Contract Formulation - Part B

What are the considerations in preparing and forming a contract? Especially quality and work control, pace and compensation

Contract Formulation

Continued from Issacon #1412 - Part A

Caveat

Note: We are not lawyers, we cannot provide legal advice

·         Legal texts should be reviewed by legal experts

·         Knowledgeable in the law of the relevant jurisdiction

Control of the work - 1

·      The acquirer's control-of-the-work variable

·         Is the extent to which the acquirer wishes to exercise control

·         Over the work to produce the product

·      For example

·         Control over a "time-and-materials" contract is complete

·         Control over a fixed-price contract is minimal

·         If the acquirer wishes to avoid any supplier claims for "interference"

Control of work - 2

·      The supplier's control-of-the-work variable

·         Is really the converse of the acquirer's control

·         And is the extent to which the supplier has control

·         And hence responsibility

·         For the performance of the product

·      For example

·         The supplier's control, and interest in control, is minimal

·         In the case of a "cost-plus" or "time and material" form of contract

Quality control

·      The quality control variable

·         Is the extent to which the acquirer takes responsibility for quality assurance, control and testing

·      For example

·         Quality control rests almost entirely with the supplier

·         In a fixed price contract

·         Although inspection and testing may be a condition of interim progress payments

Pace of work

·      The "pace of work" variable

·         Depends on whether the rate of production is optimized

·      For example

·         If the target delivery date is set sooner

·         Than an optimal program of work suggests

·         Then the work must be accelerated

·         By applying additional resources, or overtime

·         Either may imply additional cost to perform

·         And possibly additional risk due to increased complexity in coordination

·         If the work is prolonged

·         Extra costs result from idle capacity

Form of compensation - 1

·      The form of compensation

·         Is not so much a variable

·         As it should be a reflection of the other variables

·         However, it does have a range of possibilities

·      Example 1

·         If the scope requirements, or scope of work, are well defined

·         A fixed price is in the best interests of the acquirer

·         And the best opportunity for efficient operation and for profit by the supplier

Form of compensation - 2

·      Example 2

·         If the conditions suited to a fixed price form of contract are not met

·         A fixed price contract may well end up being more costly to "retro-fix"

·         Or even end up in failure

·      Example 3

·         The software industry is rife with failed projects

·         Due to the application of inappropriate forms of contract

·         Not corresponding to the degree of scope definition

·         To the detriment of both acquirer and supplier

Form of compensation - 3

·      Example 4

·         A modified form of fixed price contract is possible

·         Where provision is made for limited scope variations

·         By incorporating one or more unallocated sums

·         For use at the discretion of the acquirer

·         Such a contract may or may not include incentives

·      Example 5

·         Time and materials compensation is most appropriate

·         Where the extent of the requirements are not yet known

·         Or are highly uncertain

Supplier motivation - 1

·      The supplier's motivation variable

·         Is the extent to which a supplier is motivated to perform efficiently

·      Example 1

·         Motivation is high in any "fixed-price" or "lump-sum" contract

·         It offers the opportunity to increase profit

·         By performing most efficiently

·         Providing that quality is not compromised

Supplier motivation - 2

Example 2

·         Supplier motivation is probably highest

·         In the supply of standard off-the-shelf products

·         Since this provides the safest and quickest return to the supplier

·         Standard products may or may not meet the acquirer's needs

·         And may still require some degree of customizing

·         But this solution is usually less risky to both parties

·         Compared to an all-custom developed solution