to pay for the right to terminate without cause, my usual response when it comes to termination for cause is to do so would be rewarding them for their non-performance. That is not something that I’m not going to agree upon. The last thing you want is to have a supplier who is failing to perform to be able to continue along incurring costs your expense when there is no hope they will cure the breach.

Since termination is a right, not a duty, of the non-breaching party, you are not bound to establish a specific date for termination. For example, in a termination without cause you could establish the termination date out in the future so that your interim needs are still met. In a termination for cause, once the Supplier has failed to cure you don’t need to have the termination be immediate. Once you have issued a notice to cure, if the Supplier isn’t confident that they will be able to cure in time their natural tendency would be to wind down the work to minimize the costs they could wind up bearing. Here’s where a little common sense needs to come into play. If you need them to perform, at that point you could discuss assuming certain potential liability in conjunction with what the actual termination date you may have planned. While under the contract you may not be obligated to assume those costs, you may want to assume certain costs to ensure that you have a continuing flow of products or services. I can sometimes be better to get some performance or deliveries rather than none. If you make it all at the Supplier’s risk, they may simply not be willing to assume the potential risk to continue to perform.

In most termination for cause situations where you assume no liability if they breach the agreement the primary responsibility of the contract manager is to:
1.Manage the acceptance and payment for good items that were received prior to the effective date of the termination.
2.To work with the users to determine what effective date works best for them and include that in the termination notice.
3.If you need the supplier to continue to be producing and not abandon work in the interim you could agree accept completed products delivered up to a specific date.
4.You would manage the return of any buyer owned materials or products being held at the supplier under separate agreements and withhold any final payments until the receipt of those.


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Managing Bailed, Loaned or Consigned Items

In my blog “Knowledge To Negotiate” I wrote a post called “Bailment, Consignment, Loan of Product” that explains each of these items and the differences between them. As a contract manager if you have items that are provided to another party through any of these approaches you need to managed them differently.

In a consignment, the item is transferred to they consignee for their use or sale in accordance with the terms of the consignment. In a consignment the primary responsibility of the contract manager it to manage the accounting of:
1) What was provided to the consignee,
2) What has been used, consumed, or sold by the consignee, and
3) What is owed the consignor as a result of that use, consumption or sale.
A second responsibility is to manage the return of any remaining materials at the end of the consignment period making arrangements for there return, resale, or disposal.
A third responsibility is checking to make sure that the consignee is meeting the requirements of the consignment agreement and documenting any problems with that. That could mean things like verifying that the consignee has the required insurances; the consignee not being able to account for inventory, unauthorized sales, improper storage, or handling of the materials. It would include any act or failure to act that could cause damage to the materials that you still own.
The last portion of responsibility to manage the collection of any monies or credits due.


In a bailment situation the bailee holds the materials awaiting further instructions by the bailor. For example a supplier could have a warehouse agent hold materials while awaiting instructions for shipment to supplier’s customer. In a bailment the primary responsibility of the contract manager it to manage the accounting of:
1) what was provided to the bailee,
2) what the bailor has instructed the bailee to ship to a third party and
3) what the remaining inventory is to ensure there is no shortages of inventory.
A second responsibility is to manage the return of any remaining materials at the end of the bailment period making arrangements for the return, sale, or disposal.
A third responsibility is checking to make sure that the bailee is meeting the requirements of the bailment agreement and documenting any problems with that. That could mean things like checking to ensure they have the required insurance coverage. Documenting the bailee not being able to account for inventory, unauthorized use or sales, improper storage, or handling of the materials. That would also include any act or failure to act that could cause damage to the materials that you still own.
The last part is managing the collection of any monies or credits due for any loss of damage to the materials while held with the bailee.

In a loan of product situation the party is expected to use what has been loaned and the loan agreement will normally require that they insure the item while its in their hands. They may also be responsible to maintain and repair the item if repairs are needed during the period in which the item is loaned. The expectation in any loan of product is the loaned item will be returned in the same condition as it was loaned with only normal wear and tear excepted. With a loan of product situation the contract manager will seek to ensure that the loaned product is being managed in accordance with the conditions of the loan agreement. Loan agreements will require that the item be insured, and maintained. They may also include restrictions on the use of the loaned item. For example if a company owned a production tool used to make a product, they may want to restrict the use of that tool to only them. In a loan of product the primary responsibility of the contract manager it to manage the accounting of what was provided was provided that must be returned., A second responsibility is to manage the return of the loaned product. A third responsibility is checking to make sure that the requirements of the loan agreement are being met and documenting any problems with that. That could mean things like checking to ensure they have the required insurance coverage. Documenting any failure to meet requirement maintenance requirements, unauthorized use of the loaned product, improper use storage, or handling of loaned product. That would also include any act or failure to act that could cause damage to the loaned product.
The last part is managing the collection of any monies or credits due for any loss or damage to the product while held with the user or any costs required to put the loaned product back in good working condition as a result of the user failing to properly use or maintain the loaned product.


If you learned from this post, think about how much more you could learn from the book.
The book is only US$24.95 plus shipping. The hot-link to amazon.com is above the date.

Contracting strategies

What is a “contracting strategy”? In managing contracts for a corporation each entity may have their own contracting strategies. Sales may have their sales contracting strategies for their sales contracts. Procurement may have their contracting strategies. Service organizations may have their strategies. Leasing or licensing organizations may have their own strategies. The term “Contracting Strategy” can have a variety of different meanings. For this post,the contracting strategies I’ll discuss are various procurement contracting strategies. If you can think of ones that I’ve missed please feel free to add it through comments to this post..

A contract strategy in procurement:
Can be used to identify which purchases you have under contracts versus simply P.O.'s.
Can mean decisions on how you source (single suppliers versus multiple suppliers).
Can be a method by which you hedge certain procurement risks.
Can describe what risks you are willing to accept and what you want to transfer to the other party.
Can describe how you plan on writing agreements (fixed term, self extending, evergreen).
Can address how you manage things like end of life or end of support.
Can refer to a strategy used to manage when contract negotiations will occur.
Can be driven by perceived leverage changes that may occur between the parties.
Can represent a strategy for the establishment of standard contract templates, alternative clauses and what individuals may change or need to get approved on to changes is part of an overall contracting strategy.
Can also vary depending upon the life cycle of a product or service you are buying.

Contracting strategies are driven by the need to manage risk. They may be driven by the desire to take advantage of opportunities both now and in the future. They may also be driven by resource availability that’s needed to manage the activity. There is no one single best strategy and within a company you can easily have different strategies employed in different commodities. Let’s take a look at these and more,

1.Strategy on which purchases you have under contracts versus simply using Purchase Orders. There are three major factors that decide this. One is the potential to leverage repetitive purchases or the same items or from the same suppliers to simply get a better deal. The second factor is the inherent risk with the purchase. The third factor is the risk or impact of a failed performance. Small dollar value items may high risk and high dollar value purchases may be low risk. Low risk, not repetitive purchases should be done by purchase orders. Low risk repetitive purchases should be put under contract when better pricing or terms can be achieved. Higher risk non-repetitive purchases should as a minimum have a written or electronic acceptance so it is a binding agreement. Higher risk repetitive purchases should be under a contract. All high risk purchases should be under a contract

2.Contract strategies on how you source. If you have a single source supplier that you are dependent upon where the cost or time to switch suppliers is prohibitive, you should always have a contract and the contract needs to protect you. For single source contracts the term should be for as long as you potentially need the supply or services. You should have price and other competitive protections built into the contract. For example if you committed to purchase all of your requirements of a particular item from one supplier, to maintain that commitment you would need them to meet all performance requirements set forth in your contract. You would want them to commit to provide you with all of your demand. You would also want to require that supplier be competitive from a price and technology perspective with other companies and have the ability to benchmark other companies to force the supplier to remain competitive. If you have multiple suppliers that are under contract and are qualified to perform you would want a contract strategy where contract expire on alternative years. That way if you are not able to successful renew the agreement with one, you have the other and also have a year to bring on an alternative. I might also include a transition period, where if there is no agreement on the contract, the supplier agrees to sell you products or services for a limited term at the same price and terms that existed to smooth the transition.

3.It can be a method by which you hedge certain procurement risks. For example in true commodity markets your contract strategy could be a mix of contracts and spot purchasing. The contracted purchases provide stability in pricing and the spot purchases provide the ability to take advantage of spot rates when they are favorable and not be too hurt when they are unfavorable as the contract purchases mitigate the impact.

4.It can identify which risks you are willing to assume, the type of contract you want to enter and what risks you need to transfer. There are a number of approaches to contracts starting with time and materials and ending with a fixed fee. The variables between approaches are time versus risk. A contract strategy should help determine what the best approach is for an individual situation

5.If can describe how you plan on writing agreements (fixed term, self extending, evergreen). In determining the length of the agreement there are several things to consider. The first is how long do you expect the relationship to last. Second is how much do you think the contract terms will change. If you expect that it will be a long term relationship and the primary things that will change will be the addition or removal of products or service and changes to the prices or lead-times, you can do a long term or self-extending agreement in which you periodically have the right to negotiate those changes. That eliminates the need for managing amendments to extend the contract term. When you select a fixed term you always need to be concerned with having to manage extensions or have sufficient advance notice that you may need to source an alternative. For example, if I had a two-year term and I know that it would take 6 months to qualify and be in the queue to get materials, I would want the negotiation of any extension with the existing supplier to occur before the eighteen months had passed so I could plan accordingly.

6.It can address how you manage things like end of life or end of support. Every product has a point in time where it is no longer manufactured, having been replaced with a newer or better one. No product is committed to be supported forever. There will always be a time when the supplier declares that they will no longer supplier that product or that version. The contracting strategy needs to take both of those into account and establish what’s required to deal with those situations. It can be things like requiring guaranteed availability for a certain period. It can include things like advance notice to identify other alternatives and last time buy options to provide a smooth transition.

7.It can refer to a strategy used to manage when contract negotiations will occur. In many companies price negotiations need to occur at the same time every year to establish standard prices for planning purposes for the next year. Where groups get into problems is when they also try to do contract negotiations at the same time. The two do not have to be managed together and when you use term contracts that need to be re-negotiated its best to establish a contract strategy to have contract term expiration dates be spread over the course of the year, with the option to adjust pricing when that is negotiated. For example, if you had a contract had the price negotiated in December where the price was good for a year and the contract expired in June you would extend the contract in June with the pricing previously agreed with the agreement that new pricing would be negotiated in December of that year.

8.It can be driven by perceived leverage changes that may occur between the parties. For example, if you agree to a single source situation with a supplier, at the end of the initial contract term your leverage may be limited if it is difficult or costly to change suppliers. If you find yourself in that situation you need to have a strategy that implements either a longer term agreement or you need a contract where you have an option to extend the agreement and only limited parameters are subject to negotiation and those are also bound by other parameters. For example, they only thing subject to negotiation is the price and the future price cannot be more than X percent over the current price.

9.The establishment of standard contract templates, alternative clauses and what individuals may change or need to get approved on to changes is part of an overall contracting strategy. This is clearly part of managing risks to ensure that the right level of skill has to be involved in changes that could significantly impact the cost or risk of the purchase.

10.The contract strategy may also vary depending upon the life cycle of a product or service you are buying. For example during the initial phase of a product’s life the price is usually the highest it will be and will go down as competition enters into the market. So in this initial phase you would want long-term contracts that lock you into a price that will be falling. At the end of the life cycle of a product as companies exit the market with demand still remaining, prices tend to go up so if you renewed a contract when the market was at its low point you would want a longer term contract to protect you against that price upswing that normally occurs.

11.Contract strategy should take into account and manage when contracts expire to avoid expiration during key periods. When I worked for a bank management wanted to replace their debit card processor with a new supplier. The problem was their current contract expired in December, which was their most critical period of the year. The risk in changing suppliers at that time was simply too high to risk it. So I approach the supplier in the end of September and negotiated a three-month extension to the end of March. That was to allow for negotiations with them and others. They didn’t keep the business and we were able to switch over to a new supplier performing the conversion to the new supplier at a far less critical time. Contracts don’t need to have terms written only in annual increments. You should have a strategy that allows you to set a contract term’s length so that it will expire when it is best for you to have it expire.

12.Contracting strategy can also look at how customers decide to use prime contractors or interact with subcontractors, especially subcontractors that are critical to them where they may need long term relationships.

The key in developing contracting strategies is to always be thinking in about two things. First, what are the circumstances and what do you need at the time you need to negotiate the agreement. Second, what do you perceive will occur over the term of the agreement and how to you want to manage, control, or take advantage of that. President John F. Kennedy provided a great contracting strategy when he said "The time to fix a roof is when it's sunny."


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The book is only US$24.95 plus shipping. The hot-link to amazon.com is above the date.

Managing Payment

A contract manager may be responsible for managing invoicing or managing payment. What does managing payment consist of?

Contracts may be written where payment can be made in a number of ways such as:
1.A lump sum payment upon completion of the work.
2.Payments based upon completion of agreed milestones.
3.Payments based upon the percentage of the work that has been completed.
4.Payments based upon time and materials used to date.
5.Payments based upon cost plus a fee for overhead and profit.
6.There will be payment terms for when payment will be made.
7.There may be requirements for invoicing.
8.There may be terms where a portion of the payment due is withheld until final completion (retainage).
9.There can be terms such as pay-when-paid where the obligation to pay is contingent upon receiving payment from another party
10.Contracts may also included provisions for payment of reimbursable costs or expenses and have limits or guidelines that must be met.

In the negotiation of the payment approach the suppliers may want to do several things.

Front end load the payment or payment schedule so they are working off the buyer;s money.

Use the payment schedule and the amount of payments so that it is difficult or costly for buyers to change suppliers. The more you have paid them up front the more difficult it may be to change as they have your money.

For many purchases the negotiation of payment terms is very simple, you negotiate a certain number of days after some event in which you make payment. For example:
a commitment to pay net sixty days after the date of delivery. The key factors in establishing the payment term for the Buyer are:
1.Value of money for the use of the money during that term.
2.Ability to perform inspection, test, and possibly rejection before you are obligated to make payment.

In both negotiating payment and managing payment a key is to make sure that you haven’t paid the Supplier more than the work is reasonably worth at the time the payment will be made.This ensures that if the Supplier fails to perform, you still have the remaining money to help correct or complete the performance. Payment terms are also a good way of managing performance. For example you could have a term where if a supplier fails to meet a contract milestone on time the amount of that milestone payment will be withheld until the work is back on schedule.

When a contract manager assumes the management of a contract a part of their diligence in understanding the contract is to understand the contract rights and obligations with respect to payments.

Managing payment responsibilities may include:

1.Reviewing invoices to ensure that it represents the agreed method of payment.
2.Reviewing invoices to ensure all required back-up documentation required is provided and complete.
3.Reviewing invoices to ensure any categories or rates used are what was agreed in the contract.
4.Reviewing the invoice to ensure that the date for its submission is correct and any requirements for invoicing are complied with.
5.If retainage has been agreed that the invoice accounts for the agreed amount of retainage.
6.If it is based upon a pay-when-paid term, that the corresponding payment has in fact been received.
7.For any portion of the invoice that represents reimbursable costs or expenses it includes checking to ensure that the limits or guidelines have not been exceeded.
8.Lastly either the contract manager or another party needs to review all invoices to make sure that they are correct, complete and accurate.

If there is a problem with any of these 8 points, the contract manager needs to work with their counterpart to correct the problem so the invoice may be processed or have the invoice adjusted to remove any items in dispute or where the amount claimed has not been adequately proven or documented.

I’m a firm believer having parties submit an advance copy of invoices for review so that any problems that are found can be corrected prior to the submission of the actual invoice. That eliminates any potential delays in payment. I also believe that prior to any invoicing the Buyer’s contract manager should review their payment process with the supplier to avoid problems and delays. For example if a Buyer wants to make all payments electronically, it may require the parties to enter into a separate electronic funds transfer agreement. Information will need to be provided to set up those electronic payments such as the supplier specifying the bank and account numbers they want payments made to. The supplier needs to understand who to invoice to and how invoices are to be transmitted. As many companies batch process payments, the supplier should be advised of specific cut off dates for submissions of invoices for processing as failure to meet those dates will delay payments.

During the course of the contract the contract manager may be involved in negotiating changes to the payment terms or requirements. They may further negotiate change in rates and include those in amendments. They may negotiate new categories of costs and rates. There may also be terms in the agreement that provided for a future change or may have had a formula to change the costs or rates when certain events occurred. A good example of this would be when you have union workers and the contracted rate for them changes. There may also be costs that were subject to change based upon changes in the marketplace for those commodities. The contract manager needs to note all those potential changes and be aware of how and when those changes will be effective. You do that to make sure that invoices that cover a specific time period include the costs and rates that were agreed for that specific time period.


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Managing Confidentiality or Non-disclosure Agreements

I’ve worked on activities where confidentiality information needed to be strictly controlled where a limited number of copies was allowed, every page was numbered with the copy number, they needed to be retained in a controlled area with limited access. Access was managed on a need to know basis. Access required signing in and signing out.Information could only be reviewed. No copies or excerpts could be made. That is one extreme. I’ve also worked in activities where there was little control and higher potential risk.

In a non-disclosure agreement there are a number of common terms and the difference between one of strict control and loose control depends upon two factors. What the term requires you manage to ensure compliance and how you as a discloser or recipient choose to manage it. The following is a list of common requirements that may be in an NDA and what the contract manager may need to manage.

1.Parties. As the agreement applies only to the two legal entities that signed it you need to manage who you receive information from and who you disclose information to so it only goes to the party under the agreement. Subsidiaries are separate legal entities and would not be a party to an agreement signed by the parent company.

2.Effective date. The effective date establishes when the obligations of confidentiality go into effect. You do not want to receive or disclose information prior to that effective date.

3.Period for disclosures. This is the same as the contract term. Contract managers may need to amend the agreement if the need for disclosures extends beyond the agreed period or notify the team to stop disclosing or receiving disclosures if the term has lapsed.

4.Period to maintain information as confidential. This establishes from the date of receipt how long a recipient must maintain the information as confidential. Contract managers should be aware of the term so they can use their log of receipts to identify when individual disclosure obligations have lapsed. You can then advise the team on the need to no longer manage that specific information as confidential.

5.Limitations on what will be disclosed. The receipt confidential information creates potential liability for the recipient. You want to limit and control the flow of information into your company to manage that potential liability. One way to limit is to have a specific request from the recipient that identifies what they want disclosed. A second way is to require a separate agreement of document where there is a non-confidential description of what is intended to be disclosed and received to limit the scope. If you have a single product or service you could limit disclosures to only that information that applies to that product or service. If separate documents are used the contract manager should control, log and manage those.

6.Process for disclosures and receipt. A good NDA will identify contracts on both parties that all information must flow through. If you have this responsibility as the contract manager you would want all information going both ways to flow through. You need to maintain copies of what has been received or disclosed. You want to maintain logs of what has been received or disclosed. For receipts you to ensure that requirements for managing confidential information that has been met.

7.Requirements to mark information as confidential. For any outgoing disclosure you want to ensure that the required marking requirements are met before the information is mailed or transmitted. If others may receive or transmit information you need make sure that you are copied on those messages.Recipients should require that all confidential information provided to them must be adequately marked so that it will be properly managed. Common marking requirement will list the information as confidential and the fact that it is proprietary information of the named discloser.

8.Requirements with oral disclosures. If oral disclosure are allowed under the agreement, there will also be a requirement that they be confirmed by a writing. For oral disclosures made by the other party, you need to be copied on those and you should confirm the receipt and accuracy of the confirmation with the party that received it.

9.Standard of care to be used in managing the information. The standard of care is established through the language used in the NDA. Most of the time the requirement will required the same degree of care as the recipient uses to protect their own confidential information. If there are higher standards the Contract Manager needs to ensure that processes and controls are in place to meet the required standard.

10.Rights to use information disclosed. NDA’s may allow or restrict how the recipient may use disclosed information. The contract managers primary role with respect to this is advise individuals of any restrictions on the use of that information so readers will manage it accordingly.

11.Parties a recipient may disclose to.In today's business you have employees, consultants, third party contract employees and third parties that may have a need to know. A contract manager needs to review the NDA for any restrictions. Frequently agreements allow disclosures to third parties provided that they are subject to the same obligations of the agreement. The contract manager should verify that NDA’s are in place with those individuals and the terms of those NDA’s meet the requirements of this NDA before any information is disclosed to them.

12.Standards for those disclosures. Common standard can include limiting disclosure to only those parties that have “a need to know”. Some companies may require that any third party have a separate NDA directly with them or require that consent they consent to third party disclosures. This occurs when companies are extremely sensitive about their data. Having an NDA directly with the third party allows them to go directly after that third party in the event they breach their obligations. The contract manager needs to be aware of those standards to ensure they are followed.

13.Responsibilities for disclosure required by law. If a disclosure in required by law, such as through a court order, the recipient must make those disclosures of be in contempt of court. As such recipients look for those to be an exception to their obligations to maintain the information as confidential. A well-drafted NDA will place an obligation on the recipient to provide reasonable prior notice of such order so the discloser has the reasonable opportunity to obtain a protective order preventing that disclosure. Court orders are normally provide to the company’s legal department and the Contract Manager may need to advise the legal department of the specific obligations for them to respond. If confidential information is being disclosed to a court under and order it should be marked as such to put the court on notice that it is confidential.

14.Exceptions to the obligation to maintain disclosed information as confidential. In the NDA the parties will agree upon what events will end they recipient’s obligation to maintain the information as confidential. Some fairly common events are:

a.The information is already in the recipient’s possession having been rightfully received without a nondisclosure obligation.

b.The disclosed information is the same as information the recipient had previously developed independently on their own.

c.The information is publicly available when received, or becomes public through no fault of the recipient

d.Information was disclosed by the discloser without complying with the requirements or the NDA

e.The information is disclosed by discloser to a third party without the same a nondisclosure obligations.

Exceptions only apply to the specific information that would be excused. The obligation to maintain any information that is not subject to and exception remains in effect for that other confidential information until that either has an event that will except that or the term for holding the information as confidential has lapsed. The confidential information that is disclosed is the discloser’s proprietary information. The recipient has no right to use it. Exceptions only end the responsibility to maintain it as confidential, they don’t grant you a license to use that information. While a court ordered disclosures excuses you for the information that you disclose, it does not excuse you of your obligation to maintain that information as confidential. The contract manager’s responsibility is simply to be on the look-put for anything that would be an exception to the obligation and communicate specifically what no longer needs to be maintained as confidential.

15.Rights of use of ideas, concepts, know-how or techniques contained in discloser's information by recipient. Even if you collected and returned all copies, excerpts of the confidential information, there will always be “retained information” meaning information that is retained in minds of the individuals that read or worked with that information. To protect against infringement claims the parties may agree to allow the other party to use that retained information. A contract manager has no obligations in this area,

16.Disclaimers: The following a disclaimers that are common

a.Information is provided “As is”. This is used to both avoid liability based on dependence on the information and to avoid any responsibility to correct the information.

b.No grant of right or license under any copyright, patent, trademark owned or controlled by the other party; This simply reaffirms that in disclosing the information the discloser is not giving up any proprietary rights they have in the information.

c.Does not obligates either party to disclose or receive any information, perform any work, enter into an license, business engagement or other agreement. This makes it clear that in receiving information you are not being obligated to enter into any other activity or agreement and if the parties do agree to go forward a separate agreement is required. As NDA’s can provide information before there is an agreement, or may be used to provide information about additional or future products or service this is important.

d.Does not limit either party from offering competitive products or services or entering into business relationships with other parties. Simply receiving confidential information should not preclude you from conducting business with others. The discloser is still protected by both the proprietary rights they have in the information and your obligation to hold it confidential.

e.Does not limit assigning or reassigning employees. Except in situations where the information is extremely sensitive each party should have the right to assign the work of their parties wherever that want. For highly sensitive information a discloser may want to prevent assignment of recipients employees to work for competitors for a defined period.

f.Does not create any joint relationship or limit the ability to enter into business relationships with others.

g.Does not authorizes either to act or speak on behalf of the other; or These last two make it clear that the parties are both acting independently and can continue to do so as long as they meet the obligations of the NDA.Contract managers should be aware of all the disclaimers that exist so the can advise the business how the relationship works.

17.General Legal Terms. Common general legal terms that should be in NDA's or CDA's are:
a.No assignment
b.Amendments require written modification
c.Termination Rights
d.Survival
e.Applicable Law
f.Order of precedence when multiple documents are used,
g.Merger of prior understandings.
h.Additional or different terms and conditions (if any):

If the NDA involves technical information that is subject to control by the Government there will also be the obligation that the Recipient will comply with all applicable export laws and regulations and controls for technical information disclosed.

Contract managers should familiarize themselves with the terms to manage the agreement in accordance with the terms and advise people of what they are in the event of a problem or dispute.

18.Limitation of Liability. In most non-disclosure agreements you won’t find any limitations on the types of damages that may be claimed or any limits on the amounts that my be claimed. The reason for that is a breach of confidentiality obligations will frequently cause all the different types of damages including lost sales and lost profits. The limit on the amount that would be recovered is the actual damages the party sustains and can prove. For a Contract Manager if you are responsible to manage disclosing and receiving confidential information that is an extremely important task. The losses your company could have from not managing that properly are far and above any losses that you could sustain under other agreements as they will have both limitations on the types of damages and limitations on the total liability.


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Contract Management as part of a Team

For major contracts the management of performance is frequently a team effort. Frequently there will be a project or program manager who leads the activity. They are usually responsible to manage the team, and the over all manage performance so work is performed on time and on budget. The project manager will perform tasks the contract manager may perform in managing a small contract. The contract manager plays a supporting role to the project manager. Instead of leading periodic review meetings the contract manager may attend and manage the documentation of the meeting, the action item status. Depending upon the authority of the project manager, they contract manager may not be the one negotiating and deciding upon changes to the scope or work, they will have the primary responsibility of capturing and documenting it for the contract file.

The key in working as part of a team is to:
1.Understand and agree upon who has authority to take certain actions.
2.Establish a clear understanding on who is responsible to perform each of the individual tasks and what their responsibility is. There is no one single approach to program management and you want to ensure that nothing will fall through the cracks and not be managed.
3.Establish how the team will communicate and how information will be collected, shared and included as part of the contract file.

Program managers will normally have key activities that they feel they need to control and manage. They are usually focused in making sure that the work is performed on time, on budget and in accordance with the commitments.They will want to control all the activities that manage those. The contract manager needs to be the expert on what the contract requirements are so they can advise the program manager of what they can or cannot do under the agreement. The contract manager also needs to be able to provide advice and guidance on what the contract says in the event of a dispute between the parties. The contract manager is also responsible for getting copies of all contract documents and maintaining the contract file to reflect any changes that occur and any issues or correspondence between the parties.

If a contract manager has good program management skills, a program manager may want the contract manager to manage certain tasks in addition to their other responsibilities of managing the contract. Three common ones may be to manage:
1.Manage payment or receivables. This could include receipt and review of invoices to manage sure that the items and amounts claimed comply with the terms of the agreement and managing correction when they don’t comply..
2.Manage any bailed, loaned, or consigned items and their accounting or return.
3.Manage programs involved in the disclosure or receipt of confidential information to ensure that any provisions of a confidentiality agreement are met.

Other common tasks a contract manager may perform in major programs are:
a) Manage any early terminations with or without cause.
b) Manage notices as required.
c) Collect and document any acceptance and test activities required by the contract
d) Provide information or reporting on compliance.
e) Manage final acceptance and turnover of all required documents.
f) Manage collection and return of any items that must be returned upon completion.
g) Close or renew contract.

Future posts will discuss all of these.

Working as a contract manager on a major program provides great experience. You learn much more about the work involved in performing the contract. You also see first hand what works, what doesn't work and what can be improved from a contract perspective and share that so others learn.

Two final comments:
A key to being successful in working as a contract manager that is part of a team is to build a good working relationship with the program manager and other members of the team.
Contract managers have fiduciary responsibilities to their company to ensure that the activities surrounding the contract are completely and accurately documented and performance is done in accordance with the contract terms.Contract managers should demand exactly that from other members of the team. In the end the contract file need to accurately represent what occurred during the term of the contract.



If you learned from this post, think about how much more you could learn from the book.
The book is only US$24.95 plus shipping. The hot-link to amazon.com is above the date.

Managing Amendments and Change Orders

Prior to the contract being signed there may be a number of addendums that are issued.
An addendum changes information provided in a request for bid or request for proposals. That type of addendum is unilateral and does not require agreement by the parties. In the creation of the agreement you would capture any addendums that the contract is based upon.

For example if you had a
Request for Proposals dated July 1, 2011
Issued Addendum 1 on July 10, 2011 and
Issued Addendum 2 on July 20,2011,

You would want to both incorporate those addendums into the agreement and establish an order of order of precedence would be:
First to Addendum 2 dated July 20, 2011
Then to Addendum 1 dated July 10, 2011 and
Finally the Request for Proposals Dated July 1, 2011

That would establish the priority between those documents. Your agreement also needs to address the priority between those documents and the agreement and other documents that are incorporated into the agreement.

One the contract is executed, any change to the contract may be done by either change orders or contract amendments. A change order is a unilateral change that requires advance agreement that the one party may make those unilateral changes subject to agreed parameters that usually include the scope of the change, the type of changes that can be ordered.It will usually establish a formula for how the cost of those changes will determined and how any schedule impact will be applied. For example in procurement of construction where there can be hundreds or thousands of changes that may need to be made to continue the progress of the work, owners commonly have the right to issue change orders.

Amendments to the contract require the mutual agreement of the parties and many times contracts will define the specific requirements for any document to function as an amendment. That is done so parties don’t unknowingly change the agreement without intending to do that. It also makes sure that parties changing the agreement have the authority to make those changes.I've seen contracts where authority to make changes a specified individual or their successor.

Amendments need to:
A. Be numbered
B. Contain an Effective Date for the Amendment
C. Reference the correct Agreement that is being amended
D. Be signed by authorized parties and dated
E. If an amendment is multiple pages, the amendment number, the page number and the total number of pages should be listed 

Key Points:

1) If the amendment applies to an existing section, it should reference the correct section number and show how the items originally read and what it has been changed to. 

2) If it is adding or deleting a section, it should describe the change as an addition or deletion.

3) If the amendment contains multiple pages, the applicable Agreement number and Amendment number should be on every page.

4) At the end of the amendment it must have signature blocks for both parties and be signed by both parties for it to be effective. Signature blocks should include dates, and (particularly if the Effective Date in the amendment is established as the date when the last party signs the amendment,) The date blocks must be filled in..

In describing the actual changes to the Agreement here are some common examples:

• If you simply want to change wording in a Section you would use: “Section 5 which currently reads: __________________________________ is hereby modified to read: ________________________.”

•“Section 5, entitled “Payment” which currently reads “Payment will be made in thirty (30) days” is hereby modified to read: “Payment will be made in forty-five (45) days”

If you want to add a new Section to the Agreement you would use:
•“Section ___ which reads: ___________________________” is hereby added to the Agreement (and insert the entire text of the new section including the appropriate Section Number). When you add new sections or subsections, be sure to follow the existing numbering sequence and convention of the Agreement.

If you want to delete a Section of the Agreement you would use”
•“Section 5 entitled __________ is hereby deleted in its entirety”.

There are several things to manage when you manage amendments

Since an amendment is a later writing in time between the parties it has the highest priority in terms of precedence. This means that you need to be very careful how you draft amendments. For example, if an amendment was needed for only one product, one statement of work etc., make it clear in that amendment exactly what that amendment applies to. If you don’t you will be amending all the other documents that have the same term.
For example: “This amendment applies solely to Statement of Work # ______ and all other Statements of Work shall remain unchanged.”

Another thing to be careful with in writing amendments is sometimes companies will have Agreements that consist of multiple documents such as a master agreement that applies to all purchases and scopes of work or statements of work that are unique to specific products or services. If you write an amendment and reference both documents, you can wind up amending something you don’t want to. For example you may write your master agreements for a long term or even make them evergreen. Your scope of work or statement of work may only have been written for a one or two year period. I’ve seen amendments then written that reference both contract numbers and extend the term for one year. The impact of that was the Statement of Work or Scope of Work was extended for the one additional year which is what the individual intended. However, since the master agreement was also referenced in the amendment, the individual unknowingly changed the master agreement from the longer or evergreen term to a fixed term agreement that would expire in a year. If the amendment had been written correctly, only the Statement of Work or Scope of Work number would be referenced in the amendment. Then the only that agreement would be amended and the Master Agreement’s term would have remained unchanged.

For specific suggestions on writing see my KnowledgeToNegotiate blog post on Writing purchase specifications, statements of work, scope of work as the same suggestion on drafting and writing apply to amendments..

In an agreement where both change orders and amendments are used, my own preference is to periodically incorporate any change orders issued in the interim into an amendment that is signed by both parties. It has no legally binding impact on the validity of the change order. What it does do is provide a single source that lists all the things that were changed in the agreement to allow you to determine both what the current terms are and what terms were in effect at a specific point in time.

Including the date and the effective date of the change order or amendment is important from the perspective of managing claims and disputes. That is because you may need to identify exactly what terms were in effect on a specific date that gave rise to the dispute or claim.

If you use a contracts system it should require the contract owner to provide key data about what is included in each amendment so you can quickly find information that you are looking for. I’ve wasted a huge number of hours trying to find things in major contracts that had many amendments where because the content of each amendment wasn’t clear. I had to go through every amendment to find what I was looking for.

On major agreements with many changes I also prefer to do what is called an “amended and restatement of agreement as an amendment periodically. In doing that you are stating what the current agreement is so you don’t have to go back through every amendment to see what was added, deleted or changed. Contract managers should know what the current terms of their agreement are, and be also able to determine what they were at any specific time. It can take time to do an amended and restated agreement amendment, but it also reduces the amount to time you would need to
spend to determine what the contract says at that point in time or what it was at a prior point in time. An alternative is to maintain a marked-up copy copy of the agreement and annotate the agreement by placing amendment numbers in the specific locations of the contract that were changed by each amendment. Over time and with many amendments it gets pretty confusing which is why I prefer amended and restated agreements.

Managing Claims

A party may allege a claim for a number of reasons including:
•The other party had certain obligations that they failed to perform.
•The other party made representations which they relied upon, they were not true.
•The third parties controlled or contracted by one of the parties failed to meet their commitments.
•There were mistakes or conflicts in the agreement.
•There were mistakes or inconsistencies between specifications and drawings provided by one of the parties.
•There are latent conditions that were unknown at the time of the contract was signed that were subsequently discovered.
•One party, their agents, suppliers or personnel took certain actions that affected the other party (delays, interference, re-work, etc.)

In managing and negotiating claims there are seven steps to follow.

1. The first step is to always to read the contract to determine it it says and what it allows to understand the contract position on the claim and whether it is valid.
a) Is there a contract?
b) Is the contract enforceable?
c) Is there a duty to perform and a breach of that duty?
d) Is there anything that could void the contract?
e) Is there anything that changed the commitment? (review all amendments)
f) Was there any waiver that would impact the claim? (Is there a waiver provision in the contract?)
g) What are the remedies available to the claimant under the agreement for that section? (Look at the section for remedies)
h_ What types of damages may be claimed and any limitations or caps on damages (look at both the section in conflict and the limitation of liability as that will also apply to claims)..

2. Look at the information the provided as part of the claim.
a) Is it correct in terms of calculation?
b) Is it substantiated with adequate back up documentation?
c) If it isn’t available, can it be reasonably estimated? Frequently a party may be unwilling or reluctant to provide you with the detailed information necessary for you to adequately review the basis for the claim and the calculation of the charges. When faced with this type of situation they may not have the information, they may be trying to hide something or, they may have inflated the claim amount in hopes for a reduced settlement where you split the difference. The reality is if they were to pursue the claim in a court of law they would need to prove their case and their damages so you should not agree to accept anything less. If they don't provide you with what you need to properly evaluate the claim you can refuse to take action on it, which leaves them with the only alternative of suing you. Prior to any case going to court both sides have the right of "discovery" in which they can view the opposition's case against them, the evidence, the claim, the calculation of damages, etc. At this point you will know what they have and can decide whether to try to reach a negotiated settlement or proceed with the suit.

3. For each item in their claim you check the basis for the claim.
a) Is it the result of our violation or breach of the agreement?
b) If the claim is based outside the agreement are there prior dealings between the companies? Was the activity here any different from the prior dealings? (Eliminate basis of reliance on prior dealings).
c) Is the claim the result of our violation of our responsibility? (Such as failure to mitigate losses).
d) Is the claim a request for "equitable relief" for "extenuating circumstances”? Are they really extenuating circumstances?
e) Are they risks that they assumed or should have been aware of?
f) To what extent did the activity or our actions cause problems for them as a result of those extenuating circumstances?
g) Are there areas where portions of the claim exist as a result of negligence or mismanagement on their side? What are they? How much are the worth? Highlight and immediately deduct them from their claim.

4. Review the costs included in the claim against:
a) the remedies allowed in the agreement,
b) the damage types allowed to be claimed, and
c) any limitations on the amounts of damages that may be claimed.
Exclude any costs that would not be allowed by those sections. For example if all the party can claim is direct damages, in the claim you would exclude any incidental or consequential costs.

5. Did the claimant take steps to mitigate the damage as they are required under common law to do? If they didn’t reduce the amount.If they did, any reasonable cost to mitigate should be paid

6. Did they take steps that were inconsistent with mitigating damages, such as bulk ordering of large quantities, performing operations in advance? For example, if a contractor ordered a huge quantity well in advance of need to lower their costs should the owner be responsible for a claim if they don’t get consumed? What does the agreement say about that?


If there is a dispute in the end about whether the claim is valid or the amount, the first step I recommend is to have the issue be escalated to the next level of management. It's at that level where both parties can look at the issue outside of "the heat of the battle" and consider it from a strict business decision.

7. Consider:
a) What is the relationship we have with the other party?
b) Do we need or want to continue to do business with them?
c) How many resources and of what types will it require to pursue or defend the claim?
d) What will it cost to pursue or defend the claim?
e) Do we have the right to under contract to recover legal fees if successful?
f) What is the degree of confidence that we will be successful?

If there is no agreement at that level you then need to look back to the agreement to determine: a) What the contract says about how disputes will be resolved. (Are their arbitration of mediation provisions.
b) What is the applicable law, jurisdiction and forum?

Managing changes and the cost of changes

If you fully identify what you want to purchase in your specification or statement of work prior to your negotiations, you have the maximum leverage to get the most competitive price. If your specification or statement of work is not complete or does not represent exactly what is needed, it usually requires that you to negotiate a change. There are two types of changes. One type is changes that require the mutual agreement. The other type is when the contract provides one party the right to unilaterally order a change where the parties have agreed in advance the types or changes that may be ordered and establish how the cost or schedule will be impacted by those ordered changes (“change orders”). Most changes and change orders occur after you have issued the purchase order or signed the contract, which means that you may no longer have the same negotiation leverage.

The amount of leverage you have to negotiate changes will depend upon a number of factors including:
•What your contract or purchase order says regarding how changes will be managed and how the cost of the change will be determined.
•The stage of performance at which the need for the change occurs.
•The degree of simplicity in which the work may be stopped and given to another supplier.
•The potential costs of making the change to another supplier.
•The impact a change in suppliers will have on the schedule.

The worst case situation you can have is when you didn’t address how changes would be managed and how the cost would be determined in your contract and at the point you want to make the change it would be difficult or costly to change suppliers or changing suppliers would have a negative impact on a program that would be far more costly than paying the supplier’s price. In that situation the supplier has significant leverage.

There are a number of potential costs in changing a supplier midway through the performance of the work.
•There may be termination costs with the current supplier.
•There will clearly be a cost associated with having a new supplier come up the learning curve to understand what has been done and what is needed.
•There may be costs associated with some work needing to be re-done so that it is compatible with the new supplier’s systems, tools, etc.
•There may also be a cost associated with any delays that occur as a result of changing suppliers.

The greater the potential cost impact of the change, the more leverage the supplier will have in negotiating the change and the more you need to build in protection

The best way to protect yourself and retain needed leverage in negotiating changes is to ensure that you use the maximum leverage you have before you reach agreement with the Supplier to negotiate two things into your agreement:
1.The right to terminate the purchase order or agreement without cause.
2.A changes provision that establishes both a methodology and a formula for determining the cost of the change.
In addition, if portions of the work could be done by other suppliers, you may also want to have the right to deduct portions of the scope of the work.

The right to terminate the agreement without cause provides you the leverage to bring on another supplier if that is feasible and necessary because you are unable to reach agreement with the supplier on equitable terms for the change. The changes provision provides you with some leverage to negotiate changes based on those terms when there is no other reasonable option than just staying with the existing supplier. Being able to deduct portions of work from the scope could provide additional leverage to ensure an equitable cost for the change.

What are the types of things that should be included in a changes provision? That depends upon what type of product or service you are buying. Here’s an example of some of the different issues you could address:
1.The supplier should be required to provide detailed estimates of the cost of the change.
2.The language should state that if you can’t mutually agree on the cost of the change on a lump sum basis, that you can require the Supplier to perform the work on a time and materials basis.
3.It should establish the rates that you will pay for all the different categories of labor, or processes, if work must be performed on a time and materials basis.
4.The basis for direct cost for any materials required as part of the change (what can be included in direct cost and what must be provided for in their overhead rate).
5.The allowable percentages for contributions to the Supplier’s overhead and profit.
6.The allowable mark-up on work performed by subcontractors both for the subcontractor and the main contractor.
6.Other cost elements if necessary, such as acquisition rates, allowable levels of scrap from a specific process.
7.Documentation substantiating the costs charged (e.g. copies of invoices for materials, labor time sheets)
8.Rights to review or inspect the work in process to verify any time and materials charges.
9.Rights to audit all documentation not required to be submitted.
10.Last but not least, while the formula should address how deductions in the Scope of Work will be managed. (Otherwise the Supplier may want full price on additions, but want to give you pennies on the dollar for deductions).

The leverage in negotiating changes will vary the same as all the other factors that influence leverage. If you did business with a supplier on a repetitive basis and they know that treating you fairly is a pre-condition of getting future business you may need less protection than if you are dealing with a Supplier where the agreement may be their only dealing with you. To me it’s always better to play it safe and build in protection irrespective of the relationship. You never know what can occur during the course of an agreement that could change both the dynamics of the relationship and the supplier’s behavior.

One approach to simplify contract management’s negotiation of changes is to establish that the cost of a change or change order can be either
1.A cost that is mutually agreed between the parties, or if there is no agreement
2.It will be established using the formula for establishing the cost.
In doing that the supplier knows that if their quote doesn’t appear to be fair or reasonable, the buyer can require the supplier to provide proof of their actual cost based upon the requirements listed in the changes section.

Changes or change orders need to be documented. You can then do periodic amendments to add those to the agreement by an amendment that incorporates them by reference.