1.Explain what a draft contract is. Who should review the draft contract before is executed by all the parties? 2. List the basic parts of a contract. 3. Explain what an executed contract is. Who should receive a copy of the executed contract? 4. Describe some of the strategies that can be used to debrief unsuccessful suppliers. 5. A Cost Plus Incentive Fee (CPIF) Contract has the following parameters: Target Cost = $300,000 Target Fee = $30,000 Share Ratio 75/25% Maximum Fee = $45,000 Minimum Fee = $15,000 The seller completes the work with the buyer's permission for an actual cost of $320,000. No additional scope was added to the project. What is the fee the seller receives? 6. A Cost Plus Incentive Fee (CPIF) contract has the following parameters: Target Cost = $500,000 Target Fee = $45,000 Share Ratio 50/50% Maximum Fee = $60,000 Minimum Fee = $30,000 The seller completes the work with the buyer's permission for an actual cost of $450,000. No additional scope was added to the project. What is the final price paid that the seller receives? 7. You have signed a Cost Plus Percentage Cost (CPPC) contract with a supplier to perform some work for you. The contract parameters include: Estimated cost = $100,000 Fee percentage = 10% The supplier is able to complete the work for a cost of $80,000. What is the final price paid to the supplier? CHAPTER @ SIGNING THE CONTRACT AND CLOSING THE PROCUREMENT After you have completed negotiations, the next step is to document the agreed- upon terms, the SOW, and all other items that were negotiated with the supplier. When you have received the documented agreement from the supplier, draft the contract. Nothing in this chapter (or book) is intended as legal advice. Everything is general information. An attorney licensed to practice law in your jurisdiction must address specific legal concerns. DRAFT CONTRACT Drafting the contract depends on the policies and procedures of your company. We will now discuss contracts although in no way will any legal advice be offered. If you work for a small firm, there may not be any policies or procedures in place. In that case, you can find contract templates for many types of agree- ments online. It would be wise, however, for you to consult an attorney if you are not trained in contracts because the law can be complicated depending on your industry and the supplier's industry. If you work for a larger company, or a governmental entity, you will prob- ably have policies and procedures already in place. Become familiar with them. If checklists are available, use them. Contracts are the area of supply chain manage- ment that can either bring value to your company or bring legal woes and costs. Note: Although purchase orders are a form of contract, we will not discuss them. If your company does not have one, purchase order templates are available 186 Procurement Project Management Success online. Caution: Take care to fully review and understand all of the legal ramifica- tions of any purchase order template before you use it. Parts of a Contract A contract has many parts. In general, there are the specifics of the goods or services you are procuring, legal terms and conditions, and the signatures. At the beginning of a contract, you will have a contract number and the title of the con- tract. (If your company does not keep a log of contract numbers, ask your boss how you should develop one.) The title includes the supplier's name and usually the goods or services for which the contract is required, for example: Contract 131031 Janitorial Services with 24-Hour Professional Janitorial Service. After the contract number and title are the following: Specifics of the goods or services: Identity of the parties Addresses of the parties Purpose and background of the contract Assumptions for the contract Restrictions, if any Pricing model and actual price Duties of each party Rights of each party Start date and end date of contract Deliverable dates, if any Deliverables quantities, if any Time is of the essence Contract renewal or extension Payment terms Payment due dates Shipping and handling charges, if any Taxes, if any Interest, if any Late fees, if any Terms and conditions: Ownership of intellectual property Representations and warranties Disclaimers Liability Indemnification Insurance Signing The Contract and Closing The Procurement 187 Confidentiality provision Termination of contract Liquidated damages Default Arbitration clause, if any Waiver Assignment Severability Notice Entire agreement Jurisdiction Signatures: Signature of party Printed name of party (a requirement that depends on jurisdiction) Title of party Date signed Not all of the items listed will be appropriate in every contract, and some con- tracts may need terms that are not listed. The provisions listed are generally included in contracts, and all are important enough to seriously consider before deciding not to include them. If you are unfamiliar with any of these concepts, please consult a person who has more experience. That person could be inside or outside your company. Other sources of information include workshops and seminars which may be found by doing an online search; the professional society for supply chain man- agement for your industry which has information on many types of training about contracts; and the ISM which is an excellent resource for all supply chain training as well as templates. An attorney who regularly does commercial con- tracts is also an excellent resource. Reviews After you have drafted the contract, including the appropriate terms and con- ditions as well as the SOW and specific information necessary, it is time for reviews. Your company may have procedures in place for getting the draft con- tract reviewed. If you are in a small company, you may have to decide who needs to look over the contract before it is signed. The most important idea in getting the draft contract reviewed is that everything that needs to be stated in writing is included. Frequently another person will think of things that need to be there that you never thought about. Also a fresh pair of eyes can find typos that change the meaning of the language in the draft contract. 188 Procurement Project Management Success At a minimum, a more experienced procurement professional should read the contract. A more experienced procurement professional might have ques- tions about it. Usually questions mean that you need to add more information to make sure everything is there and is clear. A better way to have the draft contract reviewed is to have legal, your supervisor, the department manager/executive, and the procurement owner review it. Each of these people will look for different things in the contract. This level of review is still no guarantee that every issue or risk has been addressed, but it is certain to ensure that most have been. (In the case that something important has been left out, you will have the remedy of amending the contract in the futureusually with the agreement of all parties and in writing.) In medium-size and large companies, using a checklist is appropriate to make sure you have all of the reviews required. Figure 9-1 shows a minimum review requirement for a medium-size company. Signatures After all of the reviews have been completed and you have incorporated com- ments as appropriate, you need to get all of the signatures required by your company. Again, your company may have procedures for obtaining all required signatures for a contract. Often, in medium-size and large companies, you will need several approval signatures before the final signature on the contract. This requirement is usually dependent on the amount of the contract (capital expendi- ture) and the risk to the company. The higher the cost, or the greater the risk, the more approval signatures you will need to get. Usually there is a separate sheet for approval signatures that will be filed with the executed contract. (Most contracts will require only one signature per party, although sometimes there will be more than one signature per party.) Figure 9-2 shows a sample checklist for obtaining approval signatures that will then become the permanent, written record of the signatures. Using a check- list ensures that no signature is overlooked. A contract is not a legal document until all parties sign it (known as a fully executed contract, which is legally binding). When you have all the approval sig- natures and the signed contract from your company, you will send the contract to the supplier for signature