In writing and negotiating contracts many times the first document you may write may not be the purchase agreement itself. It may be a purchase specification, scope of work or statement of work that will use an existing agreement. You can have the best purchase agreement in the world but still will have problems if your purchase specification, statement of work or scope of work isn’t properly written. In the event of a dispute between the parties, these documents undergo the same scrutiny as the purchase agreement’s terms.
Whether you are a commodity manager, contracts manager or lawyer you need to be able to write or review these documents to make sure they are clear and enforceable. This means that many of the conventions for writing contracts also apply to writing these documents. For simplification in this blog, when I use the term “Purchase Specification” it can mean purchase specifications, a statement of work or a scope of work as they all do the same thing which is to define the scope of the purchase. When I refer to “Agreement” it means the standard contract terms and conditions. Purchase specifications may be incorporated by reference into the Agreement or they may become stand-alone agreements that are written to incorporate by reference the terms of the Agreement.
1. What content should be included in Purchase Specification?
Depending upon what you are purchasing the Purchase Specification may include a number of different terms and requirements to supplement the Agreement. I did a quick list and came up with a few that might be in a Purchase Specification. I’m sure there are many more.
Project scope. This will describe the boundaries that define the depth and breadth of the project or work, including functionality, organization, and major deliverable materials.
Key assumptions. This defines environments or conditions under which the work is defined and the estimates were determined. If the Purchase Specification has been well crafted and the scope and responsibilities are well understood, the use of assumptions should be limited or non-existent.
Supplier responsibilities. This defines the activities or tasks that the supplier will perform (or assist in performing) that are to necessary develop the deliverable materials and complete the project or work. For each activity (task), the completion criteria must be objectively stated (especially for fixed price contracts.) For time & materials Purchase Specification, the activities or tasks and the completion criteria are highly recommended. For activities or tasks that generate deliverable materials, the delivery of that deliverable material may be the completion criteria for that activity or task.
Buyer responsibilities: This section would list activities or tasks the buyer must perform (or assist on), to enable the supplier to fulfill its responsibilities. Buyer responsibilities can be to provide specific information or deliverables or it may simply be to provide reviews and approvals at different aspects of the development or performance of the work.
Confidentiality. If there are and standard or unique requirements regarding the protection of the information contained in the Purchase Specification, that would normally be addressed in advance. Purchase Specification may also impose confidentiality restriction on information generated as part of the work or development and could include unique or additional requirements.
Deliverable materials. These are the items that are to be provided by the supplier and delivered to the buyer. In most cases you will want to own the deliverable materials so that you may use them as you see fit in the future without needing agreement from the supplier and to prevent the suppliers use of such deliverable materials with other customers.
Deliverables. This would be a list of all items to be produced by the supplier and part of the contract. If deliverables include tasks, you would define the upper level tasks, background information, objectives and sub-tasks
Buyer deliverables. If the buyer has committed to provide the supplier with any deliverables during the course of the development or work, the buyer deliverables would be listed.
Acceptance criteria. Acceptance criteria are the detailed, objective, measurable conditions, which if stated in the Purchase Specification, must be met by the supplier for the buyer to accept deliverable materials and complete the performance.
Test criteria. These are specific tests that may be required as part of acceptance.
Completion criteria. For “project-based” Purchase Specification, completion criteria are objective criteria that must be met for overall completion of the project. For fixed price contracts, the completion criteria are typically a) satisfaction of the completion criteria in the list of supplier responsibilities and delivery of the deliverable materials.
Materials and equipment. This would consist of a list of any materials and equipment to be provided to the supplier under loan from the buyer for use during the term of performance.
Schedule. The schedule would include the project time frame, from start-up to project completion. It would also include major checkpoints or phase milestones. A schedule could establish a general period for performance, with specific requirements for completion once performance has commenced.
Rates, Charges, or fee schedule. This describes the fees for services such as rates for time & materials contracts. For fixed price agreements it would include the price and any payment schedule and amounts to be retained until final completion of the work. The fee schedule would also describe any reimbursable expenses and other charges related to providing the services, including recurring charges, one time charges; usage charges; etc.
Changes. If not already addressed in the agreement the Purchase Specification may include agreed parameters for controlling the cost of changes or additions to the work and how the value for credits for reduction to the work will be calculated.
Deliverable materials guidelines. This is a description of each deliverable material, including purpose, content (size/volume/description), and delivery format or media.
Project change control procedure. This would describe a formal procedure to manage changes to project scope, schedule, hours/charges, and other elements that affect the project.
Deliverable materials acceptance procedure. This is a formal procedure to manage the review and acceptance of those deliverable materials, including the process for resolving objections, if any. For example Purchase Specification for a major development may include a detailed acceptance process and procedure that must be followed.
Escalation procedure. This would be a description off a formal procedure to manage the resolution of conflicts that arise during the provision of the work or services.
Project management requirements. These would include anything that you feel is needed to help manage the performance of the work such as project review meetings, management review meetings, etc..
Payment. Identify the conditions for making payment to a supplier for goods and services rendered such as including a payment schedule that is tied to milestones and deliverables or payment based on the percentage of work completed.
Proprietary rights If the work will include the use of Supplier’s pre-existing materials, describe what rights the Buyer will have to use such materials if they are included in the deliverables such as a license. If new work will be performed, you need to describe what each of the parties rights will be with respect to any new proprietary materials or inventions created. This would be included in the Purchase Specification only if the Agreement did not address it of if it would be different from what was included in the Agreement.
Security requirements. If Supplier will be provided highly confidential materials or high value materials or equipment consider including requirements for the level of physical and electronic security that must be in place.
Use of facilities If Supplier personnel will be working at Buyer’s location, include any requirements for those personnel so they understand what is expected of them.
Travel. If the Buyer will be reimbursing the Supplier for travel, include any reimbursement requirements or guidelines that the Supplier must follow for reimbursement.
Training. This would describe the training that the supplier must provide to buyer and buyer’s employees to ensure that maximum benefits are gained from the equipment, goods, and services provided by the Supplier.
Documentation. This would be a list of documentation to be supplied as part of the purchase, such as operating manuals, user guides, business processes or technical support procedures.
Maintenance and support. If require this would specify the support required, the hours of support operation, response or turnaround times, and the level of support to be given.
Risk management terms. In this you would include any additional or different terms that may be required because of risks you have in dealing with the specific supplier, the specific purchase risks or both.
Performance Management Tools. This would ensuring that you purchase specification includes requirements you may need to manage the supplier’s performance or to control what the Supplier may do.
2. Keys In Writing Purchase Specifications
§ Use probing questions with the requisitioner and technical expert to uncover their needs.
§ Write in short “active voice” sentences.
§ Use defined terms from the Agreement.
If you want to use acronyms, define them.
If you want to use acronyms, define them.
§ Manage compatibility with the Agreement
§ Use the right “standard of Commitment” for each commitment.
§ Manage any “Incorporation by Reference” of any additional documents.
§
For every commitment ask and make sure the language addresses the following five questions:
For every commitment ask and make sure the language addresses the following five questions:
o Who is responsible to perform the action?
o What is their responsibility?
o Where must it be done?
o When must it be done?
o How must it be done?
§ Identify any risks with the supplier or the procurement in advance and include language and tools that helps manages them if they are not already addressed in the Agreement.
§ Include tools to manage performance.
3. Uncovering Needs
M. Q. Patton in “Qualitative Evaluation and Research Methods” defined six basic types of questions that would be used in an interview:
o You can ask what a person has done or is doing (Behaviors)
o What a person thinks (Opinions/values)
o How they feel (Feelings)
o Facts (Knowledge)
o What people have seen, heard (Sensory)
o Background/demographics
In identifying what needs to be included in the Purchase Specification you should have a checklist of questions to ask the user or internal expert or to use when reviewing information they generate. For example, you could use the requirements and deliverables listed in Section 1 above and simply go through them to ask if they will be needed. If they are need, you need ask six basic questions:
- o What do they need or want?
- o Who is responsible to perform the action?
- o What is the scope of their responsibility?
- o Where must it be done?
- o When must it be done?
- o How must it be done?
For example, for all the tasks they want the supplier to perform and all the deliverables they want provided, you want to ask the same six probing questions about each. This helps discover the basic facts on what they want. Once you have uncovered the facts you can then use the other type of questions to further understand their opinions or values and identify potential options. For example you can ask a question about what they are doing and how the product or service will be used to understand the importance or risks involved. You can probe about their opinion or value on a specific point to determine the strength of the need. You could discuss potential options to identify how they feel about other options and whether they would be receptive to alternatives. You can also probe for information that they may have based on their knowledge and experience regarding critical points or potential problem areas to be addressed. A technical subject matter expert may have significant knowledge about the subject that you can learn from.
Questions should be open-ended so they are able to choose their own terms when answering the questions. Questions should be asked one at a time. Unlike supplier interviews where asking why isn’t recommended, you should be free to ask “why” questions internally so you fully understand what’s needed and why.
4. Using the “active voice”.
You don’t need to be a lawyer to write any of the different types of Purchase Specifications, the most important thing you need to do is make the requirements clear. The best way to do that is to write in the active voice. In active voice sentences the subject performs the action expressed in the verb; the subject acts. In sentences written in passive voice, the subject receives the action expressed in the verb; the subject is acted upon. The agent performing the action may appear in a "by the . . ." phrase or may be omitted.
Supplier shall deliver the Product to the Buyer on June 1, 2011
(Active voice example)
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The Product shall be delivered by the Supplier to the Buyer on June 1, 2011
(passive voice example)
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The Product shall be delivered to the Buyer on June 1, 2009
(passive voice example with agent performing the action omitted)
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Active voice sentences are more concise and fewer words are required . They clearly
define who does what, For example, “Supplier shall deliver the Product to the Buyer” makes it clear that the Supplier (who is the subject of the sentence) is responsible to deliver (the verb of the sentence) the Product to the Buyer. Passive voice sentences are longer and can create confusion. They can also de-emphasize the responsibility of the party. For example
The Product shall be delivered by the Supplier to the Buyer on June 1, 2011 . In this sentence the Subject is the Product, not the Supplier responsibility. In writing contracts we want to clearly define responsibilities.
The Product shall be delivered to the Buyer on June 1, 2011. In this sentence the subject is the Product, the verb is deliver, but the party responsible for that action is not identified.
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In writing Contracts Documents you also want to avoid the use of dangling modifiers that are caused by the use of passive voice. A dangling modifier is a word or phrase that modifies a word not clearly stated in the sentence. To avoid “dangling modifiers” consider using introductory language that provide background information or sets the stage for the main part of the sentence that describes the responsibilities. For example:
‘Invoices received before the end of the month will be paid by the fifteenth of the next month” This doesn’t make it clear whose responsibilities they are, An active voice approach would be to set the stage such as.
For Supplier invoices received by the end of the month, Buyer shall make payments by the fifteenth of the next month.
This makes it clear the Buyer (the subject) is responsible for the verb (make payments) by a certain date if the condition for that payment is met.
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Examples of Active Voice:
Supplier will provide the Products or Services as specified in the Purchase Order.
Supplier will begin work only after receiving a Purchase Order from Buyer.
Buyer may request changes and Supplier will submit to Buyer the impact of such changes.
Defined terms may be established several ways. The agreement may have a definitions section that creates specific defined terms. Print a copy of that out so you can use it in writing the Purchase Specification. Defined terms can also be established in the Agreement where they are first used. For example instead of saying “consolidated 2012 world-wide pricing and discount list” each time you refer to it you could create a defined term by writing “consolidated 2012 world-wide pricing and discount list (hereafter “Price List”) and that would create a defined term called Price List. This second type of defined term is not included in the definitions section and you would need to search the Agreement for other defined terms. Most well written agreements will use the same convention for establishing defined terms when first used and once you find what that is you can use the find functionality on your word processing program to search for others. For example if you used the convention I show above and search for “) you would find possible defined terms used in the Agreement.
6. Use of Acronyms.
When you want to use acronyms in a document define them either in a definitions section or when first used. If you want to use an acronym that is well defined in an industry standard document, make reference to that document. For example "as defined in INCOTERMS 2010" or "as defined in JESD471 Symbol and Label for Electrostatic Sensitive Devices published by the Joint Electron Device Engineering Council (JEDEC)"
7. Manage compatibility with the Agreement
Many times Purchase Specification are issued under a master agreement so you need to
ensure that the terms included in the Purchase Specification are compatible with the
Agreement. The Agreement may look to the Purchase Specification to establish or complete a
specific term. If it does, you need to ensure that It’s established. One of the biggest
problems that you can have is when the Agreement calls something by one term and the Purchase Specification uses a different term. For example, if the Agreement looked to the Purchase Specification to establish the Epidemic Defect Rate that is required for the Epidemic Defect Clause that’s in the Agreement, if the Purchase Specification doesn’t also call it the Epidemic Defect Rate you may have failed to establish the rate required by the agreement and without the rate you would have no epidemic defects protection. If the Agreement looks to the Purchase Specification to establish the warranty term, and the Purchase Specification is silent as to the warranty term you would have no warranty.
There are several ways to manage compatibility. One is to use the defined terms that are used in the Agreement. When you use the same defined terms the same meaning will apply in both the Agreement and the Purchase Specification. A second way of managing compatibility is to use the “find” functionality in your word processing program to search the Agreement for any times the Agreement points to the applicable Purchase Specification. For example, if the Agreement contemplated that the Purchase Specification would be a statement of work of “SOW”, search the Agreement to see each time that is used and see whether the Agreement is looking to the SOW or Statement of Work to establish a specific term. If it does write it down and make sure the Purchase Specification establishes the term using the same terminology.
If you’re using a standard template to create your applicable Purchase Specification, I would still do a compatibility check. I’ve run into a number of situations where an Agreement may have been written off a prior template that isn’t compatible with the current template, the template has omissions, or as a result of negotiations the Agreement isn’t compatible with the standard template for the Purchase Specification.
Defined terms in an Agreement will have a convention that indicates they are a define term. Some drafters may capitalize the initial letter, others may capitalize all letters. Follow the same convention when using defined terms in your SOW.
Defined terms in an Agreement will have a convention that indicates they are a define term. Some drafters may capitalize the initial letter, others may capitalize all letters. Follow the same convention when using defined terms in your SOW.
8. Use the right “standard of commitment” for each commitment.
There are different standards of commitment based on the words used in describing the commitment. You can:
1. Intend to do something
2. Agree to agree in the future
3. The party can make a commitment that they may do something
4. Agree to agree in the future with both parties acting in good faith
5. Agree to act in "good faith"
6. Agree to do what is "commercially reasonable"
7. Agree to do what is "reasonable"
8. Agree to do it with "best efforts"
9. Make a conditional commitment (If X happens then we will do Y)
10. Make an absolute commitment ("shall, will, must")
11. Make a Material Representation
12. Make a warranty.
Understanding the Different Commitments
Intent. A statement that the parties “intend” to do something is not a firm commitment on its own as the parties are free to change their intent.
Agree to Agree is not a firm commitment as there is nothing that forces the parties to agree and if you don’t agree, there is not commitment.
Saying that a party “may” do something does not obligate the party to do that. For example, in most termination provisions we may terminate the agreement but we are not obligated to terminate it
“Should” also does not require performance. It merely describes what a party should do, not what they must do.
Agree to agree in the future with both parties acting in good faith only requires the parties to act in good faith in seeking to agree. If there is no agreement and you can’t prove bad faith (which is difficult) they met their obligation
Agree to act in "good faith“ only requires that they act in good faith, if they did and you didn’t get what was promised they met their obligation
Agree to do what is "commercially reasonable“ requires them to act in a manner that would be customary for their industry. If something would cost them more to do it may not be commercially reasonable.
Agree to do what is "reasonable“ only requires them to assert reasonable efforts to perform, but requires more than commercially reasonable.
Agree to use "best efforts“ is frequently interpreted to mean that they are required to assert their best efforts irrespective of cost to do something
None of these types of commitments guarantee you will receive performance, they only require the party must exert the committed level of effort to perform.
Making a conditional commitment (If X happens then we will do Y) is an absolute commitment only if the condition is met. If the condition is not met there is no commitment
Using words such as “will” “shall” or "must" are unconditional commitments to perform. If you need or want something done, the language that requires it must be in clear, unequivocal terms.
For example saying that a Supplier “should” do something does not require that they do it! It only says that they should. If they chose not to, they met their obligation.
If it isn't practical or economically feasible to require a firm commitment, (e.g. the supplier will need to stock inventory that you would be obligated to buy) you may consider a two stage commitment approach.
For example, the Supplier shall use best efforts to do X within __ days, but X shall be done in no greater than ___ days.
This provides a best efforts commitment to meet a target or goal, but also an absolute requirement to provide it by the no greater than date.
Only agree to use reasonable or commercially reasonable efforts when absolutely necessary and always try to get a 2 stage commitment when using them.
For example, Supplier shall use reasonable efforts to perform repair or replacement of Defective Products within X days after receipt, but in no event shall repair or replacement be provided in more than Y days.
Modifying Commitments For Impact
As the impact of problems can vary, so you may want to consider language adjusting the standards of commitment depending on the magnitude of the problem. For example:
“Supplier shall use reasonable efforts to perform repair or replacement of Defective Products within X days after receipt, but in no event shall repair or replacement be provided in more than Y days. If the percentage of Defective Products exceeds X%, Supplier shall use its best efforts to perform repair of replacement in ___ days, and in no event shall the repair or replacement be provided in more than ___ days.
(Where each period allows less time because of the magnitude of the problem)
Time Commitments
When time is important to the commitment, use language that makes the time period clear. For example the difference between a lead-time of 90 days is substantially different whether it is 90 calendar days or 90 business days (which equates to at least 126 calendar days). Define Days as Calendar Days so it clear
Simply saying that they must do something in 5 hours could mean business hours or consecutive hours. If you called at Friday as 3:00 and the Supplier was open 8-5 Monday thru Friday it could mean that it won’t be done until Monday at 11 when you may need it by 8:00 on Friday. Make it clear what you want.
Where language describing requirement could have a dual meaning such as requirements for bi-monthly reports could mean twice monthly or every other month. Make the commitment more exact. For example instead of saying bi-monthly use specific dates like on 1st and 15th day of the month
What standard should Buyer provide?
Except for the Payment obligation (which is probably already conditioned on the receipt of conforming goods or services and an acceptable invoice), Buyers should resist making firm commitments to perform unless you are 100% sure you will comply. If the Buyer makes a firm performance commitment, the Buyer may be liable if it fails to meet its commitments. For example, If the Buyer is responsible to provide materials or approvals to the Supplier by a certain date, the Buyer could be subject to claims from the Supplier for damages the Supplier sustains if the Buyer fail to meet that date. If you are forced to make a firm commitment, address and limit the Supplier's remedies for your potential failure.
“"Buyer shall provide its acceptance or rejection within 10 calendar days after receipt from Supplier. If Buyer fails to provide such approvals or rejection in a timely manner, Supplier shall be provided a day for day extension of the performance period as the sole remedy for Buyer's failure to respond on time".
“If Buyer fails to delivery the materials on time, Supplier may cover and Buyer's sole liability shall not exceed _______.”
Words to Avoid in Supplier Commitments:
When you see any word similar to: aid, assist, attempt, contribute, endeavor, facilitate, help, support, or try you should recognize that none of these are making a firm or a measurable commitment. If you need something, the lowest level commitment you should agree to is for the Supplier to use reasonable commercial efforts.
8. Manage any “Incorporation by Reference” of any documents.
It is common drafting practice to incorporate by reference an existing writing into contracts, or Purchase Specification in order to save space. To properly make them part of the Agreement they should be incorporated by reference within the body of the Agreement or within the body of the Purchase Specification.
Incorporation of a document by reference is done by stating the incorporation by reference in the body of the Purchase Specification where the specific document is referred to, or incorporating those documents in listing of Attachments or exhibits within the Agreement.
For example:
Pricing is set forth in Attachment A, entitled “Product and Price List”, five (5) pages, dated January 2, 2012, which is incorporated by reference into this (Agreement. Purchase Specification, Statement of Work or Scope of Work).
Pricing is set forth in Attachment A, entitled “Product and Price List”, five (5) pages, dated January 2, 2012, which is incorporated by reference into this (Agreement. Purchase Specification, Statement of Work or Scope of Work).
Section 11 Attachments and Exhibits.
The following Attachments and Exhibits are hereby incorporated by reference into this (Agreement. Purchase Specification, Statement of Work or Scope of Work).
Attachment A, entitled “Product and Price List”, 5 pages, dated January 2, 2002
Attachment B, entitled “Cancellation and Rescheduling Terms”, 1 page, dated January 2, 2002
Attachment C, entitled “Supplier Quality Agreement”, 5 pages, dated December 31, 2000
This Statement of Work adopts and incorporates by reference the terms and conditions of Base Agreement #_______).
Attachment B, entitled “Cancellation and Rescheduling Terms”, 1 page, dated January 2, 2002
Attachment C, entitled “Supplier Quality Agreement”, 5 pages, dated December 31, 2000
This Statement of Work adopts and incorporates by reference the terms and conditions of Base Agreement #_______).
Exhibit 1 “Sample Return Material Authorization” form, 2 pages dated ______,
The key thing you need to do is make it very clear exactly what document(s) you are incorporating by reference. To do that each document to be incorporated should have a name, title, or reference number and a date, or formal revision number
This is so you know the exact version of the document that is included. If the document consists of multiple pages and not all pages need to be incorporated, you should list the applicable page numbers being incorporated.
If you incorporate multiple documents into your Purchase Specification, you should also establish an order of precedence between those documents and have the Purchase Specification have precedence over any of those incorporated documents.
9. Answering the five questions.
For every commitment ask and make sure the language addresses the following five
questions:
1. Who is responsible to perform the action?
2. What is their responsibility?
3. Where must it be done?
4. When must it be done?
5. How must it be done?
For example:
“ Supplier shall deliver the Product to the Buyer on June 1, 2020 ex-works Supplier’s dock in Taipei, Taiwan”
In the above example defined terms for Product, Buyer and Supplier are used.
The language is written in active voice.
It also answers the five questions:
1. Who is responsible – The Supplier
2. What is their responsibility – deliver the Product.
3. Where must it be done – The Supplier’s dock in Taipei.
4. When must it be done – June 1, 2020.
5. How must it be done – under ex-works delivery terms.
If also includes the right standard of commitment – “Supplier shall deliver” making it a firm commitment.
10. Other drafting conventions to manage.
Avoid ambiguity. Make any requirements clear so that both parties clearly understand what will be required for performance
Be consistent. Always review the document to ensure that all requirements and sections are consistent with and do not conflict with the requirements of other sections.
Avoid redundancy. If you say the same thing more than once there is always the possibility that you won’t be consistent. Make it clear and say it once.
Use carve outs. When there are exceptions to specific requirements use carve outs to make the requirements clear. A carve out is a preamble to a sentence that excludes certain things. For example: Except for Buyer Holidays, Supplier shall ….
Define things when possible. Rather than use terms that can be subject to different interpretation by the parties like reasonable, promptly, etc. define what you mean or make the requirement specific.
Make time requirements clear. If you can’t define a specific time for performance use promptly instead of immediately and consider including an outside limit. For example “Supplier shall correct defects promptly. Any defect shall be corrected in no more that thirty (30) calendar days from Buyer’s notice of the defect.”
Use “and” or “or” correctly. Use “and” when you want multiple things done so that the language the follows “and” is in addition to the first item. Use “or” when there are multiple alternatives and you are willing to accept either. Never use “and/or”.
If you use “applicable”, define what you mean by applicable. Otherwise there can be a dispute arising out of what each party considers to be applicable.
Don’t use cost and expenses. For example internal spending on correcting a problem may not be considered a cost. In fact Supplier’s may attempt to limit what you can claim by including the term “out of pocket” costs, and that means only what you have paid to a third party. The word “expenses” is a broader term and would include both costs and other expenses. For example: “Supplier shall reimburse Buyer its reasonable expenses associated with ……”
Lists. When you include lists, make it clear whether they are examples of what it required and that more may be required or whether the list is intended to be inclusive.
Mutual. Avoid using the word mutual in and Purchase Specification. If you are referring to something that is outside the agree scope of work or services, it already needs to have mutual agreement to add it. If it is within the scope of the work it already needs mutual agreement to change it. If both parties will work on something together, rather than use mutual, define what the scope of each parties responsibilities. If you are forced to use something that requires mutual agreement, always protect yourself by requiring that such agreement will not be unreasonably delayed or withheld and if possible establish parameters that the mutual agreement must fall within. For example: On July 1, 2012 Buyer and Supplier shall meet to mutually agree upon the final price for ________________. The parties shall act in good faith and neither party shall unreasonably withhold or delay such agreement. The parties agree that the final price for _____ shall be no less than $ ______ and no greater than $_______.
Representations. When a Supplier has made a representation that you are relying upon for the award to the business, include that specific representation in the Purchase Specification. Most Agreements contain what are called merger clauses that state that the agreement represents the entire understanding of the parties. If you don’t include any representations in the Purchase Specification, you would not be able to enforce them if they were not accurate.
Warranties. The Purchase Specification should be used to add any unique warranties that are not included in the Agreement that would be applicable to the purchase. The Agreement may also look to the Purchase Specification to establish things like the applicable warranty term for the purchase especially if the Agreement contemplated having potential different warranty terms for different types of products or services.
Approval. If the Purchase Specification requires your approval of different submissions or deliverables you should have acceptance criteria for those submissions or deliverables agreed in the Purchase Specification. If the approval is required within a specific period of time after submission your Purchase Specification should always establish what your liability will be for failing to meet the required dates. One of the simplest approaches is to include language that provides the Supplier with a day for day extension of the time for completion for any Buyer caused delays as Buyer’s sole liability for the delay.
Numbers and formula. Make and numbers and formula very clear so there is no other possible interpretation of them. When a number is used in the body of the Agreement, it is recommended that you spell out the number both alphabetically and numerically. This is to eliminate any confusion and in the event of a problem the written word will have priority. This is not recommended for price lists that contain prices for many part numbers where just listing the number numerically is used. Example: The non-recurring charges shall be One Thousand US dollars (US$ 1,000.00). Supplier shall provide the replacement part within five (5) calendar days. For currency, there is something like twenty-three countries that use the term dollar for their unit of currency. Some are small countries; others can be significant trading partners like the United States, Canada, Hong Kong, Taiwan, and Australia. To avoid confusion on currency, spell out the specific currency you are using (Ten Thousand U.S. Dollars (US$10,000.00) where used or through a clause or definition (e.g. ”Dollars” shall mean U.S. Dollars).
11. Risk Management with Purchase Specification
Most Purchase Specification templates are designed to deal with average risk procurement situations and average risk suppliers. Depending upon the terms that are negotiated in Agreement some of the risks and costs could shift to the Buyer so you may need additional terms and conditions to help manage the cost and risk. Just to get you thinking, here is a listing of some risk management terms:
- Alternative logistics model requirements for delivery performance problem
- Approval of project personnel and changes to personnel
- Approval of subcontractors and lower tier subcontractors
- Different assignment or change of control rights
- Different change management process,
- Conflict of interest requirements
- Coordination of work requirements
- Stricter confidentiality requirements
- Alternative warranty response obligations
- Different damages including liquidated damages
- Escalation procedures
- Escrow requirements tied to necessary licenses
- Fitness for a particular purpose warranty
- Additional guarantees (product, services, satisfaction)
- Rights to inspect of facilities
- Additional insurance requirements
- Professional liability and errors and omissions
- Employee dishonesty and computer fraud insurance
- Requirements for bonds
- Key employee restrictions / non-competitive activity
- Multi-year price protection (“Option” pricing)
- Ownership and license rights in developed materials.
- Parent company guarantee
- Alternative payment terms
- Progress or milestone payments
- Payment retainage rights until completion of the work
- Prohibitions on recruiting / hiring of employees
- Response times / performance criteria that may be different that the Agreement
- Different risk of loss requirements. For example, the right of the buyer to specifying the carrier or packing or packaging requirements.
- Safety & security requirements
- Responsibilities for temporary use of facilities
- Responsibilities for temporary use of machines or loaned items
- Alternative termination rights
- Trigger clauses related to credit ratings or other events that release escrow and allow use of licenses
- Downtime credits / service level credit
- Additional warranties
12. Include the tools in the Purchase Specification to manage performance
The Purchase Specification is where you establish controls needed to manage performance. If you have agreed to assume a cost or risk, you simply can’t let the Supplier do its own thing, so your terms need to provide you with the necessary control over what the Supplier can do over the things that can impact your cost or risk. Control is a way of managing behavior or performance. Examples of control type of provisions would include:
- Control over the Supplier’s team that performs the work and any changes to that team.
- Control over where the work is performed
- Control over subcontracting of the work
- Restrictions against assignment of the work
- Control over changes to the product or service
- Control over changes to the process.
The Purchase Specification is also where you include the financial ways to manage performance. This would supplement the agreement and use the four main financial ways that manage performance:
1. The remedies that you have in the event of a breach (the types and amount of damages you may recover).
2. The costs of any remedies the Supplier is required to provide for failing to meet the specific obligation.
3. Any pre-agreed impacts to price for non-performance such as liquidated damages or price adjustments for being late with deliveries.
4. Impact to their payments and cash flow. For example, a terms that would allow the Buyer to not make progress or interim payments if the work was behind schedule would be designed have the cash flow impact to try to drive the Supplier take necessary actions to get back on schedule.
The Purchase Specification should be written in a manner where you structure the terms to drive the desired performance. A classic example of this is many times a Buyer will want the Supplier to help you reduce the cost of the work. Which approach will work better in meeting that goal?
- Fixing their overhead and profit amount and sharing in the savings, or
- Paying them a fixed percentage for both overhead and profit based on the cost of the work?
To me the answer is clear. (A) provides the Supplier with an incentive to perform, whereas (B) provides a negative incentive. How much help would you expect to get if helping you penalizes them by reducing the amount the Supplier gets paid for their overhead and profit?
Another aspect of managing performance is to negotiate express conditions for that performance.
- Make it an express commitment in the Agreement.
- Use language that establishes it as a firm commitment.
- Avoid any softening or qualifying language that would reduce the commitment.
