Wednesday, January 19, 2011

Terms That Manage Risks and Costs

Here are a few examples of terms that are used to manage specific risks.

Type of clause
Risk or Cost Being Managed
Approval of Subcontractors and Material Suppliers. Approval of assignments
Reduction in value or change in quality or risk of performance due to change.
Audit or Examination of Books and Records
Overpayment of charges
Background Investigations may be based on security requirements or to provide protection against theft, other personnel originated problems.
Protection against losses due to theft. Avoidance of personnel problems and claims.
Bank Guarantees will pay a sum of money to a beneficiary if the opposing party does not fulfill the obligations under the contract.
Recovery of excess cost to complete or correct the work if the Supplier fails to meet their obligations
Bonds (Surety Bonds)
Bid Bonds. Protect against some of the additional costs or re-procurement if the party fails to honor their bid.
Risks or costs being managed: Additional cost of re-procurement
Bid – excess cost of re-procurement if supplier fails to sign the contract.
Performance – cost to complete or correct the work.
Payment – payment to any unpaid subcontractors
Fidelity – payment for losses due to theft of a Supplier employee.
Business Activity Restrictions on On-Premise Operations. control over Supplier personnel or Supplier Subcontractors performing other work or activities at Buyer’s site
Avoid potential liability, conflicts with the Buyer or Buyer personnel. Prevent problems to Buyer’s image.
Change of Control Rights. This provides alternative termination provisions in the event of a  “change of control”.

You cannot prevent a Supplier from merging with or being acquired by another party. This provides the ability to terminate the contract  (preferably without liability) in the event the Supplier merges with or is acquired by a 3rd party that would be problematic for the Buyer (such as a competitor).
Change Management Process.
Formal process for change requests, reviews and approvals.
Risk or Cost:  Control costs of the work and avoid potential Supplier claims for additional costs
Change Pricing. Formulas for changes, additions, deletions of work.
Control over future pricing risks or costs once you are locked into the Supplier where the time, cost or ability to change suppliers is limited.
Conflict of Interest. Restrictions on other activities the Supplier or Supplier personnel may do,
Competitive risk. Prevent sharing of information or know how with others where it would be in conflict with Buyer’s interests
Coordination of Work to avoid disruption to Buyer’s operations, other suppliers.

Avoidance of interruption of Buyer’s work and claims by 3rd parties for interruption of their work.
End of life Restrictions would include things like
restriction on the EOL of a product or service or extended term notice requirements for EOL with the right to make a last time purchase.
End of life is a supply continuity risk and a long term support risk.
Escrow requirements.

Escrow may be used to protects against continuity of supply and long term support Risks or Costs or to provide the ability to take partially completed work and finish it. Escrow is only half of the protection you need as you always need to have appropriate licenses that will be triggered at the same time as the escrow materials are released.
Exchange Rate Risk. Currency / Price adjustment formulas
Pricing risk
Financial Reports might include requirements for the Supplier to provide non-standard financial reports such as quarterly updates that may not be audited.

Continuity of Supply caused by Bankruptcy or supplier supply problems caused by financial problems. Monitoring the financial health of a Supplier may be important to managing against potential risks financial troubles can create.
Guaranteed availability of products, service
Risks or Costs
Long term product, parts and service support
Inspection of Facilities to verify quality and  performance status.
Costs associated with the delay or non-performance of the work or the need to manage potential quality problems
Additional Insurance Requirements
Professional Liability and Errors and Omissions
Employee Dishonesty and Computer Fraud
Insurance on completed operations

Ability to recover costs associated with the insured item such as:
Cost to correct any errors or omissions
Recovery of Losses due to fraud
Recover of losses sustained to completed operations  
Key Employee Restrictions

Competitive risk which could result in lost sales, lost profits. Key employee restrictions are used when a key employee of a Supplier has, as a part of work for Buyer, been provided with access to Buyer’s trade secrets.
Multi-year Price Protection
Offset Rights

Collection of monies the Supplier may owe the Buyer. Offset rights would be important ins situations where a Supplier may potentially owe the Buyer substantial amounts of money either related to the purchase or for other purposes where the right is used for collection purposes.
(Buyer offsets any payables it may have with the Supplier against receivables due from the Supplier).
Ownership / Exclusivity Requirements
Competitive Risk or ensuring you get a return on your investment. If the Buyer is either making commitments or providing funding for the Supplier to develop a product or service for the Buyer, the Buyer wants to retain the competitive edge that this would provide in the marketplace by either owning the development or having exclusivity to ensure that it will get the appropriate return on its investments or commitments.
Parent / Company Guarantee

Ability to recover costs and damages from the Supplier’s parent company for contracts with their Subsidiaries, where the assets of the Subsidiary may not be sufficient.
Progress or Milestone Payment Terms,
retainage, and rights to withhold Payment.
Protection against advance or overpayment in excess of the value of the work performed. Leverage to have performance completed and deliverables provided by being able to withhold payment.
Period of performance requirements such as allowable duration of the work once work has commenced.

Extended disruption to your business.  If you include a completion date only, a supplier could start the work, and then do little until the end of the period and then finish leaving you with significant disruption for an extended period. An example could be to provide a term during which the work needs to be performed and a requirement that within that term, once they commence the work it must be completed within a certain period.
Approval of Project Personnel
Risk or Cost:
Getting what was promised and what you paid for.  If work was being done on a time and materials basis a lesser skilled employee could impact the cost of the work.
Purchase options

Price and terms. Provide protection to purchase future needs at the agreed price and terms of the option.
Recruiting/Hiring of Employees
Prohibitions against hiring of employees

Protection against the loss of key employees and the cost to replace them with individuals of equal qualifications.
Representations made by the Supplier regarding the Products, Services, Satisfaction.

Getting what you where promised which may also have been what motivated you to select the Supplier and pay the price. If the Supplier makes a material representation in the contract that the Buyer relied upon in making their purchase and that representation proves untrue, the Buyer may terminate the contract without liability.
Termination for without cause rights

Avoid on-going performance issues by being able to change Suppliers. Avoid unnecessary costs by being able to stop the work. 
Third party beneficiary is the right to enforce the terms of a contract where you are not a party to the agreement..
Where third party beneficiary rights are important is with outsourcing where another party will be purchasing on your behalf and you are concerned that they can’t or won’t enforce certain rights.
Volume commitment conditions require the Supplier to meet certain conditions as a condition of their keeping the commitment in effect
Being locked into purchasing from a Supplier who is not meeting their obligations, but in whose performance may not be enough to terminate the agreement.
Warranty for a Specific Purpose.  Used in situations where a Buyer is relying on the Supplier to select the appropriate product for Buyer’s expressed purpose and Buyer relies on that selection.
Getting what you paid for. This expands the warranty so that not only must the item meet the agreed specifications, but it also must be fit for that specific purpose.