Acceptance

The concept of acceptance is a key part of procurement agreements. Acceptance by a Buyer is usually linked to two other aspects of the contract: 

• Acceptance by the Buyer normally triggers the Buyer’s obligation to make payment. 
• Acceptance also extinguishes the Buyer’s right to reject products or services as defective and in many cases serves as the point at which the Supplier’s warranty obligations may commence. 

Acceptance is also a key issue for Suppliers from a revenue accounting perspective. The Supplier may not be able to claim a sale for revenue as long as the Buyer may return the product or services.

Once the product or service has been “accepted” the Buyer’s rights shift from being able to return a product or have a service be re-performed as defective to having corrections be performed under whatever warranty or service commitments exist.

 

As acceptance is important, many contracts will establish acceptance criteria. Products or services must meet acceptance criteria for the work to be considered complete. Acceptance criteria should be detailed, tangible, objective, unambiguous, and objectively measurable.  If acceptance criteria are established, they become the basis for the Supplier to declare that the Product or Services have been provided and they are due payment. The failure to meet the acceptance criteria allows the Buyer to withhold payment. On-going failure to meet the acceptance criteria may be grounds for termination of the agreement.

   

Completion criteria are the basis for declaring the completion of individual activities/tasks or statement of work itself.  Completion criteria should be detailed, objective, written conditions, stated in the contract, that the Supplier is required to meet to satisfy their obligation(s) to Buyer. A contract may spell out a number of tasks that must be completed and the completion of those tasks may be described as a milestone.

The completion criteria may be the successful completion of all milestones.

To manage performance its important to link acceptance criteria and completion criteria to payment. For example:

• Final payment would be tied to acceptance of the completed Product or Service. 
• Interim or milestone payments would be linked by to the completion and acceptance of all the tasks that make up the milestone. 

If the measurement of the value of the work performed may not be exact, payment term may provide for money to be retained until the project's overall completion criteria are satisfied. 

Don’t tie payments to dates without any link to the completion of the individual tasks or milestones, as you lose that leverage in terms of getting the Supplier to perform. You get more attention when you owe them money, versus the Supplier potentially owing you and you having to chase them to get the work completed.

ADVANCE PAYMENTS.

Advance payments require payment to be made in advance of he delivery of the product or service. For example in a purchase of capital equipment or tooling vendors frequently request payments to be made in advance of delivery. There are three things to be concerned about in making an advance payment. First is the Supplier financially stable where you payment will not be at risk. If you made an advance payment to an unstable supplier at best you would have a purchase money security interest in the product, at worst you would be an unsecured creditor in the event the Supplier ever went bankrupt. Second is how much leverage will you lose in getting the job completed on time if they already have been paid a significant amount of the payment. You never want to provide too much of an advance payment for that reason and could potentially provide a smaller payment with a form of progress payments as the work is done. The third aspect of making an advance payment is the cost to you of the money, especially if there is a difference in payment amounts and terms between suppliers

The cost involved in making an advance payment is the time value of the payments made in advance of your normal payment terms. To calculate the cost of an advance payment you need to know three basic things:
1. The Value that the company places on money.
2. The number of days in advance in which payment is required.
3. The amount of the payment being made.

The formula for calculating the cost of an advance payment is:
Cost per day (value of money divided by 365)
X number of days (Usually starting at Net 30 and counting back)
X Payment Made (Amount of Payment made)
= Cost of Advance Payment

Assume in this case that your value of money is 12% or ..0328767 a day

Example:
Two vendors have quoted on a tooling job.
Vendor 1's terms are:
Cost: $100,000
Payment: 50% with order 50% with first article.

Vendor 2's terns are:
Cost: $101,000
Payment: 25% with order 75% on production commencement.

The schedule is as follows:
Place orders: 1 June (230 days advance)
First Article: 28 September (100 days advance)
Production: 12 December (30 days advance)
Net 30 pay: 12 January (0 days advance)

To compare the two you must calculate the cost of advance payments:
For vendor 1:
You have paid:
$50,000 paid 230 days in advance
$50,000 paid 100 days in advance

1. For the first payment made, take 230 days x the daily rate .0328767 = 7.56 percent
2. You then multiply the percentages (7.56%) by the amount of the payment ($50,000) for the cost of the one payment ($3,780.00.)
3. You repeat the process for the second payment (100 days x daily rate of .032876 = 3.26%.
4. You multiply 3.28% by the amount of the payment $50,000 = $1,630.
5. The total cost of the advance payments for vendor 1 is $3,780 + 1,630 or $5,410
6 The total cost of Vendor 1 is $100,000 (the price) + 5,410 (the advance payment cost) or $105,410.

For vendor 2:
You have paid:
$25,250 paid 230 days in advance
$75,250 paid 30 days in advance

1. For the first payment made, take 230 days x the daily rate .0328767 = 7.56 percent
2. You then multiply the percentages (7.56%) by the amount of the payment ($25,250) for the cost of the one payment ($1,908.90.)
3. You repeat the process for the second payment (30 days x daily rate of .032876 = .985%
4. You multiply .985% by the amount of the payment $75.250 = 741.31.
5. The total cost of the advance payments for vendor 2 is $1,908.90 + 741.31 or 2.650.21
6. The total cost of Vendor 2 is $101,000 (the price) + 2,650.21 (the advance payment cost) or $103,650

What I would then do is tell Vendor 1 that they aren’t competitive when you take into account the cost of the advance payment requirements to get those to change those terms so I would get the best of both, the lowest price and competitive payment terms.

Agency

In contracting the legal concept of agency comes into play in several areas so you should have a general understanding of the types of agency relationships that may exist, the type of authority an agent may have.

An agent is someone that has the authority to act on behalf of another party. The party they act on behalf of is called the “principal”. There are three types of agency that may be created – actual authority, apparent authority and implied authority.  For agents that have actual authority that has been granted to them, the degree of that agency can range from very broad to limited. For example:

• Universal agents hold broad authority to act on behalf of the principal. An example of a universal agency would be a power of attorney.
• General agents may have authority to conduct transactions over time.
• Special agents may be authorized to conduct a single transaction or transactions or over a limited period of time.

Actual authority exists where the principal's words or conduct reasonably cause the agent to believe that he or she has been authorized to act. If the principal gives actual authority to an agent, all the agent's actions falling within the scope of the authority given will bind the principal. Apparent authority is created when the principal's words or conduct create the situation where a reasonable person would believe that the agent was authorized to act. Implied authority is created by position held by an agent. For example, officers of a company would have implied authority to act on behalf of that company. Procurement people, by their position may be considered to have authority to act and bind the corporation.

In Procurement the concept of agency becomes important in two areas. The first is enforceability. For you to have a binding contract with the Supplier, that contract needs to be signed by someone that has the authority to bind the Supplier.  If an officer of the Supplier’s company is signing the contract, they will be deemed to have implied authority. If you want to ensure that they have actual authority you can ask the Supplier to provide you with a secretary’s certificate in which the Secretary of the Corporation represents that the authority has been granted which usually occurs through a vote of the Board of Directors or by an authorized delegation of the authority.  If you deal with someone outside of the Supplier to ensure that you have enforceability of your contract you would want to see the document that grants that party the authority to verify both that they are authorized to act and verify that the act is within the scope of what they have been authorized to do as an agent of the Supplier.

The other aspect of agency that is important in procurement is created because

Buyer / Supplier relationship can be interpreted under the law as a form of agency.  Since under the Law of Agency the Principal may be held liable for the acts of their Agent, they Buyer’s contracts need to protect the Buyer against that potential liability. So most contracts will include a general indemnification or hold harmless and indemnification provision that requires the Supplier to “defend, indemnify, and hold the Buyer harmless against any third party claims for personal injury or property damage caused by the Supplier to a third party. This is done to help shield the Buyer from both the costs of defending against those third party claims and also the cost of any damages that may be awarded. To ensure that there is substance behind that Supplier’s promise, most contracts also include requirements for the Supplier to carry certain to insurances that would be used to protect against the financial losses of such claims.

If the Buyer is Purchasing the Supplier’s product with the intent to resell that product as part of the Buyer’s product, that also puts the Buyer into the liability chain where the Buyer could be sued for product liability injuries incurred from the Supplier’s product. The same indemnifications and insurance requirements are intended to protect against these potential claims.

If the Supplier sold a product or service to the Buyer and that product or service infringed upon the intellectual property rights of third party, the Buyer could be sued for damages resulting from the infringement and the third party could seek an injunction preventing further use of the product by the Buyer. To protect against these types of claims, contracts will generally include an intellectual property indemnification, which requires them to once again “defend, indemnify and hold harmless”, the Buyer from such claims. The intellectual property indemnification terms will also include certain additional remedies that the Supplier must provide in the event of a claim, such as get a license to use the IP, redesign their product or service so that it non-infringing, etc.    

The laws of agency and the responsibilities that the Buyer assumes as part of reselling the Supplier’s product or service are why the Buyer needs to be concerned about the actions or inaction of the Suppliers and the Buyer can wind up being liable for those Supplier actions.

Agreements To Agree In The Future

Frequently during a negotiation the parties will encounter an issue where there is not enough experience or history to establish a term at that point in time. This is especially true if the item is new, and has no real history of costs, yields, or other performance. Some people may address this is by including language that the parties will meet to mutually agree to certain terms or changes in the future. While you can include certain basic standards such as both parties must agree to negotiate in good faith, the problem is the dynamics of leverage will change in the interim, and the longer the time period it takes to come to agreement, the greater the potential risk because the more you have invested.

How you feel about postponing agreement to the future really depends upon the circumstances. For example, if you were a buyer and felt that the market may be becoming more competitive over the period, planning to agree in the future may be to your advantage as you may have more leverage at that point based upon the leverage from the marketplace.

Agreeing to agree in the future also has strong potential for problems when general business conditions change, competitive positions change, the supplier’s management changes; the supplier’s focus changes; the demand or capacity changes; or even the motivation for entering into the agreement changes. The leverage that you had when you initially started the agreement may be gone because of commitment to the specific direction you have taken. Leverage may also have shifted to the other party, especially in situations where your transition to another Supplier will be lengthy, expensive or difficult or where it’s not worth investing your internal resources to make the change.

If you want to be protected against being taken advantage of because the potential leverage shift to the other party, its important to set parameters regarding what may be agreed in terms of either upper or lower control levels. For example in 6 months the parties will meet to mutually agree upon pricing, which shall not be (less than) or (greater than) X. Or the parties will meet to agree upon yield numbers, which shall not be less than X.

It can be extremely difficult to prove that the other party is really not negotiating in good faith, so the more you can bound your commitment to agree in the future with parameters and the tighter the parameters are, the better off you’ll be. For example if you didn’t know how much time it would take to test something, there is nothing to prevent you from establishing in advance what the amount of time assumed was at the beginning, the skills of the individual performing the test and the rate that is attributable to the individuals doing the testing. That way when the negotiation in the future occurs, you established the benchmark to measure from in terms of the amount of time, people and rate, so the only thing left to negotiate is the difference in the actual time spend at the agreed rate. The key is to significantly limit what’s open to be negotiated.

If you don’t establish parameters you may find that “An agreement to agree in the future is no agreement at all” and the supplier who you thought would be reasonable has turned this into an opportunity to use the shift in leverage against you.

Amendments

Amendments need to:

            A.  Be numbered

            B.  Contain an Effective Date for the Amendment

C.  Reference the correct Agreement that is being amended 

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 must 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 ___ 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 ___ is hereby deleted in its entirety”.

One 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, they 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 and only the Statement of Work or Scope of Work number was referenced in the amendment, only that agreement would be amended and the Master Agreement’s term would have remain unchanged. 

Amortizing One Time Costs into the Price

In some situations as part of the price and payment arrangement I’ve seen groups want to

amortize costs into the price, which impacts payments. For example, rather than pay non-recurring expenses for the development of something, you agree that those costs will be spread or amortized over future purchases. Amortizing expenses requires you to commit to purchase a certain volume so the cost is fully liquidated or you need to assume liability for any un-liquidated costs.

The more important aspect of negotiating the amortization into the price is to make it clear what is being amortized and for how long or how many units to ensure that the amortization amount is backed out of the price once the expense has been fully liquidated.  

There are a number of Suppliers who are willing to amortize costs into their price for two simple reasons. One is it locks you into using them for those volumes or be subject to any cancellation penalty for un-liquidated costs.  The other reason is it presents additional profit opportunity for them. Many times Buyers may change and if the new Buyer is unaware that the price included an amount being amortized , they would be negotiating future pricing against the wrong benchmark. If the amortization period is complete the benchmark for any negotiation should be the price less the amount being amortized.

Assignment, Novation, Change of Control, Pledging

In business today change occurs frequently. Buyers may divest certain business that previously had contracts with a Supplier. Suppliers may want divest certain operations or businesses that had contracts to sell products or services to Buyer. A party may want to assign some or all of their rights or liabilities to third parties.

As these situations may arise during the term of the contract you need to be prepared to deal with them in your contract negotiation.

It’s important to understand the concepts of each.

An Assignment is the act of transferring an interest in property or some right (such as contract benefits) to another. Under an assignment the party that assigned the agreement would be secondarily liable to the original party unless the parties otherwise agree.

For example if A and B have a contract and B assigns that contract to C,  C would be primarily liable to A and B would be secondarily liable to A if C did not meet the obligations of the contract,

A Novation is agreement of parties usually done in conjunction with an assignment where upon the assignment there is now a new agreement between the original party whose contract was assigned and the party to whom the contract was assigned that in effect extinguishes (cancels) the old agreement and relieves the assigning party of liability under the contract.  

For example if A and B have a contract and there is an assignment and novation of that contract by B to C, the contract would now be between A and C and B would no longer be liable to A under the contract as the “novation” extinguishes their liability

A “change of control” occurs when the entire company is sold to another company or merges with another company where the original company does not have controlling interest in the combined company.

            For example B is sold in its entirety to C. or

B Merges with C and B does not have majority control over the merged entity.

Pledging is when a company (usually the Supplier) wants to assign its right to payables to a third party (usually a financial institution)

            For example B the Supplier may seek to have all payables by A the Buyer

Be assigned to C (Supplier’s Bank) as part of a revolving line of credit C has with C.

The risks with an assignment is that instead of dealing with the party that you contracted with, you are now dealing with another party so there could be a loss in value, increase in problems etc. So from a Buyer’s perspective you want to prevent the Supplier from being able to assign the contract without your consent.

The typical things that get negotiated in Buyer’s consent to the Supplier doing an assignment is whether consent is solely at Buyer’s discretion or is subject to a reasonableness standard.  Most Buyers would prefer to be able to assign their contract without requiring the Supplier’s consent as they see needing to get the Supplier’s consent as an opportunity to “hold them up” where they would use Buyer’s need for the consent to leverage something better for them such as an additional payment of fee. So Buyers will pursue the unilateral right to assign in certain business situations such as the sale of the business that uses the contract.

The risk with an assignment and novation is for a Buyer to agree, it is just like qualifying a new supplier where you need to determine whether the new company has the necessary assets and resources to stand behind not just future commitments but also to stand behind all of the potential liabilities with respect to prior sales such as the warranties, indemnities, etc. Most of the time Suppliers that are involved in these types of assignments want it to be an assignment and novation so they have no liability going forward and Buyer can only look to the new entity.  That may be fine if the new entity has everything you need or what to ensure you remain protected, but what if they don’t? One option is to refuse to agree to with the novation. I’ve encountered Suppliers that simply refuse to accept anything but an assignment and novation. When I refused, the contract remained with them to perform. But that was clumsy. So I also did a new agreement with the new entity that simply incorporated by reference all the terms of the existing agreement so going forward they would sell at the same terms and pricing as the original supplier. While that would mean that on purchases going forward you would not be able to look to the original Supplier for liability, what it did do was to keep the original supplier still liable for all their prior sales and any liability associated with them.

The risk with a Change of Control is the potential negative impact a change of control might have (such as the supplier being sold to a major competitor of your company’s). Most companies would never give a Buyer veto power over who that may potentially sell their company to or merge with, but from a Buyer’s perspective if the change of control is problematic to the Buyer the Buyer should have the right to terminate the agreement in the event of a change in control.

The risk with pledging is you are introducing a third party to the relationship whose sole concern is the payment of monies to them. So if you are going to agree to pledging, the language would need to make sure that activity has no impact on the Buyer’s rights or remedies.

Let’s take a look at sample terms for each

Assignment:

Assignment language usually contains several sections

1. The prohibition

“Neither party will assign their rights or delegate or subcontract their duties under this Agreement to third parties or affiliates without the prior written consent of the other party

2. the standard for the consent
1. “such consent not to be withheld unreasonably”
2. “such consent shall be in Buyer’s sole discretion”
3. The impact of an un-authorized assignment
1. Any unauthorized assignment of this Agreement is void.”
4. The rights of the parties to assign the agreement in conjunction with the sale of the Business providing or using the Contract goods or services.
1. except that Buyer may assign this Agreement in conjunction with the sale of a substantial part of the business utilizing this Agreement
5. Any restrictions on the agreed assignment
1. “To a non-competitor of Supplier.”
2. “provided such company has a substantially similar financial position as supplier”

Novation

If you wanted to prevent a novation you might include something like the following:

“This contract shall be binding on the parties and their respective successors and permitted assigns. Except in the instance of an assignment or transfer by Buyer of all or any portion of this agreement, the assigning party shall remain liable for the performance of any assigned or transferred obligations hereunder.

The requirements for a novation may vary by jurisdiction. For example in New York for there to be a novation it must specifically say it is a novation. In assignment consent letters Suppliers may try to create a novation by the words they use where the language in affect would say that Buyer may only look to the new entity going forward.

Change of Control

A change of control is different that an assignment as the contract is not being moved to a different company, and in fact the original supplier may continue to operate as a independent legal entity that is simply owned by a third party. If they wanted to move the agreement from the original supplier company to a different affiliate company, which would be an assignment and the terms of the assignment provision would apply,

Should you be concerned about Change of Control and have contract language to deal with that?  In some cases you should. For example, if your competitor purchases a key Supplier of yours it may be harmful. The problem is that it is impossible to negotiate change of control clauses in an agreement that would prohibit the sale of their business. That’s because company’s officers and directors have a fiduciary obligation to act in the best interests of their shareholders so they would not be willing to agree to anything that restricts their ability to have their company merge with or be acquired by another company. At best what you may be able to negotiate into the agreement would be terms that give you certain rights and remedies should there be a change of control that could be damaging to you. For example you could potentially negotiate in a term where if there was a change of control and the new entity was in direct competition with you, you would have certain rights such as the right to terminate the agreement with reduced or no liability within a certain period of time to allow you to move to another entity if possible. For example:

“In the event of a change in Control of Supplier, where all or substantially all of the assets of Supplier are acquired by any Entity, or Supplier is merged with or into another Entity to form a new Entity (a “Change of Control”, then at any time within twelve (12) months after the Change of Control occurs, Buyer may, terminate this Agreement, in whole or in part, with sixty (60) days written notice. Buyer’s sole liability in the event of such termination shall be _________________ [

Pledging

If you were to agree with the concept of allowing the Supplier to pledge or assign their rights in accounts receivables to a third party, there are a number of protections that you would need to put in place for that so Buyer’s rights are unaffected  The following is an example of a clause that you add.

“Supplier may assign Supplier’s right to receive payments under this Contract; provided, however, that any such assignment (a) will not increase the number of payments or amounts due from Buyer, (b) will be subject to any claims and offset rights as well as Buyer’s right to receive payment for unused credits, and (c) will not affect any of Buyer’s rights or remedies under this Agreement.  If Supplier assigns any of its rights to receive payments hereunder, then Supplier agrees to indemnify, defend and hold Buyer harmless from any and all claims, damages or losses relating to claims brought by any non-party asserting rights under this Agreement.”

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Authority

There are two types of authority express or implied. Express means the corporation has granted that individual with authority to bind the Corporation.  The Board of Directors of the Corporation will make a resolution to grant authority.  For example, the Corporation may grant the Vice President of Procurement the authority to bind the corporation and be able to delegate signing authority within the procurement organization.   Express authority only applies to the specific company that granted the authority.  For example, the Vice President of Procurement would not have authority to sign contracts on behalf of a Subsidiary. The Subsidiary would need to grant that authority.

Implied authority may exist by the position of the signer or by previous dealings. An example of previous dealings would be if a corporation consistently performed on contracts that were signed by someone that didn’t have the authority thereby ratifying the authority, that type of behavior could estop or prevent them from arguing that the

Party didn’t have the authority and try to void the agreement. If an officer of the company is signing the contract they will have implied authority to bind the Supplier because of their position as an officer of the Corporation.

If a non-officer is signing the contract, including the words “duly authorized” as part of the signature block may show authority. If they represent that they have authority and do not, they can be personally liable.

The reason why you would want to verify authority is lack of capacity to sign an agreement such as not having the authority is a legal defense that can be used to void the agreement.

To make sure a party is authorized to sign a contract you may also ask for what is called a “Secretary’s Certificate”.  The Corporate Secretary provides a certificate that an individual is authorized or they may provide a copy of a resolution from the Board of Directors granting authority as proof that the individual has the authority.

Bailment, Consignment. Loan of Product

A good definition of Bailment is found in wikipedia:

"Bailment involves the transfer of possession and not ownership. In order to create a bailment, the bailee (the party receiving the item) must both intend to possess, and actually physically possess, the item. The bailee is generally not entitled to the use of the property while it is in their possession. A bailor can demand the return of the property at any reasonable time, without prior notice. No matter how a bailment arises, the bailee has both a duty of care and duty to re-deliver the bailment. The bailee is expected to take (as a minimum) reasonable precautions to safeguard the property, although this standard sometimes varies depending upon who benefits from the bailment. A bailee may be liable in conversion (unlawful taking) if the property is not returned upon the request of the bailor, or if the property is used without permission of the bailor. Bailment can be voluntary vs. Involuntary. It can be for consideration or gratuitous and bailment for consideration have a higher standard of care required. A bailment may also be for a fixed term or indefinite term. Bailment is used when you primarily want to have another party hold the item pending other instructions (such as to ship it to another party)".

Consignment is similar to a bailment where you a placing goods in the hands of another but the intent for the use of the goods are different. In a Bailment situation you want the other party to hold them for you. In a consignment situation the intent is for the goods to be sold rather than returned. In both situations the party that provided the goods retains ownership.

A “loan of product” is a situation that falls between a bailment and consignment where the intent is to allow the other party the right to use the product

 The table below shows the differences between the three.

	Bailment	Loan of Product	Consignment
Right to sell	None, May transfer at Bailor’s direction.	None, May transfer at Bailor’s direction.	Per the terms of the consignment
Right to use	None	Yes	Per the terms of the consignment
Risk of loss for transfer to location	Bailor	Loaner	Consignor (party who owns the material)
Risk of loss or damage to the property held	Depends upon standard of care based on circumstance (e.g. gratuitous versus for consideration	Per the terms of the agreement. Usually responsible for anything above normal wear and tear	Per the terms of the consignment
Profit or Loss	Not applicable	Not applicable	Belongs to the Consignor
Responsibility to report shortages	Yes	Yes	Yes
Responsibility to report damages	Yes	Yes	Yes
Acknowledge receipt	Yes	Yes	Yes
Ensure goods are not pledged or encumbered	All	Yes	Except for authorized sales per the agreement.
Report transactions	Only if transfer were contemplated in the agreement		Yes
Make settlement and payment	Not applicable	Not applicable	Yes
Maintain books and records of transactions	Only if transfers were contemplated under the agreement	Not applicable	Yes
Permit inspection of materials	Yes	Yes	Yes
Remove materials	Yes	Yes	Yes
Maintain Insurance to replace materials if lost or damaged	Yes	Yes	Yes
Return materials on termination or expiration of the agreement	Yes	Yes	Yes
Provide packing information on return	Yes	Yes	Yes
Mark the materials to show ownership	If required	Yes	If required
Reimburse for any materials that are stripped, stolen, lost, damaged. Unaccounted for	Yes	Yes	Yes, plus all materials sold
Pay cost of service or maintenance	No	Yes	No

BEST PRICING CLAUSES, BEST AND FINAL OFFER LANGUAGE

Should you use Best Pricing language for your agreements or best and final offer language for your bids and proposals?

In the U.S. and other countries, pricing is subject to the Anti-Trust laws.

Under anti-trust laws a company is required to offer you similar pricing for purchases of like quantities under like terms. So the laws give you

basic underlying price protection. When you seek "Best Pricing" without tying it to similar commitments you usually run into problems with the supplier's legal counsel because of the anti-trust risk. If they offer it to you, irrespective of quantities and terms, they legally have to offer that pricing to all other customers.

The Robinson-Patman Act is a United States law that prohibits anticompetitive practices, specifically price discrimination. The Act prohibits sales that discriminate in price on the sale of goods to equally situated purchasers when the effect of such sales is to reduce competition. Included within the determination of Price are the net price and all other compensation paid. The value of any goods or services that the Seller throws in at no additional cost, would be part of the compensation

For liability under the Robinson-Patman act a number of things must occur:

§  There must be discrimination in price

§  On at least 2 consummated sales;

§  From the same Seller;

§  To 2 different purchasers;

§  Sales must be contemporaneous;

§  Sales must be for "commodities" of like grade and quality;

§  It must be sold for "use, consumption, or resale" within the United States;

§  The effect may be "substantially to lessen competition or tend to create a monopoly in any line of commerce."

It is unlawful to knowingly to induce or receive discrimination in price, which is prohibited by this section.

Defenses to the Act include:                                                                                            

• Cost justification (where the cost to sell to one customer may be different than the cost to sell to the other)
• The need to be competitive (matching the price of a competitor). 

Some Suppliers will clearly try to use the act as a way to avoid best pricing clauses.

Knowledgeable Suppliers would be aware of the risk and would never accept a best pricing provision without the appropriate ties to quantities and terms.

A Supplier’s reluctance to agree to price reduction could be driven by either the desire to increase their profit at Buyer’s expense or they're simply not convinced that they will be able to drive the cost down to make the firm commitments on reductions.  One way to flush that issue out is to suggest that instead you approach it on a benchmarking basis where you would agree on the cost formula for the product or service and then do annual benchmarks to see if the underlying cost in the market has changed that would allow them to reduce the price.  Another approach could be if there are or will be competing products, you could get them to agree to benchmark their cost to you versus what you could buy a competing product for from a competitor.  It would not give you guaranteed reductions, but it would be ensuring that the product remains competitive in the market.  If there is a firm purchase obligation that should absolutely be linked to their on-going competitiveness.

A fairly common form of best pricing provision that I’ve seen is something like the following:

Most Favored Customer.  The Prices provided by Supplier to Buyer under will not exceed those offered to other customers purchasing similar products and services in like or lesser quantities to be produced under similar terms and conditions.  If Supplier offers prices to other customers for like or lesser quantities under similar terms and conditions during the same time period that are lower than those offered to Buyer, then those prices shall become available to Buyer at the time of availability to that other customer.

The problem with this type of provision is that it is relying upon the Supplier to voluntarily disclose those situations and does not provide any right to audit their sales prices. The other problem is that the requirement for purchases under “similar terms and conditions” provides a significant loophole where a Supplier could easily argue that because the terms and conditions are not similar, they are not obligated to offer lower the price. I personally don’t like this type of best pricing clause as I think it allows the Buyer to sit back and do nothing under the assumption that they will get the best pricing when that may never occur.

Another approach at best pricing is to use benchmarking. Here’s an example of one:

         Benchmark Studies

At any time during the term of this agreement Buyer may do benchmark studies with other suppliers to determine whether Buyer is receiving competitive prices.  Benchmarking may consist of RFI’s, consumer indexes, consumer/industry consultants, qualified supplier pricing, technology efficiencies or any other vehicles Buyer reasonably determines to be valid.  In the event that Buyer learns of lower prices for similar products or services for like or lesser volumes under similar terms and conditions, Supplier agrees to reduce the current agreement Prices to the mean benchmark price. Both parties agree to update the current agreement Prices to reflect any agreed to changes.

The advantages of this type of approach is:

1. The Buyer is not relying on the Supplier to disclose price reductions made.
2. There is no need for an audit provision that most Suppliers would refuse to allow.
3. The Price is not limited to what the Supplier does with their other customers; it applies to their competitiveness in the marketplace.
4. The adjusting of the Supplier’s price to meet a competitive benchmark would be one of the allowable exceptions to Robinson-Patman that allows for price differentiation. 

For example you agree that you will take in a certain number of competitive quotes or benchmarks and if their price is above the mean/average of those, they must lower it to the mean.  If you had 4 or more you could also offer to throw the high and low out. Then the market would drive the price you pay.

I don’t like "Best Pricing Clauses" as they allow the Buyer to be sloppy or complacent. It allows them to feel that they do not have to make the extra efforts to pursue the best deal, as they will get the best deal automatically if someone else does. It's a false sense of security as Suppliers won't advise you of when they have offered a better deal and most buyers don't have the time or right to verify that they are in fact not getting the best deal. Including a "best pricing" provision or other similar provisions in an agreement is "window dressing" unless you can actually use and enforce it. Suppliers may be willing to allow you to include a best pricing provision in an agreement, but most would not be willing to allow audits of their actual sales records. They would also not be willing to allow you to audit the terms. So you would have a provision with no substance and not easy means of identifying if the commitment was not met.

Should you use "last and final offer" language in your bid or RFP? I can think of hundreds of times when I have been told that what was offered was the lowest possible price, only to be able to negotiate it down further.

 "Last and final offer" language also allows the Buyer to be sloppy or complacent. It allows them to feel that they do not have to make the extra efforts to pursue the best deal, as they will get the best deal automatically as a result of telling the supplier to provide it. If you tell a supplier, who knows that they are the preferred supplier, to provide a last and final offer, the odds are that you will be paying more than you would if you negotiated. Once you seek a last and final offer, the Supplier will consider any further negotiation activity beyond that un-ethical. If you negotiate, they know the additional concessions may be required.

Bids, Request for Quotes, Request For Proposals

The Invitation for Bid, Request for Proposal or Request for Quote is just another step in the negotiation communication process. Each document must provide the Supplier with the understanding of what you want. Sometimes you may not be totally clear in what you want or can afford, so you may identify specific alternatives or options you want them to bid on or, you may allow them to provide options or alternatives of their own.

You use these bid or request for proposal documents to do several things.

1.     You want to set their expectations. They may have formed their own expectations during their prospecting stage, which need to be reset and these documents are the best alternative for providing them with an understanding of what is important to you. The sooner you can begin to set their expectations or break down expectations that they may have formed from their prior discussions with people from your company, the better off you are. Having it printed in black and white provides the authority of a writing. This is your company’s formal position.

2.     You also use the documents as a mean of setting the anchor or benchmark for the negotiations. When they provide a bid or proposal based on these documents you need to hold them to it. If they come in at a later date and want to make changes, you use these documents to either hold them to their initial proposal or to extract concessions from them in return for the concessions they are seeking from you.

It is very important in any specifications that are provided, those specifications must be written in a manner that doesn’t limit the competition. This can happen by being so closely written to one Supplier’s product that it may exclude all others. That would eliminate your power of competition and you don’t want to give that up before you have started.

If there is a preferred product or thing you want them to provide, one approach is to include the words “or equal”. This can work if what the specification is referring to really does have other competitors that produce equal products. If they don’t, the language is ineffective.

The best way is to write the basic specification in a manner which broadens the potential competitive base by having certain required areas of functionality which the broad base can supply and allows optional or alternative functionality with the decision criteria being based on the best value (a combination of functionality and price).

Invitation to Bid

An Invitation to Bid is mostly used for purchasing commodities or simply "goods". The bid packages consist of the specific requirements and specifications of the product that is going to be purchased along with all the required bid information. In certain circumstances a company may want to have a bid function as an offer that they can accept without additional negotiation with award being made to the lowest responsible bidder.  With an Invitation to Bid, if a Supplier bids different than requested they may be considered non-responsive. If a Supplier takes exception to the terms, they may be considered non-responsive. In many situations the expectation is that the price may not be negotiated, but you can get around that by changing a requirement.  Bid documents are used when the product or service being purchased is well defined. There is an art in constructing a bid document.  For example when you have a number of line items included, is the bid for each and can awards be made separately, or is the bid a form of “all or none” proposal.  If bids are based on a number of line items and estimated quantities what will the basis for the award be? Is it based on the sum of all the extended prices (price times estimated volumes)?  If your is not fully defined and there can be additions or deletions you may include a number of unit prices to quote on, but how should those be take into account in the award. Lastly, if you have significant flexibility in a number of areas you may also want to include a number of options in it what are a form of “what if?” type of negotiation tactic to understand the individual cost and impact of potential changes. Most buyers would like to “cherry pick” bids by either awarding individual bidders only those items which they were the lowest on, or by using the low unit prices in other bids to negotiate a better price with the Supplier.

Make no mistake about it; in bid situations Suppliers will be looking for ways to improve their profit by the way the bid. If they bid “all or none” they want to protect their pricing as they may not be profitable on items they bid low on. Suppliers may also try to guess where the volume estimates are incorrect to bid high on the volumes that were underestimate and bid low on the volumes that were overestimated.  They can also price options in a manner where the price difference between the options isn’t consistent with the change in their cost simply because they want to drive you to make a decision that would be more profitable for them.  When possible, always keep the right to make separate awards and negotiate pricing as it cuts down on many of the pricing games Suppliers can play.  

Request for quotation (RFQ) is a process where suppliers are asked to provide a quote for a product or service. The RFQ may be used for informational purposes. If the intent is to get a firm quote that the Buyer can rely upon you would normally use an Invitation for Bid or would require that the Supplier provide a firm quote that will be in effect for a specified period of time.

Request for Proposals
The request for proposal (RFP) is an approach that is frequently used when you may have general requirements for a product or service the must be met and you want to solicit competing proposals from suppliers that have different solutions that can meet your needs.  For example, for a product that requires development or customization you would use a RFP to understand not just what the Supplier proposes as the solution but also all the issues, life cycle costs and risks associated with purchasing from the Supplier. While some of the information requested may seem like a duplication of effort to what the Buyer may have learned in a pre-qualification, the difference is the pre-qualification provides you with information about what the supplier can do. By including it in the RFP, it describes what they will do.  That’s why many times the RFP and the Suppliers response to the RFP will be included as part of the agreement.

The following information would normally be requested as part of and RFQ that involved the development of a new product. Many of the same questions would apply to services or Software.  Many of the responses requested involve discovering what the total life cycle cost will be if you select that supplier.

1. Proposal must be based upon the information and specifications provided by the Buyer.  You want them to provide a proposal on what you need, not what they want to sell.

2. If the supplier feels that any conflicts exist within the documents they must identify any trade-off and assumptions made in their response. The time to discover conflicts and assumptions is prior to making the award, not after where it can cost more money or where your sourcing decision would have been different.

3. Their ability to meet the proposed schedule for the development milestones. Proposal of alternative schedules. Alternatives may help identify just how confident the Supplier is about meeting the schedule and what you may be able to plan on.

4. A description of how the product will be developed by the Supplier. This is more of understanding their thought process to see if they really understand what you need.

5. The team that will be used. Where they will be located. Their experience and skills. The development will only be as good as the team assigned. This and restrictions on transfers to the team avoids bait and switch tactics.

6. How the Supplier will provide project management, engineering control process, engineering skills. This will give you an indication of how professional the management process will be.

7. What design tools will be used? This helps clarify what automation they will be using in the process to design it.

8. Any pre-existing materials to tools used (for Software development). This identifies any things in the development that they will continue to own and for which you may need to negotiate licenses to make derivative works to support future needs.

9. Other information that demonstrates the supplier’s capability to develop the product. This leaves it open for the supplier to submit proof of their qualifications, which could include references.

10. Any non-recurring expenses related to developing or testing the product. This is part of understanding the total cost of doing business with them.

11. The costs for samples, prototypes, production units, spare parts, out of warranty repairs, maintenance or service contracts. This is part of understanding the total cost of doing business with them.

12. What commitments the supplier will make to reduce cost over time and with increased volumes. This helps identify what the potential life cycle cost of the relationship will be.

13. Cost and lead-time for any required tooling or equipment. This is part of understanding the total cost of doing business with them.

14. Product lead-time and flexibility. This is part of understanding the total cost of doing business with them. Lead-time drives investment in safety stock; Lack of flexibility increases inventory levels.

15. Items to be included in the unit cost (such as packaging). This is part of understanding the total cost of doing business with them.

16. Any objections, exceptions to the Buyer Terms and Conditions provided. This identifies the costs and risks the Supplier is willing to assume and what they expect the Buyer to assume as part of determining the total cost of doing business with them

17. Country of Origin and manufacturing location. This helps identify what the landed cost of the product will be as part of the total cost

18. Willingness to participate sourcing or logistics programs described in the RFP. This helps identify what the landed cost of the product will be as part of the total cost

19. Any proposed alternatives with cost impact identified. This allows them to propose alternatives that may provide increased value or reduced cost to consider.  Supplier can be smarter than your own people in knowing what works or what’s the trend in the market.

20. Due date for Proposals and how long the proposal will be firm.

 If you were buying a standard product your RFP list would be much shorter:

1. If the supplier feels that any conflicts exist within the documents they identify any trade-off and assumptions made in their response. 
2. The costs for production units spare parts, out of warranty repairs, maintenance or service contracts.
3.  What commitments the supplier will make to reduce cost over time and with increased volumes.
4. Product lead time
5. Items to be included in the unit cost (such as packaging)
6. Any objections, exceptions to the Buyer Terms and Conditions provided.
7. Country of Origin and manufacturing location.
8. Willingness to participate sourcing or logistics programs described in the RFP.
9. Due date for Proposals and how long the proposal will be firm.

If you were soliciting a proposal on a service you would probably ask many of the same questions with a heavier focus on the team that will be providing the services.

1. Proposal must be based upon the information and specifications provided by the Buyer.  You want them to provide a proposal on what you need, not what they want to sell.

2. If the supplier feels that any conflicts exist within the documents they must identify any trade-off and assumptions made in their response. The time to discover conflicts and assumptions is prior to making the award, not after where it can cost more money or where your sourcing decision would have been different.

3. Their ability to meet the proposed schedule for delivery of the service. Proposal of alternative schedules. Alternatives may help identify just how confident the Supplier is about meeting the schedule and what you may be able to plan on.

4. If not a standard service, a description of how the Service will be developed by the Supplier. This is more of understanding their thought process to see if they really understand what you need.

5. The team that will be used to provide the service. Where they will be located. Their experience and skills. The development will only be as good as the team assigned. This and restrictions on transfers to the team avoids bait and switch tactics.

6. How the Supplier will provide management, and control over performance of the Service.  This will give you an indication of how professional the management process will be.

7. What tools will be used to perform the service. This helps clarify what automation they will be using in the process to design it.

8. Other information that demonstrates the supplier’s capability to perform the service. This leaves it open for the supplier to submit proof of their qualifications that could include references.

9. Any non-recurring expenses related to developing the service. Any recurring expenses in providing the service. This is part of understanding the total cost of doing business with them.

10. What commitments the supplier will make to reduce cost of the service over time. This helps identify what the potential life cycle cost of the relationship will be.

11. Service scheduling lead-time and flexibility. This is part of understanding the total cost of doing business with them.

12. Any objections, exceptions to the Buyer Terms and Conditions provided. This identifies the costs and risks the Supplier is willing to assume and what they expect the Buyer to assume as part of determining the total cost of doing business with them

13. Any proposed alternatives with cost impact identified. This allows them to propose alternatives that may provide increased value or reduced cost to consider.  Supplier can be smarter than your own people in knowing what works or what’s the trend in the market.

14. Due date for Proposals and how long the proposal will be firm.

Option Bidding

As a part of negotiation of the total cost of an item, you may consider using an approach called option bidding. The same type of activity can occur in a negotiation through the use of "what if" tactics, where you solicit the cost of different alternatives. The use of option bidding or "what if" is done to understand the potential variables of cost in the relationship from a number of different perspectives. It can help identify where requirements are adding costs to the relationships. It can also provide you with a greater understanding about the supplier or the way they operate. For example, one supplier may want to limit the amount of change that occurs by either limiting the amount of change or charging premiums for change, whereas another supplier may be more flexible in nature and be willing to accept such changes with minimal limitations and no premiums. One supplier may be willing to offer a substantial discount for a longer delivery schedule (either because of other work they have or their lack of confidence in the schedules) whereas, another supplier may not be willing to offer anything because they want the work in that period or they have solid confidence in meeting the dates. One supplier may be willing to charge minimal costs for extending warranties because they have high degrees of confidence in the reliability of their product, whereas another may want to charge substantially for extended warranties because either they don’t have the same confidence in the reliability of their product, or their business model wants them to sell items with short warranties so they can sell on-going maintenance and repair agreements sooner.

As each supplier's capabilities, motivations and business models may be completely different, the doing of some amount of option bidding or "what if" also allows you to flush out a better understanding of what's important to them and how they operate. Once you understand what is important to them, you have the ability to change you negotiating tactics for you can use what is important to them in negotiating or trading off certain items under negotiation

Attached is a sample long form of option bid which gives a flavor of some of the types of things that could be asked. I doubt I would ask all of them in any one bid. For many activities this would be overkill. What you ask for should vary with each activity. However, even the simplest bidding activity can have a form of option bidding, such as asking a supplier what happens to their price if we were to give them more or less time to do the work or what if we agree to pay them sooner. Many times you may be paying a premium to have work done on a planned, but not critical, schedule which the requisitioner might be willing to change if they were aware of what they could save by making modifications to the schedule.

As you will see, the option bid sets the assumptions to be used for the bid and then asks for options for changes against that baseline. The key in doing that is it allows you a more disciplined set of responses for evaluation. Everyone must bid against the baseline and options are evaluated against the baseline.

Sample Option Bid

BID PROPOSAL

INSTRUCTIONS:

Supplier shall answer all items set forth in the Bid Proposal and in the format provided.  Supplier shall set forth all objections to the documents in the space provided or by attachment to the Bid Proposal AT THE TIME THE BID IS SUBMITTED. BASE BID pricing must be based on the following assumptions, however supplier will have the opportunity to provide alternative pricing where the supplier either has objections to the documents or wishes to offer alternative proposals.

BID PROPOSAL MUST BE BASED ON THE FOLLOWING ASSUMPTIONS (BASE BID):

1.  Pricing is F.O.B. ORIGIN for U.S. manufacture or; for non-U.S. manufacture, pricing is quoted F.O.B. PORT OF ENTRY duty paid.

2.  Payment is NET 30 days after receipt of conforming goods and invoice.

3.  Prices quoted and payment is in U.S. DOLLARS.

4.  Prices exclude all one time costs such as N.R.E., tooling, test equipment, set-up costs, etc.

5.  The product will carry a ONE-YEAR WARRANTY from date of acceptance.

6.  Quality and Reliability Exhibit requirements will be met.

7.  Service Exhibit requirements will be met.

8.  Agreement requirements will be met.

9.  Pricing quoted is fixed for TWO YEARS.

10.  Prices are inclusive of all taxes.

11.  Prices include the cost of disposable "BULK PACKAGING".

------------

BID PROPOSAL

------------

For:  [PROGRAM NAME]

We have read the Request for Proposal in detail and submit the following Bid Proposal.

1. PRICING

(Note: SUPPLIER IS REQUIRED TO BID 24 MONTH FIXED PRICING, "BASE BID".)

Yearly Quantity (Volume / year)	24 month fixed price (base bid)	18 Month fixed price	12 Month fixed price	12 Month step price
Under 1,000
1,000 to 5,000
5,001 to 9,999
10,000 to 24,999
25,000 up

1B. If the above quantities do not define where your real price/quantity breaks occur, the following space is provided to identify alternatives:

1C. Identify below what commitments will be required from to achieve additional cost breaks (Example; hard tooling, quarterly forecasts, master purchase orders, etc.) and the respective savings/cost for any such commitment.

Commitment	Savings	Costs

1D. In order to assist the Buyer in calculating estimated cost over the life of the program please provide your estimate, by percentage, of cost fluctuations (+ or -) projected for years 2-5.

Category	Year 2	Year 3	Year 4	Year 5
Labor
Materials
Overhead
G&A
Other

1E. Are you willing to enter into a contract for longer than two years based on your estimates set forth above? _____YES, for _____ (#) year(s)                 ______NO

2.  PAYMENT

Supplier offers the following Payment options

Payment terms	Percent adjustment to base bid
COD
Letter of credit – sight
Letter of credit - 30 days
Letter of credit - 60 days
Net 10
Net 30	Base Bid
Net 60
Net 90
Other (define)

3.  WARRANTY

Supplier offers the following Warranty options

Warranty period	Percent adjustment to Base bid
No warranty
6 months
12 months	Base bid
18 months
24 months
Other (specify)

4. TRANSPORTATION/PASSAGE OF TITLE

Delivery term	Premium
Ex Works Supplier Dock at _________	None, base bid
CIF to Port of Export
DDU to Port of Import
DDP to Buyer Dock at ___________

5. Cancellations:

Supplier offers the ability to cancel orders with cancellation charges as follows:  (NOTE; The "No Cost Period" should not exceed your proposed lead time in Section 6A.)

Days prior to scheduled delivery	Cancellation charges
_____ days	No cost
Greater than 120
91 to 120
61 to 90
30 to 60
Thirty or less

6. OUT OF WARRANTY REPAIRS

Out of warranty repair cost	$
Out of warranty repair lead-time after receipt of the material.	______ Calendar Days
Repair Locations

7. PROTOTYPES

Type	Cost per unit	Lead-time from Issuance of order
Engineering (complies with requirements for form, fit, function)
Pre-production (complies with specifications)

8. ONE-TIME COSTS

Per Bid Instructions, the following one time costs have been excluded from the base bid:

Item	Amount
Non recurring engineering expenses
Set-up costs
Tooling costs
Other (specify)

9. TEST EQUIPMENT

Supplier shall describe below, the test equipment which will be required to duplicate supplier's testing. For any test equipment of the above that is produced by the supplier, supplier offers to provide such equipment at the following cost:

Test Equipment	Cost

10. TECHNICAL ASSISTANCE

1.  Describe the technical assistance that will be provided during the program at no cost.
2.  For technical assistance not included above, list your fee schedule and describe the nature of such assistance