Writing Good Contracts Matters a LOT!
I have been having a lot of interesting discussions recently with both procurement and legal executives who are increasingly concerned with the state of their contract management processes. This is occurring for several reasons.
- The exposure of many companies to greater risk is heightening the focus on contracts.
- The need to write better statements of work (SOW’s) and Service Level Agreements (SLA’s) is recognized as key to improved outcomes. You get what you ask for. Don’t expect platinum service if you specified silver.
- As Tom Linton stated in a recent Procurement Leaders interviews, PRICE = SPECIFICATION. You can directly throttle the price of a product or service by limiting it’s specification, or alternatively, prices can be allowed to escalate if proper specifications are not effectively collected and identified ahead of time.
- Managers recognize that contracts, once written, become literally filed away until something bad happens. Contracts should instead be a living document, as things will change, and measurements need to be embedded in them that allow individuals to understand if the relationship is going on track or not. Of course, if you aren’t measuring something, than you have no leg to stand on if things go wrong and there’s nothing in the contract that says anything about how to handle unexpected issues. There should at least be an agreed on procedure to deal with unexpected surprises.
- Litigation is escalating. More companies are seeing non-performance issues arise, and are going back to their contracts. Intellectual property is at the top of the list. It costs a lot more to get out of trouble once you’re in it, then to spend the time earlier and write a better contract.
To become better prepared to a) write better contracts, and b) manage them appropriately once they are written, Paul Humbert and Robert Mastice have developed a great list of simple rules to follow in preparing a SOW and a contract. Here they are. Additional insights can be gleaned in their book “Contract and Risk Management for Supply Chain Professionals”.
- Define what is to be performed
- Learn from and do not repeat mistakes
- Link payents to performance or progress
- Develop a well-organized table of contents
- Clearly specify the objectives to be achieved
- Anticipate changes in needs or circumstances and decide how these will be addressed.
- Seek input from the right people at the right time
- Specify the project plan, schedules and milestones
- Specify where the deliverables will be performed
- Avoid making any unintended (implied) warranties
- Specify the standards of performance requirements
- Specify the applicable testing or acceptance criteria
- Avoid incorrect, inconsistent or contradictory statements
- Develop an order of precedence for the contract documents
- Anticipate the need for interpretation and who’s judgment will govern
That’s it! If you follow these rules, you probably won’t get into TOO much trouble…