Saturday, January 29, 2011

Payment, Payment Schedules

For many purchases the negotiation of payment terms is very simple, you negotiate a certain number of days after some event in which you make payment. For example:
a commitment to pay net sixty days after the date of delivery.  The key factors in establishing the payment term for the Buyer are:
1.     Value of money for the use of the money during that term.
2.     Ability to perform inspection, test, and possibly rejection before you are obligated to make payment.

In major procurement activities the ability to pay after the work has been completed may not be possible and in those situations you may need to negotiate a payment schedule with the Supplier. In negotiating payment schedules Suppliers may want to do several things.
·      Front end load the payment so they are working off your money.
·      Use the payment schedule and the amount of payments so that it is difficult or costly for you to change suppliers. The more you have paid them up front the more difficult it may be to change as they have your money.

For Buyers one key in negotiating payment schedules is to make sure that you haven’t paid the Supplier more than the work is reasonably worth at the time the payment will be made.  This ensures that if the Supplier fails to perform, you still have the money to correct the performance. Having money owed to the Supplier is one of the best forms of leverage to get performance. For example, in some contracts payments will be structured based upon the percentage of the work that is completed less a certain amount of retainage to further ensure that all the work is completed.  It doesn’t matter whether you are having a building constructed, a major piece of capital equipment delivered, or a major piece of software development completed, in all instances you want to make sure that the Supplier has provided all they are supposed to provide before you want to release substantial amounts you may owe them.

In negotiating payment schedules it is also important to have any progress payments not be tied to time.  Time may pass and the Supplier may be running behind on the schedule so you don’t want to reward them for not performing.  Always tie payments to deliverables or actual progress. You can also use your payment schedule as leverage to try to drive the Supplier into making commitments to get you back on schedule simply by including a requirement that if they are late in meeting the milestone, percentage of performance or deliverable, you have the right to withhold those interim payments until they are back on schedule.  Delaying one payment may not be enough to have the Supplier invest in bringing the work back on schedule, but withholding all may drive the desired behavior.

Pen and Ink Changes

When a change is required to an Agreement sent for signature, sometimes a party will strike out or write in changed language and initial it. Assuming that you agree with the change, the cleanest way to manage these changes is to re-generate the Agreement with the changes included and have it re-signed. It is legal to make pen and ink changes. All pen and ink changes to the Agreement must be initialed by both of the individuals who are signing the Agreement at each point where a pen and ink change has been made. If only one party initials a change, the change has not been agreed upon.

A pen and ink change by one party would, under contract law, be considered a counter offer. If it is accepted by both parties initialing it, the agreement is formed with the change being part of the agreement. If its not initialed by both the parties, the counter offer has not been accepted and agreement has not been formed as there is not a meeting of the minds. 

Initialing all Pages

If there is any concern about the integrity of the Supplier, you may want to take the additional step of having both parties initial each page of the Agreement, Attachments, Exhibits and all other documents that make up the Agreement. This prevents the unscrupulous Supplier from removing a page and substituting another page with different content.