Thursday, February 10, 2011

Negotiation - Thoughts on Negotiating Subcontracting and Assignment

When you select a Supplier, a large portion of your decision criteria may be based upon who will perform the work. It can be at the heart of your having confidence in them to perform the work. It can  be the basis upon which you agree to pay the price or in the terms that you agree. If you contracted to buy a car from Mercedes, you wouldn’t want them to have Ford provide you the car. If you hired someone because of an individual or teams specific expertise, you wouldn’t want the work performed by someone of lesser capability. If you qualified a Supplier based on their high quality processes, you wouldn’t want the work to be actually performed by someone in the back alleys.

To protect against these situations Buyers want to control whether their contract may be assigned (performed by another party) and who the work may be performed by (control over subcontracting).

Supplier’s may want the right to assign the contract for their own business reasons and not have their hands tied in terms of who can perform the work by giving control over subcontracting to the Buyer.

In negotiating these provisions the Buyer should focus on several key messages.

  •  First, the contract is being awarded to the Supplier (not some third party) based on their perceived capabilities, quality and value the Supplier offer

  • Second, the contract is being awarded based upon Buyer’s assessment of the Supplier’s quality and processes, not the quality and processes of some third party.

  • Third, any problems with performance or quality will cause significantly more damage to the Buyer than the Buyer would be able to collect under the Contract.

For assignment the only thing you may be willing to agree to is if the assignment is in conjunction with the sale of the business or assets required to perform the work.  Even in that situation the Buyer may want to retain the right to cancel the contract without liability if they do not want to do business with the new Supplier (especially if the new Sipplier is a competitor or a Supplier they had a problem with in the past.

For subcontracting, you may allow them with freedom to make minor changes to who performs small portions of the work, but if who performs the work is important you need to retain the right of approval over subcontracting. Suppliers may agree to the right of approval if it’s tied to a reasonableness standard. Having the right of approval also gives you leverage to negotiate price reductions if you feel the alternative is providing less value or more risk.  

Most Suppliers hate to give up control over the right to assign or subcontract the work. The same ones usually don’t want to sign up for certain performance liabilities. I have a basic rule that I follow: If you agree to be liable for performance I may agree to reduce the level of control that’s needed to manage the risk. If you won’t agree to the liability then I need the control so I can manage the risk. Its one or the other, never both. 

The one situation where you won't have control is if the Supplier merges with or is acquired by another company as that is not an assignment. Officers of companies have a fiduciary obligation to do do what's best for their shareholders and as such would never be able to agree that they won't merge with of be acquired by another company.  If you had concerns in this area you would more likely include what is called a "change of control" provision where if it happens you as the Buyer will have additional rights you may not have had under the Agreement such as being able to terminate the agreement without liability or the requirement grant you certain licenses so you aren't dependent upon the new entity unless you want to be.

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