Friday, December 16, 2016

How To Write An Amendment or Addendum.

An amendment is a document that changes what was agreed in the agreement or changes made by previous amendments. An addendum is simply a document that adds to or changes requirements that were stated pre-contract such as in a bid document or request for proposal. One of the key things to remember in drafting either of these is in interpreting a contract priority is given to the latest writing in time. This means that you always have to consider whether you want to addendum to apply to all prior documents or whether you want it to apply to a specific document. It also means you need to decide whether what you want that amendment to apply to the entire document or only for a specific requirement.

The general format for an amendment is fairly simple.

Amendment # ________to Contract # _________

1. This amendment (the "Amendment") is made by _________________ and _________________, parties to the agreement number _______dated ___________(the "Agreement").

2. The Agreement is amended as follows:

3. Except as set forth in this Amendment, the Agreement is unaffected and shall continue in full force and effect in accordance with its terms. If there is conflict between this amendment and the Agreement or any earlier amendment, the terms of this amendment will prevail.

By: __________________________
Printed Name: _________________
Title: ________________________
Dated: _________________


By: __________________________
Printed Name: _________________
Title: ________________________
Dated: _________________

In drafting the actual amendment section there are three common methods used:

The first is by using redlines and strikethroughs. Under this method, additions and deletions to the contract are shown visually, with additions underlined and deleted text crossed out. The underline highlights the text added and the strikethrough shows the language that is being deleted. A second approach is the clause, section or document is replaced in its entirety. In this method, when amending a contract you simply state what is deleted and has been replaced. The third approach is to describe the amendment. Using this approach, the specific changes within a clause are described.

For example here is the original clause to be amended.

a) All Material purchased pursuant to this Agreement shall be done by Buyer's issuance of its Purchase Order, either in writing or by telephone or telegraph.

The goal of the amendment is to add both Electronic Data Interchange and Fax and to delete “telegraph” as it is no longer used.

Using the strike though and redline approach it would be:
a) All Material purchased pursuant to this Agreement shall be affected by Buyer's issuance of its Purchase Order, either in writing, by Electronic Data interchange, by Fax. or telephone. or telegraph

Using the delete and replace approach it would be:
1. Delete section 11 a) in its entirety and replace with:
“All Material purchased pursuant to this Agreement shall be affected by Buyer's issuance of its Purchase Order, either in writing, by Electronic Data interchange, by Fax or telephone.”

Using the describe the amendment approach it would be:
1. Modify Section 11 a) as follows: Delete the word “telegraph”. After “in writing add: “by Electronic Data Interchange, Fax”.

My personal preference is to not use the strikethough and redline approach. I prefer to use the other two approaches. When there will be a significant amount of changes in a section I prefer to use the delete and replace approach. When changes to a section are minimal, I like to describe the changes.

From a contract management perspective its best to maintain what I call a “record copy” of the contract that highlights what has been amended; by which amendment number; and when. That is because many times when disputes arise you may need to prove exactly what was in effect at a specific point in time or period. Here’s an example. We had manufacturing done by a contract manufacturer and there was a major defect with one of the supplier’s parts. The contract manufacturer argued that it was our problem as the supplier was our supplier. We did research on that supplier’s contract to identify if that was a part we had authorized for use and when did we authorize it. What we found was we had amended their contract to add the part for use, but that didn’t occur until well after the contract manufacturer started using it on their own. This discovery turned it from a problem we caused to a problem that the contract manufacturer caused by sourcing it on their own rather than our approved source that was different at the time.

For contracts that have many amendments over time, they can be difficult to work with and very cumbersome to understand what is required. An approach to eliminate this confusion is to do what is called “an amendment and restatement of agreement.” When you do an amendment and restatement of the agreement you create a new agreement as of that specific date where the original agreement and all amendments that are still in effect are merged together reflecting what is agreed by the parties as of that date.


In writing addendum to an RFP you would use:

Addendum # ________to RPP # _________

1. This addendum # ___________ dated___________ is added to RFP _______________

2. The RFP#______________ is changed as follows:

3. Except as set forth in this Addendum, the RFP is unaffected. If there is conflict between this Addendum and the RFP, the order of precedence shall be _____________________

By: __________________________
Printed Name: _________________
Title: ________________________
Dated: _________________

In an Addendum you would not use the Redlines and strikethroughs approach. Most addendums add new items that were left out of the RFP or would be deleting or changing requirements.

For adding or deleting documents you want to be clear so the document should have a title, a listing of the number of pages and the date of the document or revision number. For describing the changes to the RFP requirements you can use the same approaches as an amendment where you either have a Section or document is replaced in its entirety or you can describe the change.

For example:
If the goal is to delete a prior specification and replace it with a more current one you could say:
“Delete the document entitled Specification for Acme Rocket consisting of Ten (10) pages, dated June 3, 2014 and replace with the document entitled Specification for Acme Rocket consisting of Fifteen (15) pages, dated July 23, 2016.”

In doing either an amendment or addendum you always want to describe the specific document involved, so best practice is every document should have:
1. A title.
2. A list of the number of pages.
3. The date of the document or the revision number for the document.
That way it is clear exactly what document is being changed or added.

Thursday, February 18, 2016

Managing Risk

Recently I’ve seen articles posted on a number of sites about the greatest risks in contract management. I decided to share my thoughts about risk and risk management as these articles haven’t done justice to the issue. I don’t know how you can identify the “greatest risks” simply because there are so many variables. For example the risks to the Buyer are always going to be different than the risks to the supplier and depending upon which side you represent they need to be managed differently. Risks will also vary greatly depending upon the subject matter involved as different things have different inherent risks. The needs of the parties as the actual magnitude of the risk may vary greatly. The ramifications of either party not getting what was committed will vary depending upon use. Something that is nice to have will have different magnitude of risks from something that is mission critical. The one thing I do know is that management of the negotiation, contract management and risk management are all inter-twined and they are not a single point in time activities. They occur and need to be managed throughout all phases of the relationship. ·

Various risks will exist throughout life cycle of the Product or Service and the relationship. To illustrate that this is my view of the phases that exist in negotiation:

1. Conceptual Planning. For a supplier the risk is determining what features and benefits a buyer will want and will be willing to pay for.
2. Product or Service Development. For a supplier the risks here are time to market versus competitors and being able to develop a product that works.
3. Marketing and prospecting. For a Buyer one of the risks here is the supplier finding out too much about what you need, why, and when as that impact leverage in the negotiation.
4. Pre-qualification by Buyer/Supplier. This phase helps determine the potential risks in hiring specific suppliers for your work.
5. Definition of buyer’s requirements. One of the biggest risks to the buyer is purchasing something that isn’t what they need. This phase is to both identify what is needed to reduce the potential for scope change in the future and results in the creation of the specification or scope of work.
6. Bid. Quote, Proposal Stage. As part of this stage you identify the specific business requirements that will be part of the deal. Many of those business requirements are linked to specific costs and risks.
7. Review of Suppliers bid or proposal. In this stage you look for any disconnects between what you want and what the supplier is willing to offer as those disconnects represent risks that need to be managed.
8. Negotiation Planning / Preparation. In this phase you establish what you want, what you are willing to agree upon and what risks you are willing to assume. For any risks you are willing to assume you need to address how your contract may need to change to manage those assumed risks.
9. Negotiation. Agreement is reached and signed. The negotiation process establishes what risks both parties have agreed to assume and what they have agreed to manage.
10. Mobilization period. Typical risks in the mobilization period involve changes that may be required because of schedule, availability of materials etc.
11. Performance period. The performance period is when performance risks occur and when you need to use your contract tools you build in to manage performance.
12. Changes during the contract. Every change to the scope can add to the cost, but they can also introduce new or different risks or complexity.
13. Contract close out.
14. Warranty redemption.
15. Contract Claims. How well you manage and document the performance of the contract can impact the how successful you will be in dealing with claims.
16. Disposition / salvage at the end of the useful life. The biggest risk in this stage is making sure you have what is needed to maximize your return on the disposition.

From a risk management perspective how well you manage all the activities leading up to the formal negotiation (phases 1-8) will have a major impact on how successful you’ll be in the negotiation and whether your tactics will work. They will impact how successful you will be in either having contract terms that transfer the risk to the other party or provide you with what is needed to help manage risks that you agree to assume. How well you manage all the activities following the formal negotiation and contract execution (11-16) will determine how much of the value you negotiated you’ll actually keep. It will help keep intact risks that were transferred from changing or eroding. If will also allow you to use the tools you included to help manage risk and performance. Anything left un-managed will always cost more.

What’s the greatest risk? For a Buyer there are many risks. For example here’s my list of general categories of risk for a Buyer:

• Performance risks with contract deliverables, quality, schedules, on-time delivery.
• Risks from third party claims.
• Contract enforcement risks including the potential of contract lapse for failing to extend the term.
• The risk of defining and getting what you want/need.
• Risks with changes that will occur to the product or service, the relationship, your demand, the circumstances.
• Risks in pricing, payment, currency exchange, and any adjustable rate factors.
• Risks in long-term support need to use the item purchased.
• Risks in continuity of supply (if there is demand for the product or service over time).
• Legal risks associated with the product or service complying with laws.
• Risks with defective products and warranty redemption, warranty support.
• Risks with delivery performance and the need for flexibility.
• Risks dealt with by the insurance coverages and indemnities (third party liability, property damage, and infringement claims.
• Risks with the import / export
• Risks in recovery should something go wrong (limitations on the types of damages, limitations or caps on liability, limitations on tindividual amounts or types of costs recoverable, and exclusions from liability.

Each of these general categories of risks can be further defined. For example, risks from third party claims may involve:
• Claims for product liability that caused personal injury, property damage.
• Auto liability for personal injury or property damage
• Premises liability (for guests and business invitees), for personal injury
• Financial claims against the product or work such as security interests or liens.
• Claims of infringement of intellectual property rights. Infringement of copyright, patent, mask works, trademark, and misappropriation of a trade secret claims. These risks include the cost to defend against the claim, the damages awarded and the cost to correct the infringement to allow continuing use such as licensing fees.
• Claims from other Suppliers for things like unfair trade practices, defamation, libel, slander.
• Claims relating to Supplier employees for personal injury (as guests or business invitees) and as workers under workers compensation, employers liability, claims for employment rights, and government claims for withholding taxes
• Claims by governmental agencies for complying with laws, regulations, ordinances and licensing or permit requirements.
• Claims that impact the potential ability to import product.

When you put risk into perspective, the management of risks needs to be done in a number of ways in the relationship. First and foremost is the qualification and selection of the supplier you will do business with. That helps identify the inherent risks they will bring into the relationship and you need to identify how you will best manage those risks. Second key in managing risks is to clearly define what you require. The clearer you are in terms of what you need, the lesser the need to make changes. The clearer you are the better prepared a supplier will be in determining if they can meet your requirements and what it will take to do that. Third, in the Bid. Quote, Proposal Stage, Review of Suppliers bid or proposal stage and Negotiation Planning / Preparation stage two things must occur. One is you need to draft a contract that includes terms needed to either transfer these risks to the supplier or have the tools and controls you need to manage the risks you assumed. You also need to include tools to manage performance. The second aspect of this stage is you need to ensure that the supplier is both capable and willing to both manage and assume the risks you need them to assume. If they can’t or won’t you may need a different supplier or you may need to change your contract so you have more control over the supplier to help you manage the risks. Many suppliers want the freedom to act however they want. If they want you to assume the risks of their actions you need the ability to control what they can do as part of managing the risk.
In the negotiation stage you need to ensure that the terms you agree upon will provide you with the desired protection against the perceived risks. Upon execution of the contract you move into the contract management phase where you use the tools you built into the contract to manage against risks that arise. For a buyer one of the biggest risks that can be managed from that point forward is performance / schedule. Once again, you should have tools built into the contract to help you do both.

To manage against the risk of performance you need a number of tools:

The first is what I would call Relationship management where you build a strong relationship with the Supplier’s account team so that they know and understand what you need, want and what will impact them getting future business awards if they don’t perform. This does not need to be addressed in the contract.

The second method to manage the Supplier’s performance is Structural. In the contract you would include all the structural tools you need to manage their performance. The larger or more complex the purchase, the more you need the structural tools as part of the contract requirements that the Supplier must meet. Examples of structural tools that would be used to manage performance are:
• Having clear specifications or a statement of work that makes it clear what they must deliver.
• Establishment of a team to manage performance and Supplier contacts.
• Identify tasks required.
• Establish schedule, milestones and deliverables
• Have a clear process by which the work will be tested and accepted
• Establish a strong program review process
o Establish meeting review schedule, frequency, attendance
o Implement action item lists
o Identify content and frequency or required reposts
• Have rights to audit any on-site work being performed for quality and performance,
• Establish Senior Management involvement and reviews
• Establish formal escalation process
• Include ability to back charge management costs for significant problems, delays or resources provided.

The third method is Control. If you have agreed to assume a cost or risk, you simply can’t let the Supplier do its own thing, so your contract 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 fourth aspect of managing performance is Financial. The four main financial ways that manage performance are:
1. The remedies that you have in the event of a breach of the Contract (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 term that would allow the Buyer to withhold 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.

In the vast majority of cases correcting performance problems is an investment decision on the part of the Supplier. If the financial approaches that are included in your contract won’t have a significant financial impact on the Supplier, the Supplier probably won’t make the investment to correct the problem.

The fifth aspect of managing performance is to structure 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?
A. Fixing their overhead and profit amount and sharing in the savings, or
B. 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?

The sixth aspect of managing performance is making sure that you include and negotiate express conditions for that performance.
1. Make it an express commitment in the Contract.
2. Use language that establishes it as a firm commitment.
3. Avoid any softening or qualifying language that would reduce the commitment.
Any commitment that includes “efforts” as part of it whether its Best Efforts, Reasonable Efforts or Commercially Reasonable Efforts doesn’t guarantee performance. All it does is require the Supplier to extend that level of effort in trying to perform.

A seventh and last way of managing the Supplier’s performance and your risk is Contract Administration. The amount of contract administration you need will be dependent upon the Supplier and the risks. There are three main focus to contract administration. One is to manage the delivery of any Buyer deliverables. That is to avoid claims by the Supplier. The second is managing Supplier performance with the goal of obtaining products, supplies or services, of requisite quality, on time, and within budget. For contract administration to be successful you need the structural management tools to be in place. The last focus on contract administration is maintaining the working contract file. A good contract file should consist of the following:
1. A record copy of the contract, highlighted to show any amendments made and when those amendment were made.
2. A record copy of the applicable statement or scope of work, annotated to show any changes agreed and the effective date of those changes.
3. Copies of all amendments
4. Copies of any change requests and their disposition.
5. An action item log.
6. Copies of all correspondence to and from the Supplier
7. Minutes from all meetings and calls with the Supplier
8. Copies of any inspection reports on the progress of the work, site visits, audits, etc.

Whether you win or lose on a claim may be dependent upon being able to establish who did what and when and what the requirements were at a specific point in time.

Managing risks requires you to consider the entire life cycle of the product or service as part of your strategy to manage the risk. For example, if you purchased capital equipment one of the things you want as part of managing your life cycle cost is to be able to get maximum compensation for the equipment when it becomes surplus to you and you want to sell it. If the equipment contained software, you need to secure the right to assign the license it in conjunction with the sale of the equipment. If you don’t do that when you initially negotiate the equipment purchase you are creating a risk for that point in time. If the equipment supplier is unwilling to allow the assignment, the value of the equipment would be substantially reduced as you are forced to sell it for scrap versus a working item. Alternatively the equipment supplier could require a new license that would be an added cost to your buyer, which in turn would reduce what they would be willing to pay for the equipment.

Thursday, February 11, 2016

Substantial Completion

In some contracting you have the concept of substantial completion and final completion. While it is mainly used in construction, its application could be used in other areas. Substantial completion is usually defined as the work being completed with the exception of a small punch list or snag list of work still remaining to be completed or corrected. Final completion is when all that work is complete per the terms of the agreement.

Several things may be tied to substantial completion. The first is any monies that have been retained against performance may have the amount reduced once substantial completion occurs. You may still retain some funds until there is final completion as protection to ensure the work is completed. Why would you want to structure it where a certain percentage of the retainage is released before final completion? The simple fact is retainage is holding the supplier or contractors cash. Any time you hold their cash, that costs them money in terms of either opportunity cost or their cost of borrowing that amount to finance there operations in the interim. The longer you hold their money the more of a contingency they will build into their price to cover that cost. If you can be adequately protected with the reduced amount of retainage, that should save you money. Holding onto more than you need doesn’t increase your protection, it only increases your potential price you will pay.

A second action that may be tied to substantial completion is when the control over the site changes from the contractor to the owner. Owner controlled work that is required to “fit up” the premises for its intended use may be delayed until after substantial completion for a number of reasons. The first is to avoid potential conflicts between the contractor and their subcontractor’s work on the project and the work of the owner or companies contracted by the owner to perform work on their behalf. Another reason could be to avoid labor issues. For example, when the contractor has control over the site, personnel working on the site could be restricted to only Union laborers. Once the Owner has control over the site they can allow any type of laborers to work on the site.

A third action may be to start commencement of warranties on all the work that is determined to be “substantially complete”. There could be lengthy requirements for commissioning of equipment included in the work so its clear that everything is operating as specified under full load. The warranties on that work could either be excluded from the warranty commencing on completion of substantial performance, or you could have their warranty start separately when the commissioning is accepted.

The amount of retainage you hold during the period from substantial completion until final completion is a business call. I would always recommend that you retain more than the value of the punch as incentive for the contractor to finish the work. If you reduced it to the value of the punch list the contractor could make the decision to simply walk away from the work. While you would have the retained monies to help pay for that, it becomes added work for you and is likely to take longer and cost more to have someone else do it.