Wednesday, January 18, 2012

Blanket Agreements

Blanket agreements describe a contractual relationship where the majority if not all terms are agreed by the parties in advance. Specific requirements are managed by a statement of work, or scope of work that incorporate by reference the terms of the blanket agreement. They may also be structured where individual purchase orders are issued against the blanket agreement. Blanket agreements can save time so those same legal terms that most of them contain do not need to be negotiated each time there will be a purchase. Most blanket agreements also function similar to a credit card agreement, they set the terms in the event you elect to make a purchase but they do not obligate you to make purchases. This means that you don’t traditionally assume any obligations under those agreements until you also issue a document that specifically commits you to make the purchase.

While Blanket Agreements simplify the need to do negotiations of all the terms one of the concerns that you always need to manage are:
1.Competitiveness in terms of pricing over the term.
2.Performance over the term.
3.The impact the term may have on the protection you get.
4.As needs and product or service requirements may change over the term of the agreement you also need to have the ability to change terms to the agreement to keep up with those changes.
5.Availability when you do need it.

As to pricing the key is what trends do you see and how long will the supplier agree to offer you the price without adding in significant contingencies. For example if you agree that price will only be in effect for one year, you need to protect yourself against being surprised with follow on pricing. This means that you need to take the time it would require to source an alternative supplier plus the product lead time and back that off from then end of the first year terms and need to negotiate your price before that. If you don’t want to be forced to have to use an alternative supplier your contract would need to have a pre-agreed formula or agreed benchmark process that will establish the price such as agreeing to a price escalation clause or making it subject to an index. For example in the U.S. you could use the Producer Price Index rate for a specific category.

With respect to performance, since you do not have a firm commitment to purchase from the supplier you have the option to not buy from the supplier if they don’t perform. If you will use a supplier as a sole source and it will be difficult or costly to change, your agreement needs to include tools to drive performance so you alone are not bearing the full cost of performance problems.

The term can have an impact on the value of the protection you receive. The best example of this is if you have a fixed cap on liability the longer the term, the greater the potential that there could be prior claims that effectively reduce the amount of protection available in the later years. To manage something like that you need to negotiate either a much higher limit, or have agreement that the limitations are annual limitations and the amount resets in each new year of the agreement.

Any agreement that will have an extended term needs to have a robust changes provision so when you have different needs or the business changes, you can add or deduct products or services being purchased or change the ways things are managed. If every change requires the supplier’s approval that can impact the value of the agreement if the Supplier is unwilling to make the changes you need. Since you made no firm commitments you can simply stop buying if they don’t agree to what you need. If its important for you to be able to make changes and not change suppliers, you might want to include the right to direct the supplier to makes reasonable changes to the scope provide you agree to reimburse them for the reasonable costs they incur in making the change.

With respect to availability, it does you little good to have blanket agreement be in place where at the time you want to use it the supplier can reject the purchase order or not have it available for you to buy.That can be managed in a blanket agreement in a number of ways. A. You can require the supplier to accept orders that conform with the terms of the agreement including agreed lead-times. B. You could establish a forecasting process where they will hold spots in their order queue that get released if you fail to book an order within a specific time frame.

The real advantage of extended blanket agreements is that once you have negotiated the critical legal terms you don’t have to re-visit them with any frequency. The disadvantage is your initial negotiation may be a little more complex as you need to build in terms that address the concerns. It becomes even more complex if you make a firm purchase commitment or commit to any form of requirements contract. With those your option to simply stop buying is not an option. When you introduce firm comitments to a basic agreement what you do need to include is a termination without cause provision that will allow you out of the contract and not be forced to purchase all of those from a problem supplier. Alternatively, you could make those commitments contingent upon the supplier meeting agreed metrics where the failure to meet those metrics would excuse you of the commitment while allowing the agreement to remain in effect for you to use as needed.