tag:blogger.com,1999:blog-33504949601514721322024-03-18T23:41:49.270-04:00Knowledge to NegotiateThe fastest and easiest way to find topics on my blog is via my website knowledgetonegotiate.com The "Blog Hot Links" page lists all blogs by subject alphabetically and is hyperlinked to the blog post.
My book Negotiating Procurement Contracts - The Knowledge to Negotiate is available at Amazon.com (US), Amazon UK, and Amazon Europe.Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.comBlogger620125tag:blogger.com,1999:blog-3350494960151472132.post-37400091079653969252018-04-25T12:03:00.003-04:002018-04-25T12:04:24.181-04:00Audit<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #222222;">Audit</span><span style="color: #222222;"> </span></div>
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<span style="color: #222222;">Over the years the concept and scope of audits have changed. In the past most contract audits involved money. Have you paid the other party what you were required to pay them? For items that required reimbursement, do the records exist that verify the cost to be reimbursed? Audits have migrated from a pure financial focus into information security such as cyber security, data protection, and data privacy. They have also been used to understand and help manage performance risk including third party risk, operational risk, and crisis management such as when a force majeure occurs. Internal audits may be to ensure compliance with laws or regulation. Individual issues such as quality problems may also warrant an audit or inspection of the premises where the product is made. <o:p></o:p></span></div>
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<span style="color: #222222;">The starting point in any audit provision is to establish the requirement that the company keep and maintain records for a specific period of time so they can be audited and verified. Then you need the contract to grant you audit rights. When audit rights language is negotiated, the typical things that are negotiated are:</span><span style="color: #222222;"><o:p></o:p></span></div>
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<span style="color: #222222;">1.</span><span style="color: #222222;"> </span><span style="color: #222222;">Who can perform the audit?</span><span style="color: #222222;"><o:p></o:p></span></div>
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<span style="color: #222222;">2. </span><span style="color: #222222;">When or how often it can the audits be done?</span><span style="color: #222222;"><o:p></o:p></span></div>
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<span style="color: #222222;">3. </span><span style="color: #222222;">The scope or extent of the audit.</span><span style="color: #222222;"><o:p></o:p></span></div>
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<span style="color: #222222;">4. </span><span style="color: #222222;">What records will or won’t be made available for audit.</span><span style="color: #222222;"><o:p></o:p></span></div>
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<span style="color: #222222;">5. </span><span style="color: #222222;">Who pays for the cost of the audit and the cost of any additional audits that may be required?</span><span style="color: #222222;"><o:p></o:p></span></div>
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<span style="color: #222222;">Audit rights are something that Suppliers are extremely reluctant to provide, as they are concerned about the information that the Buyer could discover. You should expect that Suppliers may:</span><span style="color: #222222;"><o:p></o:p></span></div>
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1) Require audits be performed by to independent auditor, rather than Buyer personnel.<o:p></o:p></div>
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2) Have agreement or approval over the auditor that will be used.<o:p></o:p></div>
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3) Have the scope of the audit be restricted to only that information that is required to comply with the agreed audit scope.<o:p></o:p></div>
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4) Limit the frequency of audits as much as possible to reduce the disruption.<o:p></o:p></div>
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5) Want the Buyer to pay for all costs associated with the audit.<o:p></o:p></div>
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6) Want significant notice periods prior to the conduct of an audit.<o:p></o:p></div>
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<span style="color: #222222;">What should be the notice period? The supplier may want a reasonable notice period. The problem with that is the parties may not agree upon what is reasonable. In fact, what is reasonable will always be dependent on what is being audited or inspected. For example to verify the status of work-in-process, the requirement could be immediate. The same immediate right makes sense if you were having a quality problem. An audit of financial records would require a longer period and should take into account the suppliers financial calendar. If you have a safety problem, or a data breach, you want the right to audit immediately. For thing such as financial risk of a supplier you could have the audit be once a year of more frequently if there is deterioration in their financial position.<o:p></o:p></span></div>
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<span style="color: #222222;">In establishing specific notice periods, If the Supplier can provide you what you need immediately, I want the immediate right to audit. If it is a major issue that may require preparation time, I want a maximum of (10) days. For other situations I want a maximum period of thirty (30) days. These should be expressed as calendar days as that will create the shortest period. <o:p></o:p></span></div>
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<span style="color: #222222;">Limitations on your right to audit may add to either your cost or risk. In negotiating the cost of an audit I want the results to be categorized as either: Acceptable, Minor Problems Found, or Unacceptable. If the Audit discloses acceptable performance, the Buyer will pay the full cost. If the audit discloses only minor problems, the buyer will pay for the cost of the audit and the parties will share the cost of a subsequent audit to ensure the problems have been corrected. If the audit results are classified as unacceptable, the Supplier must pay for the cost of the Audit and any subsequent audits to ensure compliance is met.</span><span style="color: #222222;"><o:p></o:p></span></div>
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com18tag:blogger.com,1999:blog-3350494960151472132.post-38717632282371481542017-01-15T11:17:00.000-05:002017-01-15T11:17:00.250-05:00Awarding Contracts Based Upon Unit Prices For Estimated Quantities<div dir="ltr" style="text-align: left;" trbidi="on">One of my first experiences with estimated quantities was when I was a procurement officer in the Air Force. We had an annual contract for automotive parts and supplies and the same supplier would win it year after year. I asked the<br />
Motor Pool Officer to provide me with a detailed list of what they had purchased the prior year and the volumes. In comparing that to the prior years bid document that seemed to be reused over and over what I found was the winning supplier had consistently bid low on items where we had overestimated the quantities and bid high on items where we had underestimated the quantities. The net effect of doing this was they were able to offer the lowest extended cost bid, but since we never purchased the quantities that we had over estimated, we simply did not get the benefit of savings on the items they priced low. Further since we purchased more of the items that we had underestimated which they bid high on, we were not saving money, we were paying more. <br />
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For that years bid we used the actual quantities purchased the prior year as the base to work off and I worked with the Motor Pool Officer to make an necessary adjustments based on known factors that would change demand. The net result was a different supplier won the bid and with periodic checks on quantities that were consumed we found that we actually saved money.<br />
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The key message of this post is if you bid and award work based upon estimated quantities that will be consumed, try to make sure that those quantities are as correct as possible and there is a high probability they will be consumed. If you don’t a savvy bidder may use that to their advantage in terms of how they price items and where or how they offer discounts. For example if there are bills of materials for work that may not be done, the savvy bidder could lower the price on those or could offer a discount on those to get the work, and when those aren’t done you don’t get the savings or discount they offered on those. At that time its too late as you awarded them the work based on the estimated total price.<br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com1tag:blogger.com,1999:blog-3350494960151472132.post-28970576477924099642016-12-16T13:27:00.000-05:002016-12-16T13:41:37.283-05:00How To Write An Amendment or Addendum.<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>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. <br />
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The general format for an amendment is fairly simple.<br />
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Amendment # ________to Contract # _________<br />
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1. This amendment (the "Amendment") is made by _________________ and _________________, parties to the agreement number _______dated ___________(the "Agreement").<br />
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2. The Agreement is amended as follows:<br />
________________________________________________<br />
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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.<br />
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____________________________<br />
By: __________________________<br />
Printed Name: _________________<br />
Title: ________________________<br />
Dated: _________________<br />
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____________________________<br />
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By: __________________________<br />
Printed Name: _________________<br />
Title: ________________________<br />
Dated: _________________<br />
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In drafting the actual amendment section there are three common methods used: <br />
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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. <br />
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For example here is the original clause to be amended.<br />
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11. PURCHASE ORDERS <br />
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.<br />
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The goal of the amendment is to add both Electronic Data Interchange and Fax and to delete “telegraph” as it is no longer used. <br />
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Using the strike though and redline approach it would be: <br />
a) All Material purchased pursuant to this Agreement shall be affected by Buyer's issuance of its Purchase Order, either in writing, by <i>Electronic Data interchange, by Fax.</i> or telephone. <strike>or telegraph</strike><br />
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Using the delete and replace approach it would be:<br />
1. Delete section 11 a) in its entirety and replace with: <br />
“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.”<br />
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Using the describe the amendment approach it would be:<br />
1. Modify Section 11 a) as follows: Delete the word “telegraph”. After “in writing add: “by Electronic Data Interchange, Fax”. <br />
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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. <br />
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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. <br />
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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. <br />
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Addendums:<br />
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In writing addendum to an RFP you would use: <br />
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Addendum # ________to RPP # _________<br />
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1. This addendum # ___________ dated___________ is added to RFP _______________<br />
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2. The RFP#______________ is changed as follows:<br />
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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 _____________________<br />
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By: __________________________<br />
Printed Name: _________________<br />
Title: ________________________<br />
Dated: _________________<br />
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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. <br />
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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.<br />
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For example:<br />
If the goal is to delete a prior specification and replace it with a more current one you could say:<br />
“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.” <br />
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In doing either an amendment or addendum you always want to describe the specific document involved, so best practice is every document should have:<br />
1. A title.<br />
2. A list of the number of pages.<br />
3. The date of the document or the revision number for the document.<br />
That way it is clear exactly what document is being changed or added.<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com2tag:blogger.com,1999:blog-3350494960151472132.post-30710178636104973202016-02-18T15:28:00.002-05:002017-08-06T09:08:06.182-04:00Managing Risk<div dir="ltr" style="text-align: left;" trbidi="on">
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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. · <br />
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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:<br />
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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.<br />
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.<br />
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.<br />
4. Pre-qualification by Buyer/Supplier. This phase helps determine the potential risks in hiring specific suppliers for your work.<br />
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. <br />
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.<br />
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.<br />
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.<br />
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. <br />
10. Mobilization period. Typical risks in the mobilization period involve changes that may be required because of schedule, availability of materials etc. <br />
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. <br />
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.<br />
13. Contract close out.<br />
14. Warranty redemption. <br />
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.<br />
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.<br />
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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.<br />
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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:<br />
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• Performance risks with contract deliverables, quality, schedules, on-time delivery.<br />
• Risks from third party claims. <br />
• Contract enforcement risks including the potential of contract lapse for failing to extend the term. <br />
• The risk of defining and getting what you want/need. <br />
• Risks with changes that will occur to the product or service, the relationship, your demand, the circumstances. <br />
• Risks in pricing, payment, currency exchange, and any adjustable rate factors. <br />
• Risks in long-term support need to use the item purchased. <br />
• Risks in continuity of supply (if there is demand for the product or service over time). <br />
• Legal risks associated with the product or service complying with laws. <br />
• Risks with defective products and warranty redemption, warranty support. <br />
• Risks with delivery performance and the need for flexibility. <br />
• Risks dealt with by the insurance coverages and indemnities (third party liability, property damage, and infringement claims. <br />
• Risks with the import / export<br />
• 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.<br />
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Each of these general categories of risks can be further defined. For example, risks from third party claims may involve:<br />
• Claims for product liability that caused personal injury, property damage. <br />
• Auto liability for personal injury or property damage<br />
• Premises liability (for guests and business invitees), for personal injury <br />
• Financial claims against the product or work such as security interests or liens.<br />
• 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.<br />
• Claims from other Suppliers for things like unfair trade practices, defamation, libel, slander.<br />
• 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<br />
• Claims by governmental agencies for complying with laws, regulations, ordinances and licensing or permit requirements.<br />
• Claims that impact the potential ability to import product.<br />
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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.<br />
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. <br />
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To manage against the risk of performance you need a number of tools:<br />
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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.<br />
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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:<br />
• Having clear specifications or a statement of work that makes it clear what they must deliver.<br />
• Establishment of a team to manage performance and Supplier contacts.<br />
• Identify tasks required.<br />
• Establish schedule, milestones and deliverables<br />
• Have a clear process by which the work will be tested and accepted<br />
• Establish a strong program review process<br />
o Establish meeting review schedule, frequency, attendance<br />
o Implement action item lists<br />
o Identify content and frequency or required reposts<br />
• Have rights to audit any on-site work being performed for quality and performance,<br />
• Establish Senior Management involvement and reviews<br />
• Establish formal escalation process<br />
• Include ability to back charge management costs for significant problems, delays or resources provided.<br />
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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:<br />
• Control over the Supplier’s team that performs the work and any changes to that team.<br />
• Control over where the work is performed<br />
• Control over subcontracting of the work<br />
• Restrictions against assignment of the work<br />
• Control over changes to the product or service<br />
• Control over changes to the process.<br />
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The fourth aspect of managing performance is Financial. The four main financial ways that manage performance are:<br />
1. The remedies that you have in the event of a breach of the Contract (the types and amount of damages you may recover).<br />
2. The costs of any remedies the Supplier is required to provide for failing to meet the specific obligation.<br />
3. Any pre-agreed impacts to price for non-performance such as liquidated damages or price adjustments for being late with deliveries.<br />
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.<br />
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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. <br />
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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? <br />
A. Fixing their overhead and profit amount and sharing in the savings, or <br />
B. Paying them a fixed percentage for both overhead and profit based on the cost of the work? <br />
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? <br />
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The sixth aspect of managing performance is making sure that you include and negotiate express conditions for that performance.<br />
1. Make it an express commitment in the Contract.<br />
2. Use language that establishes it as a firm commitment.<br />
3. Avoid any softening or qualifying language that would reduce the commitment.<br />
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.<br />
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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:<br />
1. A record copy of the contract, highlighted to show any amendments made and when those amendment were made.<br />
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.<br />
3. Copies of all amendments<br />
4. Copies of any change requests and their disposition.<br />
5. An action item log.<br />
6. Copies of all correspondence to and from the Supplier<br />
7. Minutes from all meetings and calls with the Supplier<br />
8. Copies of any inspection reports on the progress of the work, site visits, audits, etc.<br />
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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. <br />
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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.<br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-73652230188137902152016-02-11T11:56:00.002-05:002016-02-11T11:56:34.910-05:00Substantial Completion<div dir="ltr" style="text-align: left;" trbidi="on"><br />
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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. <br />
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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.<br />
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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. <br />
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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. <br />
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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.<br />
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</div>Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com4tag:blogger.com,1999:blog-3350494960151472132.post-6736887894174248312014-11-01T13:42:00.000-04:002014-11-01T13:42:33.140-04:00Reverse Indemnities<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>I had an interesting discussion in a linkedIn group so I thought I would summarize the discussion. The initial question was about third party liability. That spun into discussions on warranties and indemnities as they relate to third party liability.<br />
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In a normal buyer / seller relationship the buyer will frequently require the seller to indemnify the buyer against personal injury or property damage caused by the seller that is related to either their product or service or an injury or property damage caused by the seller while employed by the Buyer. The underlying reason for requiring indemnity is in many locations the Buyer / Seller relationship may also be viewed a principal / agent. Under agency law the buyer is acting as the principal and the seller is acting as the agent performing work on behalf of the buyer. Under agency law the principal can be liable for the acts of the agent, but the agent can’t be liable for the acts of the principal. Under this general type of relationship you seldom would see a supplier request for a reverse indemnification as the normally would not be sued for the buyer’s negligence.<br />
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One of the things I discovered was that in the oil and gas industry the indemnity is sometimes reversed where the Buyer (well operator) will indemnify the service provider against the various types of claims that could occur in the event of a major explosion, etc. In that industry since buyer is providing the indemnification, it is common to include a reverse indemnification if the service provider is grossly negligent or acts with willful misconduct. Clearly that makes sense.<br />
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The next question was whether the breach of any warranty, or the act that would exclude warranty coverage could require a reverse indemnification. Typically a buyer doesn’t provide any warranties to the seller. There may be certain acts that void warranty coverage. For example:<br />
“These warranties do not extend to, or apply to, any Product which has been (1) subjected to misuse, neglect, accident, improper installation, or to use in violation of instructions furnished by Supplier, (2) repaired or altered outside of Supplier’s factory by persons not expressly approved in writing by Supplier, (3) evaluated, screened, or tested by an outside testing laboratory not previously approved in writing by Supplier, or (4) based on design features provided by Buyer.” <br />
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Should one of these acts that would void the warranty substantiate the need for providing a reverse indemnity? They could, but the key is what caused the injury? Before I would agree to provide a reverse indemnity, I would clearly want that act to be the root cause or have directly contributed to the injury or damage. <br />
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Similarly in Intellectual Property Indemnification there carve outs or exclusions to the indemnification. A supplier may want to be excused from providing an intellectual property indemnification in several areas and want a reverse indemnification from the buyer. Examples of those are:<br />
Claims that based on combination of Suppliers product with another product. <br />
Implementation by the Supplier of a Buyer specified or provided design.<br />
Modifications to the Suppliers Product made by Buyer. <br />
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In negotiating these I would first want the combination exclusion to be something that wasn’t reasonably foreseeable. Many items I’ve purchased had no useful value of their own and only after they are combined with something else do they become useful. I've had suppliers that had products that were designed for and marketed use with a specific product that wanted to be excused from the indemnity and want a reverse indemnity when they were used in that combination. If you tell me that it was designed for use in that combination, why would I ever want to excuse and indemnify that when it was used in that combination? <br />
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As to implementation of a buyer provided design there are three ways the resulting product could be infringing. First, the design itself is infringing. Second the process used to make the product is infringing. Third, materials used in the product are infringing. For me to be willing to provide a reverse indemnity, I would want the sole cause of the infringement to be my design. I would also also want the “Buyer’s modification” exclusion and any reverse indemnification to be contingent on the fact that buyer’s modification is the sole source of the infringement. If you ever purchased things like electronic components you would know that almost all require some form of modification to be used.<br />
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Indemnifications are important. Before you give one up by giving a reverse indemnification, make sure you significantly narrow down and make clear exactly what act you must do for that to occur. <br />
For example, no form of maintenance will protect against a latent safety defect that exists in a product. For you to accept responsibility make sure that it was really your act that caused it.<br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-8852980011446158092014-07-23T07:38:00.000-04:002014-07-23T07:49:12.904-04:00Tooling<div dir="ltr" style="text-align: left;" trbidi="on"><br />
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In manufacturing, tooling means things like cutting tools, dies, fixtures, gauges, jigs, molds or patterns that are for use in producing a specific product creating the specific form of the item. In procurement the most frequent reference to tooling means a metal die that is used in conjunction with an injection molding piece of equipment or metal stamping piece of equipment to produce an item of a specific form and size that will be unique to the item being produced where the buyer’s payment for such tooling may be required. There are also CNC (Computer Numerical Control) tools. CNC tools are used in a machining process where computers are used to control machining tools such as lathes, mills, routers and grinders. Since these tools are not unique to a specific product most of the time they buyer would not be paying for such equipment unless they were required for additional capacity. It is the first type of tooling that this blog is about.<br />
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Tools may be described as soft tools or hard tools. Soft tools are usually lower cost. They are good for medium-low volumes with a high mix of production. They lead to a higher piece part cost. They provide faster lead time and response. They are more flexible to change design. They will result in increased product variances over time. Hard tooling is usually higher cost because of the materials and processes used to make the tool. It will produce a lower piece part cost. When you use hard tooling there is no flexibility in the design, a change in design requires a new hard tooling is usually higher cost. There is no flexibility in design. Hard tooling result in a longer lead time because of the time needed to build the hard tool. It provides for repeatability of the product and results in less product variances. It is used for high volumes. The physical difference between hard tooling and soft tooling is the materials used to make the tools. A hard tool is usually made of hardened steel that is machined to the exact size needed. A soft tool is made of other materials such as silicon, epoxy resin, and lower temperature melting materials such as zinc alloys, and aluminum, etc. <br />
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Whether its hard tooled or soft tooled, a tool will have a useful life (a certain number of “hits” or stampings) before it will no longer be able to produce within acceptable tolerances. From an accounting perspective for tooling you probably have several ways to depreciate the cost of the tool. Depreciation can be done as:<br />
1. Straight line (cost minus salvage value divided by the number of years of useful life). <br />
2. Unit of production depreciation basis (cost minus salvage value divided by estimated number of production units). <br />
3. Sum of years (cost – salvage value, where the total number of years are added (a five year life would total 15 (1+2+3+4+5) and year 1 would be 5/15ths, year 2 would be 4/15ths, etc). <br />
4. Double declining balance (cost minus salvage value where the useful life (say 5 years) has 2/5ths of the current book value is depreciated each year so as the years go out the depreciation amount decreases as it’s based on that year’s book value that reflects prior depreciation.<br />
5. Another accelerated method may spread the depreciation cost over the term of the contract if the tool cannot be used elsewhere. <br />
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As a buyer if you pay for tooling it can affect future sourcing decisions. The tooling you purchase and own may not compatible with a different supplier's equipment. That can potentially lock you into the supplier because to switch to a new supplier you have two costs. The cost to write off any remaining amount to be depreciated on the old tool as it's now obsolete and the cost of the new tool. One way to protect against that without getting locked into long term contracts with the supplier would be to negotiate options to extend the contract with a pre-agreed pricing formula at the same time you sign the initial contract. That allows you to determine what the best option is for you.<br />
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If the supplier agrees to pay for tooling and amortize the cost into the purchase price, you need to agree upon the number of units it will be amortized over, the per unit amount being charged and have an automatic price reduction once the cost has been fully amortized. Otherwise you will be paying for tooling cost well after the item has been fully paid for. Doing that also helps establish what your cost would be if you needed to terminate the agreement or let the agreement lapse without having met the amortized quantity agreed. <br />
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There are a number of factors to consider with tooling:<br />
Who owns the responsibility to replace the tool if it breaks? <br />
Is the tool for your sole use or can the supplier use it with other customers? <br />
The set-up and tear down cost for the tool are costs that don't affect the tooling cost. They affect your piece part cost. Those along with your run rate affects your piece part cost as those costs apply each time you don't have continuous production. Depending upon what those costs are it may pay to order and inventory more than you need to reduce the number of times you incur those costs.<br />
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When you purchase something that requires tooling that you have to purchase you would normally have a separate tooling agreement or tooling purchase order. There are a number of terms that you would want in such an agreement. For example:<br />
1. You want them to insure the tool against normal perils such as theft, and damage or loss due to fire, floods, etc. and have you named as a loss payee.<br />
2. You want the tool to marked with your inventory control sticker showing the fact that your company owns the tool so you could retrieve it in the event the supplier went bankrupt.<br />
3. You want them to perform maintenance and calibration of the tool to keep it in good working order.<br />
4.You want them to be liable for the replacement of tool in the event of negligent set up, operation, or tear down of the tool that damages or destroy the tool.<br />
5.You want the use of the tool restricted solely to your company unless you otherwise agree and are compensated.<br />
6.You want the right to enter their premises if necessary remove the toll that you own.<br />
7.You want language where they agree that they will not financially encumber the tool. <br />
8.You want the tool to not to be moved without your agreement.<br />
9.You want the supplier to not alter or modify the tool.<br />
10. You want the right to inspect the tool.<br />
11.You want the right to remove the tool at any time. <br />
12. In most situations the buyer wants to own both the design of the tool and the tool itself. Owning the design of the tool makes it your intellectual property that the Supplier couldn’t use to have tools made for others without infringing your intellectual property rights. If you own the tool ,unless you have another commitment with the supplier that locks you into using the supplier (like a firm quantity commitment), you have the flexibility to move the tool at any time to another supplier. That helps keep competition in the equation for future negotiations. <br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-69920643659511584962014-07-21T15:57:00.001-04:002014-07-21T15:57:25.177-04:00Bills of Lading<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>In a separate blog post I wrote about Incoterms. Since shipments require bills of lading I decided to do a post on them. A bill of lading has multiple functions. The principal use of the bill of lading is as a receipt issued by the carrier to the seller once the goods have been loaded onto the carrier or vessel. The receipt can be used as proof of shipment for customs and insurance purposes. It can also and be proof of completing a contractual obligations such as when Incoterms are CFR (Cost and freight), EXW (Ex-Works), or FOB (Free on Board). The bill of lading can also function as evidence of the contract of carriage. It is not a contract of carriage per se, but can be made one if the Hague-Visby rules were annexed to the Bill of Lading or other terms creating a contract of carriage are printed on the reverse side. Normally there will be a separate agreement between the seller (or buyer) and carrier.<br />
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Legally the carrier is a legal consignee of the goods. A bill of lading may also list the buyer of the goods as the consignee. The two are different. Thw freight forwarder is named by the seller (or Buyer depending upon the delivery term) for delivery to a specific point. The take possession or arrange for the carrier to take possession. The freight forwarder is considered to be the owner of the consigned goods for the purpose of filing the customs declaration and for paying any export duties, taxes or fees. The freight forwarder will further consign the shipment to the carrier. The consignee is listed on a Bill of Lading is the Buyer or a third party designated by the Buyer. If you use the FIATA bill of lading the parties to the transaction would be defined as follows:<br />
a. Freight Forwarder is the company that issues the Bill of Lading<br />
b. Merchant is used to identify the shipper<br />
c. Consignor is the seller of the goods.<br />
d. Consignee (is the buyer of the goods<br />
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The freight forwarder and the merchant have certain rights and obligations in conjunction with the consignment that are listed on terms on the reverse side of the bill of lading. There are multiple types of bills of lading. An ocean bill of lading is a document required for the transportation of goods overseas. An ocean bill of lading serves as both the carrier's receipt to the shipper and as a collection document if payment by the consignee is required. Ocean bills of lading may be negotiable or non-negotiable. A non-negotiable ocean bill of lading allows the buyer to receive the goods upon showing identification. If the bill is deemed negotiable, then the buyer will be required to pay the shipper for the products and meet any of the seller's other conditions established on the bill of lading. If the goods are to be initially shipped over land, an additional document, known as an "inland bill of lading", will be required. The inland bill only allows the materials to reach the shore, while the ocean bill allows them to be transported overseas.<br />
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Bills of lading need to be consistent with the Incoterms rule selected. For example, if the sale was ex-works the seller’s dock, the seller would not create a bill of lading as it is the buyer’s responsibility to arrange for shipment from that point forward. If the sale was FAS or FOB the seller would only complete an inland bill of lading to get it to the port and the buyer would need generate an ocean bill of lading or a multimodal bill of lading. If the delivery point was after the port of export but prior to the port of import the seller needs to complete the ocean bill of lading. Once the goods are at the port of import, the buyer would need to generate an inland bill of lading to get the goods to the point of delivery. The exception to that would be if the seller sold the items DDP wherein the seller would be responsible for generate the inland bill of lading in the export country, the ocean bill of lading, and an inland bill of lading for the import country. <br />
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In most international transactions you would use a multimodal bill of lading. The information provided on that bill of lading includes the following.<br />
1. The ship from address<br />
2. The ship to address<br />
3. The bill of lading number and bar code<br />
4. The carrier name, trailer number and serial number<br />
5. Who and third party freight charges are to be billed to.<br />
6. The SCAC (Standard Carrier Alpha Code) that identifies the specific carrier and pro number (a progressive number used to track shipments<br />
7. Any special instructions..<br />
8. Whether the freight is prepaid, collect or will be paid by a third party. <br />
9. Customer order information<br />
a. Customer order number.<br />
b. Number of packages.<br />
c. Weight<br />
d. Whether its in a pallet<br />
e. Any additional shipper information<br />
10. Carrier Information<br />
a. Handling unit quantity and type<br />
b. Package quantity and type<br />
c. Weight<br />
d. Whether the shipment contains HM (Hazardous Materials)<br />
e. Commodities requiring special care<br />
f. NMFC Number and class code that defines the National Motor Freight Code and class for the materials shipped.<br />
g. If the goods are being shipped independent of value, the declared value of the goods.<br />
h. The COD amount is shipped COD.<br />
i. The fee terms (whether prepaid, COD or customer check is acceptable)<br />
11. A limitation of liability on the shipment.<br />
12. A signature of the shipper if they do not want delivery without payment.<br />
13. Shipper and Carrier signatures and dates.<br />
14. Responsibility for loading the goods on the carrier (shipped or carrier)<br />
15. How freight is counted (by shipper, by driver pallets or by driver pieces) <br />
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If you used the FIATA negotiable multimodal transport bill of lading there are terms on the reverse side that contain the following sections:<br />
Definitions<br />
e. Freight forwarder who issues the B/L<br />
f. Merchant (the shipper)<br />
g. Consignor (the seller)<br />
h. Consignee (the Buyer<br />
i. Taken in charge (hand over by consignees and accepted by freight forwarder)<br />
j. Goods<br />
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Titles of the specific terms are:<br />
Applicability (makes terms apply even if only one mode of transport is used)<br />
Issuance of FBL (Once issued Freight Forwarder assumes responsibility to delivery and liability)<br />
Responsibilities of freight forwarder<br />
Negotiability and Title to Goods (see below)<br />
Dangerous goods and liability (requirement of notice of and liability if not described_<br />
Description of goods and merchant’s packing (Consignor guarantee Goods are as decribed) <br />
Freight forwarders liability (Limitation of Liability)<br />
Paramount Clauses (incorporates laws (the Hague Rules, the US Carriage of Goods by Sea) <br />
Limitation of Freight Forwarders Liability (limits liability to value of the goods)<br />
Applicability of actions in tort (terms of the contract apply whether action under contact or tort)<br />
Liability of servants and other persons (<br />
Method and route of transportation (provides freight forwarder right to make changes to these)<br />
Delivery (delivered when handed over or made available to the consignee)<br />
Freight and charges <br />
Liens (Provides the freight forwarder with a right to place a lien on the goods)<br />
General average (Actually an indemnity the Merchant provides to the freight forwarder)<br />
Notice (Require notice of loss or damage. If no notice prima facie evidence delivered as described)<br />
Time bar (Period in which to bring suit under the BoL<br />
Partial invalidity (the same as severability where if one part is invalid the remaining will apply) <br />
Jurisdiction and applicable law (based upon the Freight Forwarders place of business)<br />
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One of the key things within the Multimodal a bill of lading is the negotiability and title section that reads as follows:<br />
3.1 This FBL is issued in negotiable form unless marked non-negotiable. It shall be constitute title to the goods and the holder, by endorsement of this FBL, shall be entitled to receive or transfer the goods herein mentioned,<br />
3.2 The information in this FBI, shall be prima facie evidence of the taking charge by the Freight Forwarder of the goods as described by such information unless contrary indication, such as shippers weight, load, and count, shipper packed container, or similar expressions has been made in the printed text or superimposed on this FBL. However proof to the contrary shall not be admissible when the FBL has been transferred to the consignee for valuable consideration who in good faith acted thereon.<br />
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What does that mean with respect to title in the goods. It means is when you use a negotiable bill of lading the freight forwarder is given title to the goods and can transfer title to the consignee as long as the consignee 1) has paid for the goods and 2) acted in good faith. What it would also mean is seller would be prevented from submitting proof under contract that title did not transfer under their contract with the buyer until payment or that a security interest existing in the goods. <br />
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If you use a non-negotiable bill of lading, the bill of lading confers what is called a prima facie title over the goods to the named consignee listed on the Bill of Lading. Prima facie means “accepted as correct until proved otherwise”. This means that under the "nemo dat quod non habet" rule the freight forwarder and subsequently the Merchant (carrier) cannot transfer to the consignee better title than the freight forwarder has. This means that the seller may legally retain title until they are paid. The seller could also retain title until a specific point in the delivery process where there is delivery to the buyer in accordance with the agreed Incoterms rule. The seller could also retain a security interest in the goods. <br />
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In getting a prima facie title the carrier may place an encumbrance or have security interest against the goods. If the full title is not granted to the freight forwarder who delivers them to the consignee, the consignee has rights but the seller’s rights in the goods have priority over the consignee’s rights. The prima facie title would allow the consignee to have certain rights in the material. For example they would have the right to withhold releasing the goods to the named consignee (buyer) if they are owed monies. The freight forwarder or carrier also can’t simply sell the goods to recover what they are owed as they don’t have full title to make the sale. In many jurisdictions there is a legal process they would need to follow in which they would need to notify the owner of the title to allow them to make payment before selling the goods. <br />
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The UCC makes a slight distinction about the title when it comes to creditors rights with respect to the consigned materials. In those situations the consignee is deemed to have rights and title to the goods identical to those the consignor had or had power to transfer. It also goes on to say that if the consignor had perfected a security interest in the goods, that interest has priority over the rights of the consignee. <br />
Negotiable bills of lading may function as negotiable instrument and be traded in much the same way as the cargo, and even borrowed against if desired. A non-negotiable bill of lading can’t be borrowed against because the freight forwarder and Merchant (carrier) only have prima facie title and the Consignor’s title in the product takes precedence over their rights.<br />
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One main point to take away from this post is when making a shipment always make it clear whether the Bill of Lading is negotiable or non-negotiable. The way the FIATA multimodal Bill of Lading, the default is that it is negotiable unless you specifically mark it otherwise. If you fail to make what should be non-negotiable, as non-negotiable you will lose the right to introduce evidence to the contrary if you where you could seek to recover the goods for non-payment by the buyer. Personally, I would never sell under credit terms and use a negotiable bill of lading. <br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-22542276923774066322014-07-14T09:51:00.003-04:002014-07-14T09:51:34.304-04:00Liability versus providing an Indemnity<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>In a LinkedIN group a participant asked about the difference between someone accepting liability for their negligent acts versus providing an indemnity. I thought my response should be shared with my readers.<br />
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In some jurisdictions around the world the buyer / seller relationship is viewed as principal / agent. Under a principal / agent relationship the principal can be sued for the actions of the agent. If those actions are negligent the buyer can be sued under tort law for that negligence. That results in potential liability to the buyer. <br />
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If you have language that says that the supplier will be responsible to you for such liability you have a contract commitment that would be enforceable to recover the damages the injured party was awarded. If you have an indemnification, the seller is agreeing to be responsible for that potential liability and you have protection based upon the scope of that indemnification, <br />
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If the injured party sued the seller directly and not the buyer there would be no need for an indemnity. What frequently happens is the injured party will either sue the buyer (as the buyer may have more assets (deeper pockets) or they will sue both parties. An indemnification without the obligation of defense simply means that the seller is agreeing to only pay the damages awarded. If the indemnification also included the responsibility to defend, the seller would need to pay for the defense of the claim, or defend against that claim in court with them bearing the costs of the defense or settlement. If you have the obligation to defend and indemnify the seller (indemnitor) has agreed to effectively "stand in your shoes" and manage the process, pay the costs of the defense and pay any damages awarded or settlement amounts.<br />
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The value of either language to accept liability or or indemnify is based upon the assets of the party providing that commitment. When you are dealing with small companies it is best to require them to carry certain levels of insurance as additional financial protection such as comprehensive general liability and vehicle liability. Then if there is a claim the insurance company may be involved in the defense and you have the protection of both the insurance amounts and the sellers assets as protection.<br />
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The value of either agreeing to accept liability or agreeing to indemnify can be limited by the limitation of liability section as to both the types of damage that may be claimed and the amounts. I would carve either of these commitments out of limitation of liability for that reason. My rationale is simple, if the third party were to sue them directly they would not have a limit on that potential liability.<br />
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One last comment from a buyer's perspective you need to be concerned about the language in the section further limiting the value of what they will provide. You see under tort law a third party can sue for negligence. It doesn't require gross negligence or willful misconduct. Ordinary negligence will do. When a seller wants to be liable or indemnify only for "gross negligence or willful misconduct" they are setting a much higher standard that significantly limits the value of their commitment. What that is effectively saying is you need to be responsible for all ordinary negligence claims and I will only be responsible if the claims meet these much higher standards. As a buyer I would want the liability or indemnity to apply to any negligent act, error or omission. Your company didn't cause the injury or damage, they did, so why should you have to be responsible for anything. <br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-82539823430881036432014-07-06T10:58:00.002-04:002014-07-14T09:23:45.989-04:00Selecting The Right Incoterms Rule (delivery term)<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>For those individuals who may not be familiar with Incoterms®, they are a set of rules published by the International Chamber of Commerce in which responsibilities of the parties are established based upon the specific rule (delivery term) selected and the delivery point. Each Incoterms® rule (delivery term) addresses which party (the buyer of seller) has the responsibility for certain costs or tasks:<br />
• Loading on truck at origin<br />
• Export Customs declaration form completion<br />
• Carriage to port of export<br />
• Export clearance<br />
• Unloading at port of export<br />
• Loading onto vessel at the port of export<br />
• Carriage to port of import<br />
• Unloading charges at port of import<br />
• Import customs clearance<br />
• Import taxes and duties<br />
• Loading on carrier at port of import<br />
• Carriage to place of destination<br />
• Responsibility for insurance<br />
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Incoterms® are silent as to title transfer, and title transfer can be an important consideration in shipment of goods. Normally ownership is directly tied to risk of loss or damage. The party that owns the goods has the risk of loss or damage in the goods. The exception is that when you use Incoterms they define the point where the risk of loss passes from the seller to buyer. If there is no transfer of title or ownership there is no sale. For example the Uniform Commercial Code that has been adopted by all states in the U.S. presumes that title transfers at the specified delivery point unless there is language in the agreement to the contrary. CISG makes no reference to title transfer and looks to the Incoterms® to establish where the risk of loss transfers. <br />
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There are two different groups of Incoterms. The following Incoterms apply to any mode of transportation: EXW (Ex Works), FCA (Free Carrier At), CPT (Carriage Paid To). CIP (Carriage and Insurance Paid To), DAT (Delivered at Terminal), DAP (Delivered at Place), DDP (Delivered Duty Paid). Incoterms that only apply to sea and inland waterway transport are: FAS (Free Alongside Ship). FOB (Free on Board), CFR (Cost and Freight), CIF (Cost, Insurance, and Freight). <br />
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If you negotiate contracts involving international trade you should own a copy of the Incoterms. They can be ordered at http://www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/. For a very good description of all the individual rules (delivery terms) you can also visit: http://www.inhouseblog.com/international-shipping-terms/.<br />
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In negotiating contracts deciding which Incoterms® rule to accept there are many things to take into consideration. The first thing to remember is only the owner of the goods or their representative (a customs broker) can apply for an export license and clear export customs. In some locations like the EEU, non-resident companies cannot clear customs. In the U.S. non-resident companies can apply for export licenses and clear export customs. They are responsible for complying with U.S. export regulations. The U.S. export restrictions may limit some classifications of goods to a limited number of countries. There are also countries where restrictions apply to export all goods to those named countries. Similarly, only the owner of the goods or their representative, are able to apply for an import license and clear import customs. <br />
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When goods are shipped a Bill of Lading is completed. A bill of lading could is clearly stated transfer ownership. In most cases what the bill of lading does is transfer possession of the goods. The goods are consigned to the carrier or freight forwarder. The carrier or freight forwarder has certain rights with respect to the goods, but they do not have title or ownership in the goods. For a bill of lading to transfer title/ownership in the goods either the contract or bill of lading would need to clearly show the intent to transfer title/ownership. Otherwise the recipient of the goods has only the legal right to possess the goods subject to the terms of the consignment. <br />
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The point at which title or ownership transfers is an important consideration and is not controlled by the specific Incoterms® rule selected. Ownership is tied to the risk of loss or damage. If you fail to specify where title / ownership passes in the contract or other document, applicable laws may do that for you. If you had a contract that specified any state in the United States as the applicable law, the Uniform Commercial Code UCC Section 2-401 would apply. Under the UCC title transfers upon delivery at the agreed delivery point that is defined by the delivery term and delivery point selected. For examples Ex-Works Seller’s dock in New York, New York would mean that title transfers at the point the seller makes the goods available for delivery at their loading dock in New York, New York. That means that from that point onward the risk of loss or damage belongs to the buyer. It would also mean that it becomes the the buyer’s responsibility to either assume that risk or purchase insurance to cover that risk from that point forward. There are only two Incoterms rules that require the seller to provide insurance to protect against loss or damage. Those two are CIF (Cost insurance freight) and CIP (Carriage Insurance Paid to). For all other Incoterms® rules the risk of loss is with the owner of the goods. <br />
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Some companies watt to retain title / ownership of the goods until they are paid. They do that to allow them to recover the goods if not paid under what is called replevin. One problem with that is unless the specific Incoterms rule selected transfers the risk of loss, by continuing to own the goods they also continue to own the risk of loss or damage. Other companies choose to transfer title (and risk of loss or damage) to the buyer at an earlier point subject to a security interest in the goods (a lien against the title / ownership). Each approach has their advantages or disadvantages. In many sales the goods may be consumed or converted quickly so retaining ownership rights in the goods may not provide any protection. The specific type of Bill of Lading can also impact title. For example, if you used a negotiable intermodal bill of lading you are agreeing that title is transferred to the freight forwarder and are also agreeing that proof to the contrary shall not be admissible when the FBL has been transferred to the consignee for valuable consideration who in good faith acted thereon. For non-negotiable bills of lading the freight forwarder gets prima facie title in which, you could introduce evidence of title (such as retained title conditioned upon payment or a security interest.<br />
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Whether the buyer or seller manages the transportation is also a consideration. There are good and bad carriers. Some shipping lanes carry higher risks due to weather and piracy and theft. One question to ask is which is more important for me, getting the goods when I need them or getting compensated for the loss or damage? The more you want or need the products to be delivered when you need them the more you either want to control or approve the carrier and shipping lanes.<br />
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In working for large companies with very competitive shipping costs we always felt that our costs would be less than our Sellers so the majority of our purchases were made under delivery terms where the bulk of the transportation expense was under our control. There can be times when it may make sense to buy an item delivered to the destination such as with an DAP term or have delivery be from a Seller’s local subsidiary. That occurs mostly when you are importing it into a country with high duties. If you buy and import a product your duties will be based upon your purchase price and transportation costs. If the Seller subsidiary purchases it, their duty will not be based upon the purchase price. It will be based upon what’s called the “transfer price” or the amount the company sells the product to the subsidiary for which is less than your purchase price. That means the duty they will pay will be less. The same would apply to buying from a distributor as the distributor is buying it less their discount, but then you need to take into consideration that your contract would then be with the distributor and not the Seller. The one thing you never want to do is leave the cost of transportation totally open ended to the Seller. Either get a price that includes all cost or manage the transportation yourself. <br />
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Revenue recognition is another consideration. Revenue recognition is when under the accounting rules for the jurisdiction the seller can classify it as a sale. In the U.S. there are strict rules (Sarbanes-Oxley) issued by the Security and Exchange commission that prevents companies from taking credit for a sale if it can be returned to the seller. Most U.S. Sellers will want terms where title transfer is early so they don’t have to wait for deliver at some other location to occur before they can count it as revenue. They also try to avoid any right of the buyer to return the product and want to only be responsible to either repair or replace they product so it can be considered sales revenue. Revenue recognition is important to companies balance sheets and to sales organizations that are measured and compensated based upon meeting sales goals within a financial period.<br />
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Another thing you need to consider is the specific delivery point. INCOTERMS® doesn’t establish the actual delivery point and the parties are free to also establish a deliver point that makes sense between them. Even though a product may be made in one location, it may also be stocked in another. For example many company supply chains want the Seller to have stocking points close to the point of use so they can operate under a pull replenishment program. If the Seller has those, you use them. If the Seller doesn’t have local stocking points you could have stocking at different locations such as a third party warehouse or even a stockroom on the buyer’s site. In doing that you need to select the right INCOTERM and delivery point. Pull replenishment types of arrangements require additional terms regarding pull, replenishment and loss or damage to the product while stored. When I talk about selecting the right delivery point you need to take other things into consideration. For example I’ve written contracts where delivery was to a third party warehouse in a free trade zone prior to import customs clearance because the supplier refused to sell the product within the country of import. If the seller wanted to assume all costs and risks to get it to that point they could sell the product ex-works at that point. The could also select CIP, CIF or DAP to that warehouse but have the title and risk of loss transfer at an earlier point When the buyer wanted to make a “pull” that was the location they pulled from. The buyer then had to arrange for import and transportation from that point. An additional advantage for the Seller was if the materials weren’t pulled, they could have them shipped anywhere. Since the goods were never imported into that country they would not need to do any export clearance or get export licenses. <br />
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There can be tax and other implications depending upon which rule you select. Except for situations where ownership/title is transferred “on the high seas” or in a free trade zone, the transfer of title/ownership constitutes a sale at the point of delivery. Deliver point that are between the export and import frontiers are considered international sales. Deliveries within a free trade zone are also considered international sales. For international sales the seller does not have to be registered to do business in the country of import. The seller is not subjected to the laws of the country of import. The seller is also not subject to taxes on the sale of the goods. If you were to agree to sell on a DDP basis that means that the seller is responsible for preparation of the import license and import. The seller is responsible for payment of any applicable duties. From a legal perspective doing those actions within that country means that you are conducting business within that country. To conduct business within a country you must be legally registered to do business within that country. The sale within that country becomes a local sale. As a local sale, that subjects the seller to the import country’s laws and income taxes on that sale. Free trade zones are controlled areas prior to import clearance where warehouses are built and materials may be shipped. As part of tax management many companies want to avoid having sales occur within the country of import because of the tax impact. <br />
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There can be liability considerations depending upon the term that’s selected. For example in the U.S. the Patriot Act and the Trade Act of 2002, makes the importer liable if the container contains any illicit goods. <br />
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The point of sale can subject the party to the laws of the country of sale as the sale is occurring within that location. The exception to that is when delivery occurs and the sale is completed after the export customs frontier and prior to the import customs frontier. In that situation it would become an international sale and the transaction would be governed by only the applicable law and jurisdiction stated in the contract.<br />
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The last thing to consider is your knowledge of the laws of the importing country. There are two general types of laws to be concerned with respect to import. One is environmental laws and does the product comply with local environmental laws which will be a condition on import. The second set of laws are homologation laws. Homologation laws deal with compatibility of a product with local systems or networks it may be connected to. For example, a telecommunications product being imported into a country may need to compatible with local communications systems. If you sell on a delivered term within the import country it is your responsibility to ensure compliance so it can be imported. If you sell on a term where the responsibility for import is passed to the buyer before import, it is their responsibility to ensure that what they buy meets both environmental laws and homologation laws. <br />
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The advantages of using Incoterms® and specifying the specific Incoterms delivery rule (delivery term) and date of the Incoterms® publication is:<br />
<br />
1. In comparing quotes from different Sellers, if they quote a different delivery terms or points, you should take any cost differences into account in deciding who to award the business to as you want the Seller with the lowest landed cost. One thing I also like to do was to have Sellers quote or bid based upon multiple delivery points and have those costs included in their price. That way I can see how competitive their transportation costs would be which may help decide what’s going to create the lowest landed cost for me. <br />
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2. From a contracts perspective, when you incorporate them by reference into the contract the responsibilities of each party from the Sellers dock to the buyers dock for all the activities involved such as loading, transport, preparation of paperwork, export, import, customs clearance, payment of duties and insurance are defined for you. If you didn't use them, you would need to address all of the applicable portions of those in your agreement’s delivery section. <br />
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3. Each of the responsibilities has a cost involved. Some costs of those costs may be small (such as completing the export declaration). Other responsibilities such as shipping and duties can be significant. When you use the INCOTERM and specify the delivery point it's clear which party is bearing those costs. That way you know what the true cost of the purchase or sale is and who is insuring the shipment against risk of loss or damage while in transit. <br />
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I use the 2010 version. When I use them, I do it by including language such as: “The delivery term shall be Ex-Works (as defined in Incoterms 2010) Seller’s Dock in Taipei, Taiwan”. The ICC periodically updates Incoterms and sometimes eliminates or changes definitions as occurred when Incoterms 2010<br />
replaced Incoterms 2000. While Incoterms 2000 is no longer the current Incoterms rule parties to a contract are still free to use whichever version they want. The key in using prior versions or terms that may have been deleted or changed is you need to refer to the specific Incoterms date. For example, "For example delivery shall be DDU as defined in Incoterms 2000" would correctly create a DDU term. If you said DDU Incoterms or DDU Incoterms 2010 you have a problem as DDU (Delivered Duty Unpaid) doesn't exist in Incoterms 2010. New terms of DAP (delivered at place) or DAT (delivered at terminal) exist. In drafting it's best to refer to the specific date of the Incoterms you want to use to eliminate any confusion. <br />
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Like anything else, there may be a number of times where a specific INCOTERM does not match your exact needs. INCOTERMS are not fixed in stone so if none of them fit exactly what you need you can still incorporate the closest one to what you need and then modify it to meet your needs. For example:<br />
“The delivery term shall be Ex-Works (as defined in INCOTERMS 2010 except as modified below) Seller’s Dock in Taipei, Taiwan. The modifications to INCOTERMS 2010 shall be ......” An example of a modification is the buyer could agree to pay insurance to a specific point.<br />
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There may be times when you are purchasing capital equipment where you want the Seller to manage the installation and start up of the equipment. In those situations you probably need to separate delivery from installation. You can always have title, risk of loss and the delivery point be outside of the country from a sales perspective, and still have the responsibility to install, test and accept be a separate contract. If you did that the sales agreement should have monies retained, a bond or bank guarantee linked to successful installation, test and acceptance.<br />
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The selection of the INCOTERM isn’t just about who is responsible for certain actions, you need to consider all the costs and risks in selecting your term and have those and these other factors drive your selection. For example, as a Seller I would never want to agree upon a delivered term at any place other than a free trade zone prior to the import frontier without having title pass far before that. You see I don’t want to be waiting for a product to clear customs before I can invoice and get paid for the product and I don’t want the buyers inability to import the product to impact their obligation to make payment. As a seller if they cannot import a product I might help them sell the product to a customer in another location where it can be imported. As a Buyer, unless I had a legal presence in the country of export that could manage it, I would avoid EXW (ex-works) delivery terms and would want the seller to be responsible for export clearance.<br />
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One final comment, your agreement needs to address when title transfers and payment terms as Incoterms does not address those issues.<br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com5tag:blogger.com,1999:blog-3350494960151472132.post-88305263204940086892014-06-21T15:23:00.001-04:002014-06-21T15:23:14.162-04:00Contract Term – when do you include a contract term and how to negotiate it.<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>In a linkedIN group an individual stated that contracts may only be ended by completion or by termination. This is not the case as there are a number of situations where a party is excused from performing under a contract.<br />
•Subsequently illegality such as a change in the law that makes the performance illegal, <br />
•Impossibility, where the work cannot be done. <br />
•Impracticability, where it is not capable of being done <br />
•Frustration, such as one party failing to meet their obligations can frustrate the other party allowing them not to perform <br />
•Rescission, where the parties have agreed to stop it. <br />
•Novation, where the parties agree that another party will complete the work and the original party is excused from performance, and <br />
•Lapse, such as where the contract term may have lapsed without the work being completed.<br />
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It is this last item (lapse) that excuses performance that I want to talk about. <br />
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In contracting for a specific deliverable, you traditionally do not include a specific contract term as to when it starts and when it ends. What you instead have are required milestones and completion dates. Failing to meet those dates does not excuse performance and those type of contracts do not expire. To end those types of contracts they must be either completed, terminated, or performance must be excused by law.<br />
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In many other contracts such as agreements to purchase goods or service there is normally a specific contract term. In those, once the term has expired, both parties obligations to perform are limited to only those obligations that they have agreed will survive the expiration of the agreement. All terms and obligations that aren't specified to survive the expiration of of the contract term can no longer be enforced. For example, you could have language that requires the supplier to accept and delivery all orders placed within the term and obligations for delivery, compliance with the contract terms will apply to those orders. You would also usually have a <br />
“survival” provision where specific terms and obligation will remain in effect after either the expiration of termination of the contract. <br />
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When you do intend to include a contract term for your agreement here are my thoughts on negotiating the term.<br />
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If you will be dependent upon the Supplier for the products, service or support for a long period, such as occurs when you design a Supplier’s product into your product, you will always want either an extended term, or a combination of other terms, to help you manage the risk of continuity supply in supporting your production or service needs.<br />
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Once the term has ended, if you still need to make purchases, the Supplier may have substantial leverage. You always need to think about protecting against potential abuse where they feel you are locked in. That applies to both the price they can charge or the terms they sell under. If you can’t quickly switch sources of supply, you either need a longer term or need to include things in the contract to protect against those risks. End of the term buy options are one way to manage that risk. Another way to provide protection is to include an option to extend the agreement. Options for extensions of the terms should be subject to mutually agreed terms. I would push to establish pre-agreed parameters on what of the agreement is subject to re-negotiation and have parameters on changes to the price.<br />
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A lot of negotiating the term of the agreement is common sense. Always think about when is it best for you to have the contract end. For example, if you were dependent on a Product to meet revenue, you would never want the contract to end during a critical revenue period. If there could be any possible interruption in supply or services, always think about when is the best time for that interruption to occur as you transition Suppliers. If they are on-going services always consider the impact of any Supplier transition on the Business the service supports. For example when I negotiated a Debit Card processing agreement for a Major Bank the term was tied to when a transition would have the least impact. That meant that the major shopping period prior to the Christmas holidays could never have and transition occur as there was to much potential business at risk, whereas if you had the contract end in a time like mid February it made more sense. You also would not want a contract term to expire when you had major commitments you needed to fulfill for a customer and were dependent on that Supplier to fulfill those commitments. <br />
<br />
A better way would be negotiate an extension of the contract to cover that term or get agreement from the Supplier that the terms of the current agreement will apply on that program until the program is complete.<br />
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Your term also needs to take into account the fact that there is a natural lag caused by lead-time that should be taken into account in establishing the term. For example, if you were buying a product with a 16-week lead-time, the first four months of your term would be consumed by lead-time. If you had a one-year contract term from the date you signed the contract, you wouldn’t get delivery for four months, and you would have to stop ordering four months prior to the end of the term because deliveries after that would then extend beyond the term. If you need time to evaluate the Supplier’s performance prior to any extension of another term or before deciding to change Suppliers, make sure the initial term is long enough. If you have a Supplier with the 16-week lead-time and it would take four months to qualify a replacement, you would have only four months of actual performance before you were forced to make a decision.<br />
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Your term should take into account the time you need to negotiate a renewal with an eye on how long it would take to source from an alternative source if needed. If it will take you six months to quality an alternative source, you need a term that is long enough so you can both conduct negotiations with the current Supplier and if your aren’t successful still have the six months needed to source from an alternate source, or you need to have the ability to make a last time buy to cover the interim period before you can bring the other Supplier up. If you have ways in which to manage competitiveness of the Supplier and are not obligated to make purchases, a longer term may make sense.<br />
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Suppliers will look at the length of the term from several perspectives. If they are making an investment to win the business, or are discounting substantially to win the business they will want a term that is long enough so they get a return on their investment or to protect them from competition. Supplier’s main concerns with the length of the term are either financial risk (e.g. how long do they have to offer the product at the price) or business strategy (e.g. how long are they required to continue to produce the product). The longer the term, the more the Supplier may look for ways to either be able to adjust pricing to cover their exposure for changing costs, or be able to end of life the Product if it no longer is consistent with their business strategy.<br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-83451675395575388232014-06-08T14:37:00.004-04:002014-06-08T14:37:57.920-04:00Capital Equipment Purchase Contracts<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>In another forum someone asked me what I would look for in major capital equipment purchases.<br />
Since major capital equipment purchases involve contracts I thought I would share my responses.<br />
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Before deciding to purchase I would want to evaluate the total life cycle cost of the equipment. The total life cycle cost of the equipment would include the warranties provided, and the cost of after warranty service, maintenance, spare parts, and repairs. Further it would include the cost of energy consumed, set up and tear down time for changes, number and type of operators required, operating manuals provided, cost to buy more manuals. It would include the availability and cost of training, the cost of required maintenance, service and calibration and the frequency and cost of those. <br />
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First you would start with a standard purchase of goods agreement that would standard legal terms and business terms such as identifying the purchase period, delivery, performance, quality, inspection and acceptance warranty and service. I would also want contract terms that manage the cost of all the elements that the supplier controls by establishing either an agreed price to purchase them over the term at a fixed price subject to possible escalation per an agreed formula.<br />
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For things like available options I would want to include the option to purchase those in the future also at a pre-established price. I would want a good specification with acceptance and test requirements to ensure that the equipment meets their specifications. If it is something that can’t be fully tested upon delivery because it is not fully loaded or running at capacity, I would want that inspection, test and final acceptance to occur when those operating conditions are met. To ensure that I can get spare parts I would want a commitment that they will continue to produce and sell spare parts at the agreed pricing for the useful life of the equipment. If I can’t get that I might allow them to end of life spare part production if two conditions are met. First I would want the right to be able to make a last time buy. I would like any replacement include in new equipment to be backward compatible so substitution is possible withthe replacement part be sold at the same price as the original or less. <br />
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One other very important thing to consider is these days most capital equipment includes licensed software. Whether you are buying heavy equipment, process equipment and most other types of equipment you will find software is included and the seller will require a software license. To manage the cost I would want the contract to include software maintenance and control the cost of future software maintenance and any required upgrades. Another consideration is to protect the resale value of the equipment once it no longer is needed by your company. To do that I would want the right in the contract to assign the software licenses in conjunction with any re-sale of the equipment. You can sell the equipment without it, but the buyer can’t use the software unless they are licensed to use it. Including that right will ensure you get the highest value for it after your company no longer has a need to use it. If they won't agree with assignment of the license, I would want a fixed price option to license it so you can sell it and not leave the supplier open to charge whatever they want. What they probably want is to sell them a new piece of equipment.<br />
<br />
<br />
What advice or terms (other than normal T&C’s) would you look for in a capital equipment purchase agreement?<br />
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Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com4tag:blogger.com,1999:blog-3350494960151472132.post-75742191969124873782014-05-29T12:45:00.001-04:002014-05-29T12:45:14.817-04:00Date Codes and Shelf Life<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>If you ever look at labels on packaged food you will normally see the date code for when it was manufactured. It may also include the lot in which it was manufactured. Further they will include a best before date or a use or freeze before date. <br />
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The simple fact is virtually all items have a form of shelf life after which deterioration will occur. For some items that deterioration may be delayed by the manner in which it is stored. For example computer chips are stored in plastic sealed tubes to prevent exposure to the air that can cause deterioration of the materials (mostly metals). Other items may be required to be stored in specific environments to prevent deterioration. <br />
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Different companies may establish and classify shelf life of products base upon risk. Some may have non-extendible shelf lifes which if reached must not be used and must be disposed of, and<br />
Less critical uses which may require checking to determine if they may still be used. For example you could have a 4 month shelf life, which may still be used up to 12 months if determine to be fit for use. <br />
<br />
You want to buy from suppliers buy from suppliers that manage their inventory on a FIFO basis (First in- first out). You want that so the longest amount of remaining shelf life time available to you. As sometimes they may not have done FIFO management of their inventory, you may include requirements in your contract or specification to manage shelf life. <br />
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Once you learn what the reasonable shelf life for a specific product is, you could require that all shipments to you have a date code of no earlier than X period prior to the shipment date to make sure what you receive still has a reasonable shelf life left. The main reason for that is product that has deteriorated may no longer work in its application or use and could cause other problems. It may require you to purchase another one so you are paying twice. <br />
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One of the biggest concerns that I always had with individuals buying products from brokers rather than authorized distributors while you can check the date code, you are buying materials that someone else didn’t want. You have no idea how they may have treated or stored those materials and where and how they are stored can have an impact on the shelf life of the product. <br />
<br />
Requiring date codes is also important in managing safety and recall of products and their cost.<br />
Production related problems normally are identified down to the specific date(s) or lot(s) in which the problem arose. From a safety perspective if you buy products and use them to manufacture a product, you need to be able to track what materials were used in which of your products. You do that so you can identify who purchased it so you can contract them to have the item fixed or re-called. If you were able to do that you would either fix all or recall all items. If it’s a safety related problem you need to be able to do that quickly, as personal injuries and lawsuits can cost you far more. <br />
<br />
While items have shelf lives from a life-cycle cost perspective companies need to also manage the useful life it their equipment, especially all mechanical equipment. Just like exposure to the elements can affect shelf life, it will also affect the useful life of the product. For example, you have to maintain it when you use it. Conversely, if you don’t use equipment the oils and lubricants can turn into a sludge or dry out requiring repair or replacement. <br />
<br />
Here’s a personal tip. For those of us dinosaurs that still have and use watches, all of them have a mechanical element. They need to be used and running so the oils and lubricants don’t become a sludge or dry up. If you have an type of quartz watch sitting in a drawer needing battery replacement, you need to replace the battery so it runs. If you have mechanical watches they need to be wound so they run. If you have automatic watches you need to either wear them or have a machine that helps wind them. If you don’t, you run the risk that the mechanical parts in those watches will freeze up and that can cause either expensive cleaning and repair (if its mechanical or automatic) or could require you to replace your quartz movement. <br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com2tag:blogger.com,1999:blog-3350494960151472132.post-78765852521138460202014-05-26T11:48:00.000-04:002014-05-26T11:48:05.775-04:00Meeting Minutes<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>When work is completed many times one of the next step is dealing with contract claims. There are a number of tools that you use. What does the contract say as expressed by the terms of the contractual agreement? If there were changes to the agreement either by amendment, change order or variation, what do those say, what did they change and when were those changes implemented. If you had personnel on site another tool is site reports of what was being done, by whom, and when. Throughout a project there will also be a number of meetings held and for each meeting minutes should identify the status, any issues or problems, action items and action item status. They will also document what was discussed or agreed, and instructions were given. For example if a contractor brought forth a claim, the owner may provide instructions on what they require to process the claim. <br />
<br />
Whether it is the supplier, contractor or employer that writes the minutes is not important. What is important is making sure the minutes, as published, are an accurate reflection of the meeting. As meeting minutes can be introduced into court or arbitration, if you are not the one that published them, you need to take the time to read them to ensure they are correct. If they aren’t, you need to reply and specify what portions or statements need to be corrected. <br />
<br />
The reason for this is simple. Many times the individual(s) that need to deal with a claim may not have been involved in the work. The individual(s) involved may no longer be with the company or may not be reachable. For the individual managing the claim to do that effectively the contract file needs to provide them with as good of a picture as possible of what actually occurred and what was discussed and agreed. If you allow incorrect meeting minutes to be published and don’t seek to correct them, the individual managing the claim would think they were accurate. <br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com2tag:blogger.com,1999:blog-3350494960151472132.post-49978786866525827962014-05-23T11:50:00.001-04:002014-05-23T11:50:26.877-04:00Change Orders.<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div><br />
In many contracts, once you start with a supplier it is either difficult, costly, or impossible to change. Since you are locked into using them, you have little or no leverage to negotiate changes to the scope of the work that may be needed during the term of the contract. To protect against potential supplier abuse, and to make necessary changes quickly, I’ve always include the right to make unilateral changes to the scope of the work and include a price formula for establishing the cost of those changes. Those unilateral changes I refer to as change orders. In change orders the formula I include to price the change is either an amount mutually agreed or the actual cost of the work plus a percentage for contributions to their overhead and profit. The use of the cost plus a percentage approach does two things. First, it is intended to get the supplier to provide a reasonable cost initially, knowing that if they don’t, the buyer can require them to prove their actual cost. It also protects the supplier against the buyer being unreasonable, as they can wait for the actual cost to be determines.<br />
<br />
Below is an example of a Change Order clause: <br />
<br />
1. A change order is a written order to the CONTRACTOR, signed by the OWNER, authorizing a change in the Work, the Contract Price or the final completion date.<br />
<br />
2. The OWNER, without invalidating the Contract Documents, may issue orders making changes by altering, adding to, or deducting from the Scope of Work. A change in the Scope of Work may also necessitate an adjustment in the Contract Price or the final completion date. No change in the Scope of Work shall proceed and no claim for additional monies for such change or for any extra work, so-called, will be valid unless such work is done pursuant to a written order from the OWNER to the CONTRACTOR signed by an OWNER Representative. Advance approval is not necessary for extra work required to protect life or property under emergency conditions. The OWNER shall determine in each case whether the work done without written approval was of an emergency nature and whether it is to be reimbursed and a Change Order issued.<br />
<br />
3. The cost of work for any change order shall be either a lump sum agreed to by the OWNER or actual costs and a percentage fee for overhead and profit. Such percentage fee shall not exceed fifteen (15%) percent of actual costs for work performed by a CONTRACTOR alone. For work performed by a Subcontractor, the cost to the OWNER shall be determined by a lump sum agreed to by all parties or the actual costs to the Subcontractor, plus a percentage fee not to exceed ten (10%) percent for the Subcontractor's overhead and profit, plus a fee not exceed five (5%) percent for the CONTRACTOR'S overhead and profit. <br />
<br />
4. If deductions are ordered, a credit shall be computed on the same basis as increases for extra Work.<br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-5017744215416886742014-05-14T10:25:00.000-04:002014-05-14T10:25:01.280-04:00Limited Performance Windows<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>A reader asked me for suggestions on how to protect against investments that they need to make in the purchase of goods and equipment that needed to be in storage for extended term. She was dealing with a construction project in a location there would be a limited performance window per year of maybe four months out of the year due to weather and extreme cold. This meant that they would need to buy things in advance and either store them at the site or a staging area until they could be used within that window. This also meant that they had to pay the suppliers well in advance of when they may be used and was concerned about protecting that investment. She had already used several tools to protect her company. She selected only highly reputable companies to provide the materials and equipment. She also used bonding and retention of monies as another tool. She was looking for other tools to help protect her company’s investment.<br />
<br />
Once the goods or equipment are delivered to the staging site title and risk of loss transferred to her company. Loss or damage caused by normal perils would normally be covered by the company’s insurance policy. One concern that I had was loss or damage to equipment or materials<br />
caused by being subjected extreme temperatures may not be an insurable risk. The first suggestion I made is to protect against storage in extreme environments, I would want the supplier and their equipment manufacturers to specify storage requirements needed to protect the materials or equipment in that environment. The second suggestion I made was to require them to pack, package and crate equipment in a manner that meets those requirements. My assumption was that there no plans of doing and test or acceptance at a consolidation site. Next I suggested adding contract commitment that if her company followed those storage requirements, it is their supplier or equipment manufacturers responsibility to repair or replace any materials or equipment that are damaged in storage other than by normal perils such as fire or flood. If you didn't do that I could see equipment manufacturers arguing that any warranty is voided. I also thought those requirements would help if you need to call upon the performance bond as you were showing that your acts were reasonable and you followed their instructions.<br />
<br />
The other major issue with limited performance windows is warranties. You need to ensure that the warranty in place as they provide another protection against the investment in the equipment. A warranty would require the supplier to repair or replace any defective product. If you were let the warranty lapse because of the limited performance window, when you go to start up the equipment and it doesn’t work, it would be your cost to correct or replace the defective item. <br />
<br />
The most preferable warranty to protect the investment would start upon installation and acceptance of the equipment at the site so no warranty time is lost because of the limited performance windows. Alternatively you could have the warranty period that is long enough so you will still have the warranty in place after all the delays because of the limited performance windows so it is still in place after start up of the facility and for any period you have to warrant to the customer. <br />
<br />
Most warranties include warranty exclusions such as abuse to the product that would void the warranty. You want to avoid the argument that the product or equipment has been abused. Having the supplier specify the storage requirements, and having them pack, package and create products to meet those requirement will help do that. How can you have abused it if you followed their instruction?<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-59265521254517516282014-05-01T08:42:00.000-04:002014-05-01T08:45:28.581-04:00Construction Pre-Qualification<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div><br />
HOW DO WE GET THE RIGHT PARTIES?<br />
<br />
The key to it all is that we should only deal with Companies who we have pre-qualified. The nature and extent of Pre-qualification will vary based upon the size and complexity of the activity, the risks involved, the critical nature of the schedule, etc. In general, the flow of a Pre-qualification process would occur in stages however, depending upon the criticality of the schedule you may have to skip various stages, compress stages or even take acceptable short cuts to allow you to have some level a pre-qualification accomplished and yet still meet your schedule.<br />
<br />
<b>Information Gathering</b><br />
FIRST, YOU WOULD SOLICIT GENERAL INFORMATION ON THE COMPANY. <br />
The formats for this will vary as each of the different businesses are unique and certain information that deals with the uniqueness is required. <br />
In general, What you are trying to find out is their size, areas of expertise, the types of people they have on staff, the character of their past projects or products, their financial strength, and any other information which will give you insight into their capabilities. In general this information becomes the basis for your own file of Potential Suppliers of Contractors for that particular type of service or product.<br />
<br />
<b>Information Screening</b><br />
Second, usually when a requirement has been identified, you would review the information you have and from the type and size of products or projects<br />
that they list as experience. You use that to try to establish an initial group of companies to screen/or interview. You are trying to MATCH YOUR NEED AGAINST THEIR CAPABILITIES. Big doesn't always mean better, as a small job can easily "get lost" in a large firm and not get the proper attention. Neither would you hire a small firm for a project well beyond their proven capabilities. You would look at it carefully from the type of work they have done. <br />
<br />
<b>The Interview</b><br />
Third, it is strongly suggested that you CONSIDERING INTERVIEWING THE COMPANY to allow you to get a better idea of the company's capabilities and<br />
their management. Its staff, current status, current workload, management structure and philosophy, general personality, etc. represent the Company. <br />
In short, all the information that you can't get from your Pre-qualification form you should get in the interview. An interview will disclose many<br />
things you would not be able to get from the form. First, a trip to their office or manufacturing facility will indicate how busy they are at the time. For example, empty desks during a period where the business is booming can mean underlying problems in the company.<br />
<br />
Always ask for a TOUR OF THEIR FACILITY. It will allow you to look around, see what they are doing, how they manage the business, and the tools they <br />
have. It will also give you a better understanding of the character of the company. <br />
<br />
In an interview you use the time to probe in detail. For example, if you were dealing with a Company with multiple offices you may need to find out the <br />
Specific capabilities for the particular office that you will be using. This is especially important in service related activities, where you are relying upon the people and capabilities of the local office. Each office may have a different character depending upon their customer base and may be arranged<br />
and organized to deal with that customer base. For example, an office located in a Country or State Capital may specialize in Government work, while another<br />
office of the same firm in another location may specialize in private work.<br />
<br />
You should also have them PRESENT A REPRESENTATIVE PROJECT and have them walk through the project explaining how they managed it. That will allow<br />
you to understand their basic capabilities. It will also allow you to probe about who did what. It is possible to discover through the interview that the <br />
individual who was a major factor of the success of a prior project or the the company is no longer with them. That would change their perceived<br />
capabilities. It is also possible for them to identify a management structure or approach which they use that would be incompatible with your requirements<br />
For activities which involve design you should want to see representative samples of the design drawings and technical specifications which they <br />
generate to determine the quality and depth of the product. You may also want to see in detail their management systems for things like scheduling, buying of equipment and materials, material flows, quality processes, field service and support capabilities, lists of equipment they have, etc. One final suggestion for interviews, use the interview to get you information you need to help you make decisions you need on the Project such as: their estimate of what the time for the project, the estimate of equipment and material lead times, their opinion of your schedule, The contract approach they would recommend using to meeting it.<br />
<br />
<b>The Interview Team</b><br />
As you would in most cases not have all the experience needed to be able to qualify a supplier by yourself, you need to form an interview team to address<br />
all of those other areas. Clearly the size and character of the interview team is dependent upon the complexity of the project and the risks foreseen and the long term relationship. For example, if there is a need for long term service you should have someone with service knowledge and experience look at the supplier's capabilities to help understand what you will need from the supplier and what may have to be covered through other resources to develop the overall service strategy. <br />
<br />
<b>Reference Checks</b><br />
Fourth, you would CHECK REFERENCES on the Company. Find out when they worked, what they have sold, the type of job, their role, the type of <br />
contract, etc. Seek to find out everything that a reference would be willing to share with you. You may quickly find that the work they show in their brochure may not have been totally performed by them. Or they may have done the work but with a high level of work performed by or management assistance and guidance from the client. It is important that you both ask them for references and, while you are at the interview make note of the programs that they may be doing or may have just completed. References provided by a Company will always be positive in nature. That is why you should go beyond those provided in your checking.<br />
<br />
Key questions to ask in a reference check would be:<br />
• When did they work for you ?<br />
• How large was the project ?<br />
• What was their role in the project ?<br />
• Who managed the project for them ?<br />
• Would they accept that manager again ?<br />
• How well supported were they by the main office ?<br />
• What Contract Approach was used ?<br />
• Were they satisfied with the performance ?<br />
• Would they use them again ?<br />
• What was the frequency of Change Requests or waivers ?<br />
• What was their adherence to the Schedule ?<br />
• How responsive were they to problems which occurred during the project ?<br />
• How responsive were they to problems or warranty issues after delivery ?<br />
• If they were going to do it over again, what would they do differently ?<br />
<br />
<b>Financial Evaluations</b><br />
Fifth, you would PERFORM A FINANCIAL EVALUATION of the Company. In the exhibits we have provided samples of financial analysis guidelines for<br />
various types of businesses. However, from business to business and from location to location the importance of various things will differ and as such it is always recommended that the specific financial norms for evaluation be locally generated in conjunction with your local finance organization. It is important that you get the most current financial information available. Many Businesses can change dramatically from year to year. Suppliers which <br />
can be very sound one year could have sustained substantial losses and be on the verge of bankruptcy the following year.<br />
<br />
In some locations, or for certain size projects the Companies which you may wish to use may be privately held. This can present a problems in terms <br />
of getting detained financial information. If you encounter this type of situation there may be ways of getting an assurance of their financial<br />
stability without you needing to get the actual detailed financial information. For example: You could provide a set a financial norms which you require to be met and ask that the individual's Certified Public Accountant certify that they have reviewed the information and that it meets those norms. In some locations you may consider accepting a third party guarantee such as a Bank Guarantee which would protect you for any advances or payments to third parties. You could consider requiring the party to provide Payment and Performance Bonds which are normally issued by insurance companies. However, as bonds cost money you should consider this as a last step as it will add to the cost of your project and you should try to get the needed information elsewhere to determine the risk.<br />
<br />
One important note about Bank Guarantees and Insurance Company issued Bonds. It is important to remember that while they may reduce the financial risks<br />
they will not guarantee you any greater degree of success in completion of your project. In fact, their interests (those of the bank or insurance company)<br />
may be contrary to yours when there is a problem. It will bring them in as third party and usually their sole goal is to minimize their potential <br />
loss. They will not be concerned with your needs unless that effects them financially. On-demand bonds allow immediate collection of the bond amount if the trigger for payment of the bond is reached, they will also cost more than a normal surety bond as the on-demand bond does not require any mitigation of the costs, whereas a surety bond the surety has the right to mitigate the cost to complete the work.<br />
<b><br />
Staffing Comments and Concerns</b><br />
If you have done all of this checking, will you be successful? If you are dealing with work which relies on the personal performance you can encounter the problem that while you can select a very good company it is possible to get one bad performer from amongst the good. At interviews companies will always will always put their best foot forward and you will meet the top level managers and key personnel. THESE ARE NOT THE PEOPLE WHO YOU WILL BE DEALING WITH IN THE LONG RUN. As impressive as their credentials are, most of the key individuals willbe involved in Marketing for the Firm, Operational Management or providing conceptual or high level direction or top level problem solving. <br />
YOU WILL NORMALLY BE DEALING WITH SOMEONE WHO IS MUCH FARTHER DOWN IN THE ORGANIZATION FOR ALL OF YOUR EVERYDAY NEEDS. As such if you are dealing with a business where personal performance of someone on their staff is critical to your success, it is highly recommended at the interview or as a prior condition of the award, that you MEET WITH THE ACTUAL PERSON OR TEAM WHO THEY WILL ASSIGN TO PROGRAM. By doing this you can interview the specific members, make sure that you feel comfortable with their knowledge and abilities and also feel that you can work with them to accomplish the common goal of the successful completion of the Project. If you are not comfortable with the individual or team presented you should feel free to let the company know that they are not acceptable and that you want someone more acceptable. If they promise you someone and you are concerned about the veracity of their promise, you can consider including a provision in your contract which designates them as the person or team and limit the Company's ability to change to only those situations approved by you.<br />
<br />
<b>Approval of subcontractors.</b><br />
In a number of situations you the contract with may not have all of the capabilities necessary to manage the complete project. The will then have<br />
to use subcontractors to assist them in the performance of their activities. YOUR SUPPLIER OR CONTRACTOR WILL ONLY BE AS STRONG AS THE WEAKEST SUBCONTRACTOR.This is especially the case where the flow of the work requires a strong interdependence between the supplier and their subcontractors performing the work. <br />
<br />
If you have one Subcontractor that is non-performing or poor performing it can effect the entire flow of the work and the performance by your other <br />
subcontractors. Their resources are planned around the scheduled flow of the work. Commitments for their other projects are made based upon<br />
the projected flow. If your project is delayed, you then may have the problem where their people are already committed to another project<br />
and the will have to back fill when possible or using secondary resources,which won't provide you as good of a job.<br />
<br />
As such, many agreements provide for APPROVAL OF ALL SUBCONTRACTORS. If the performance by a third party is critical to your success, make sure that you have control over who is selected. If it is critical to your success, It would be important that you take the time to verify the subcontractor's capabilities. It may be as easy as discussing their capabilities with your Supplier who may have had on-going business with them. It may however require that you jointly check them out in detail if they do not have an on-going relationship.<br />
<br />
Good Suppliers are as concerned with not wanting to bring on a subcontractor<br />
who is unknown or which has potential problems as:<br />
•A Bad Subcontractor will affect your perception of them as a Supplier<br />
•A Bad Subcontractor will increase their management time on the project costing them money and resources<br />
•A Bad Subcontractor will be a source for potential claims from other subcontractors for delays and hence will increase the amount of time it<br />
take them to manage all the claims<br />
•A Bad Subcontractor can cause problems with good subcontractors who because of delays will have conflicting commitments.<br />
They should be willing to, as a team, help make all the necessary checks with <br />
you to make you feel comfortable with the total team you have assembled.<br />
<br />
<b><br />
FINANCIAL</b><br />
As a part of the interview you should also ask them to provide you with the most recent Audited Financial Statement, with the Auditor's notes.<br />
In certain instances where there is added concern, you may also request the most recent balance sheet in addition to the prior audited<br />
report. Obtain a copy of a fully audited, unqualified financial statement as of fiscal year-end. CPA prepared, un-audited interim financial statements are acceptable as long as we have a year-end financial statement. The past two or three years of financial statements are helpful in establishing trends. The financial statement should include as a minimum:<br />
Letter from Accountant (Opinion Letter)<br />
Balance Sheet<br />
Income statement (Profit and Loss)<br />
Notes to the financial statement <br />
Source and use of funds Exhibit*<br />
Change in Financial Position Exhibit*<br />
Schedule of jobs in Progress*<br />
The items marked with an asterisk (*) are helpful for analysis purposes, but are not necessary.<br />
<br />
References.<br />
You should obtain bank references, major supplier credit references and client<br />
references.<br />
<br />
<b>Evaluation of the Financial Statement.</b><br />
The first thing to understand in the financial statement is the method of<br />
accounting. The notes to the financial statement should include what method<br />
of accounting the company is using to recognize its income. Contractors generally use either of two accepted methods of accounting:<br />
•Percentage of Completion, which recognizes income on work as a contract<br />
Progresses.<br />
•Completed Contract, which recognizes income only when a contract is<br />
complete.<br />
<br />
Generally, percentage of completion is most common because it allows contractors to periodically recognize income on a current basis rather than irregularly as contracts are completed. When the completed contract method is used, it does not reflect current performance when the period of the contract extends through more than one accounting period. Contractors may, for tax purposes use the percentage of completion method for financial reporting and the completed contract method for tax purposes.<br />
<br />
In your evaluation you would check all of the references as follows:<br />
Bank references - Credit lines, availability, guarantees given<br />
Suppliers - Credit History<br />
Subcontractors - Payment performance<br />
<br />
<b>Analysis</b><br />
The following ratios that are given are generally considered norms for general construction in the U.S.. You should use them as guidelines. If a contractor does not fall within the guidelines there may be circumstances or explanation for the situation. On the other hand, if they do fall within the norms, it<br />
alone does not automatically qualify them to do the job.<br />
<br />
1. WORK ON HAND divided by: ADJUSTED WORKING CAPITAL= 20 or less<br />
<br />
2. ADJUSTED CURRENT ASSETS divided by: ADJUSTED CURRENT LIABILITIES =1.2 OR MORE<br />
<br />
3. CASH & EQUIVALENTS x 360 divided by: ANNUAL REVENUE = 7 DAYS OR MORE<br />
<br />
4. WORK ON HAND divided by: ADJUSTED NET WORTH = 20 OR LESS<br />
<br />
5. TOTAL LIABILITIES divided by: ADJUSTED NET WORTH = 2 OR LESS<br />
<br />
6. ACCOUNTS RECEIVABLE x 360 divided by: ANNUAL REVENUE = 60 DAYS OR LESS<br />
<br />
7. ACCOUNTS PAYABLE x 360 divided by: DIRECT JOB COSTS = 30 DAYS OR LESS<br />
<br />
8. SINGLE JOB divided by : ADJUSTED WORKING CAPITAL = 10 OR LESS<br />
<br />
9. SINGLE JOB divided by : ADJUSTED NET WORTH = 10 OR LESS <br />
<br />
DEFINITIONS<br />
WORKING CAPITAL. The working capital is the amount of current assets the contractor has in excess of current liabilities. When determining the <br />
working capital, review carefully what the accountant has classified as current. Generally cash or equivalents, receivables, inventory and <br />
under-billings are considered current assets. Prepaid amounts and cash surrender value of Life Insurance are not considered current. Use your judgment on the current status of notes receivable from sources such as employees, owners,or subsidiaries of the contractor to determine if they can in fact be<br />
converted to cash or consumed in the year. Current liabilities include: accounts payable, over-billings, current portions of notes payable and<br />
other current obligations such as taxes, payroll, etc.<br />
<br />
NET WORTH OR EQUITY/ADJUSTED NET WORTH. This is the total of capital stock and retained earnings less treasury stock and dividends. The number as given <br />
on the financial statement must be reviewed to see that the assets which are stated are hard assets. To arrive at adjusted net worth deduct items such<br />
as goodwill from the stated worth.<br />
<br />
WORK ON HAND OR BACKLOG. This value represents the estimated cost to complete for the current work that the contractor has on his books at this time. To<br />
determine this number take the total cost of all work and deduct the cost to date.<br />
<br />
ADJUSTED CURRENT ASSETS. This equals the current assets as listed by the accountant less items which you do not consider such as Prepaids or cash <br />
surrender value of life insurance. Also review Notes and accounts receivable from the Owner's of the Company or Subsidiaries.<br />
<br />
ADJUSTED CURRENT LIABILITIES. This equals the current liabilities as given on the balance sheet by the accountant and adjusted (Up or down) for other<br />
items which should be considered current.<br />
<br />
ADJUSTED WORKING CAPITAL. After reviewing the current status of the assets and liabilities to determine the adjusted Current assets and Adjusted Current<br />
Liabilities, subtract the adjusted Current liabilities form the adjusted current assets to find the adjusted working capital.<br />
<br />
ANNUAL REVENUE. The accountant will show this on the income statement(profit or Loss) and will be denoted by sales, income, volume or revenues.<br />
<br />
DIRECT JOB COSTS. These are the costs of the job exclusive of indirect job overhead and profit.<br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-20191432479640788192014-04-24T12:39:00.004-04:002014-04-24T12:39:46.841-04:00Warranty Self-Help and Liquidated Damages on spare parts<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>Frequently downtime on a product because of a defect is more than just an inconvenience, it can cause significant costs. I had a reader ask about how to manage against those collateral damages that may occur. I thought other readers might enjoy my response.<br />
<br />
Normally in a warranty section there will be what the obligations are if something is defective and there will also be warranty exclusions that will relieve the supplier of their obligation to provide the warranty remedies. Many suppliers may also want to have the remedies they provide to be the “sole and exclusive” remedies for a defective product. The “sole and exclusive” language is primarily used to avoid damages being claimed for the defective item. If the sole and exclusive remedies were for repair or replacement, it would also eliminate the ability to claim a refund or credit. When you see “sole and exclusive” the first thing you should check is the scope of that limitation. You do not want it to be written in a way where it will limit your remedies for breach if they fail to honor their warranty obligations. <br />
<br />
Warranty exclusions are language voids the warranty. Many suppliers will include very broad exclusions that can impact your ability to manage collateral damage from a defect. One of the most frequent exclusions is if there is damage caused by either self-help or the introduction of alternative parts where either of those actions causes collateral damage. In most contracts any collateral damage would also be consequential damages and may be excluded by the limitation of liability.<br />
<br />
How do you protect against the significant cost of down-time? What I might do if facing this situation is carry a small inventory of items that can be expected to fail or wear out. For items that are a large cost or have a lesser incidence of potential failure, I would require the supplier to stock those spare parts for immediate delivery. While there may be some carrying costs to do that, it will be cheaper than having extended downtime. I would also require the supplier to provide you with a list of generic parts that may be substituted in the event there is a failure by them to deliver spare parts on time. Then I performance language in the spare parts section that would include language that if they fail to stock and deliver such parts in a timely manner as needed, the use of those generic parts by you and the performance of self-help will not void your warranty. I would also seek to include an language that if the use of those generic parts causes any collateral damage, the supplier shall have the responsibility to repair or replace the existing product. If the product you have actually requires repair at a supplier location such as a repair depot, you might also require that they inventory a spare, working product that they will loan you while repair is occurring.<br />
<br />
He also asked if requiring the supplier to furnish commercial general liability insurance to cover collateral damage would help. Commercial General Liability (CGL) insurance policies cover specific types of perils. Normal CGL policies will not cover willful acts that self-help would be. Would it be possible to have them purchase additional insurance to cover it? While insurance companies issue unique policies they need to be able to price them. . Insurance pricing based on the average cost of the damages that would be sustained and the incidence or probability of the risk. It’s also not clear to me how they would be able to price it as there may be no history. Even if it was possible it might cost more that the other alternatives.<br />
<br />
In another forum there was a discussion about a related issue of whether there should be liquidated damages provisions in spare parts agreements. Here is the problem that I see with the rush to seek apply L.D. to spare parts contracts. How predictable is the failure of that part and what is the lead-time for the supplier to produce that part? Ones that require replacement as a result of normal wear and tear can be predictable and the supplier should be able to manage that. However, many times the requirements are not from normal wear and tear. The failure or a part on a piece of equipment may be caused by negligence of the operator or the customer's failure to maintain the piece of equipment. That's not something that's predictable. Is that a risk that the supplier can manage? Then consider how old is the piece of equipment? If the equipment is old it may no longer be in production where you could pull one from the production line to meet the need? If it's old it may need to be produced from scratch. To protect against the liquidated damages it would force the supplier to carry virtually all items in inventory. That of course is going to significantly drive up the cost of all the spare parts. <br />
<br />
My solution for that would be similar. The customer should carry an inventory of normal wear and tear parts, so time for replacement isn't critical. I would also require the supplier to carry a dedicated inventory of critical replacement parts, which if they fail would cause the equipment to not operate. For non-critical parts I wouldn't require an inventory as that only would add to the cost and timely delivery isn't needed as they not critical. I probably would agree to pay an inventory carrying charge on those critical parts. I would then seek LD only on their failure to deliver those critical parts. Lastly, as LD clauses will be read together with Limitations of Liability, I would want that LD clause carved out of the LOL, as many or costs you want to recover are not direct, they are consequential and may include lost profits.<br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-58954864955010978572014-04-13T13:26:00.001-04:002014-04-13T13:26:25.477-04:00Does continuing work void a termination?<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>Sometimes I’m amazed by some of the opinions expressed on on-line contracts forums. They do provide me with subject matter to write about.<br />
<br />
In the situation the individual said that the contract had been terminated by the employer but they continued to perform work. In his opinion he felt that the continuing of work voided the termination. That simply does not happen. Once a contract is terminated, it has ended, except for any obligations that were agreed to survive the termination. Once that contract has been terminated if there is continuing work being performed it needs to be done either under a new contract, or the work is being done without no contract in place. Creating that new contract could be as easy as writing a one page agreement that incorporates the terms of the terminated agreement for the remaining scope of work with a new period of performance. <br />
<br />
A further concern he had was the employer was seeking to go against some of the guarantees in the terminated document over two years after the agreement was terminated. For the employer to be able to do that you would need to check two things. First, since the agreement was terminated did the guarantees survive that termination.The second thing to be checked is what is the statute of limitations in that jurisdiction for bringing a contract claim. You see in many jurisdictions an action under contract has a two year statute of limitations. If that statute of limitations had passed, they may no longer have the right to make a claim against the guarantee. The guarantee only applied to the contract that was terminated. It did not apply to the additional work where there was no contract. Allowing additional work to be performed outside of the original contract does not extend the statute of limitations period on the terminated contract. <br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-21400624095728537112014-04-10T08:11:00.000-04:002014-04-10T08:11:04.652-04:00Multiple Documents – Does a later writing constitute a merger of documents?<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>In a discussion that I participated in an individual asked a question about when a contract starts. The problem in a bid some conditions were included. There was a letter of authorization based upon the bid. In a subsequent contract those bid conditions were missing. As this discussion included a number of issues I thought I would post my response here.<br />
<br />
What is the starting point of the contract. That issue will depend upon the LOA. If it has language making a firm commitment where it is accepting a clear offer of the other party to enter into an agreement. That creates a contract. <br />
<br />
If the Bid form used to solicit the bid that is being accepted included specific terms, and the bid conditions conflicted with those, the two documents would be read together along with the letter of authorization. The general rule in contracts is later writings in time have priority over prior documents. If the party that wrote the letter of authorization didn’t address the conflict, they were accepting the bid documents as modified by the supplier’s offer. If the LOA objected to the suppliers terms, no agreement would be formed as the letter would constitute a counter offer that needed to be accepted by the bidder <br />
<br />
The date the LOA is signed would be the starting date of the contract, unless something to the contrary is specifically included in the LOA. When you sign a contract after making a commitment under the LOA, normally what would be done is you would incorporate the LOA by reference into the agreement and the effective date of the agreement should be retroactive back to the date of the LOA. <br />
<br />
The second issue is what happens if the two are different where something included in the LOA does not get included in the contract. If you failed to incorporate the LOA by reference into the agreement or include what was covered by the LOA in the agreement, once again the general rule is the latest writing in time has priority in the event of a conflict. That means that the contract would have priority. As priority is applied only when there are conflicts, the later writing in time (the Contract) does not exclude non-conflicting language. <br />
<br />
If this question applied to the U.S. and was governed by the UCC, the UCC does not make a presumption that the mere signing of the later agreement presumes the intent of the parties for it to be the final and complete expression of the parties. Instead, the UCC makes it clear that both parties must evidence their intent for it to be the final and complete expression of both parties. I believe that in the U.S. even though the UCC does not apply to all contracts, courts would follow that same rationale. <br />
<br />
For it to show that the parties intend the new agreement to represent the final agreement of the parties, my opinion is you would need to have merger language in the new agreement specifically to that effect. An example of merger language is “This Agreement replaces any prior oral or written agreements or other communication between the parties with respect to the subject matter of this Agreement.” In the situation being discussed there wasn’t any merger language. <br />
<br />
Without a merger clause what you wind up having is two legal documents that are both in effect as they have not been merged into one. Those two documents would need to be read together to determine the scope of the agreement. The contract being the later writing in time<br />
has priority in the event of a conflict. If the omitted conditions conflicted with the terms of the contract, the terms of contract would prevail. If there is no conflict between the omitted item and the terms of the later contract, the two documents would be read together and those non-conflicting conditions would be part of the agreement.<br />
<br />
If you have multiple documents always be cautious in reviewing that later document for two reasons. The first as I pointed out here they can potentially exclude or have priority over what was previously agreed. Second always be cautious in writing contract amendments. Contract amendments are later writings in time and will have priority over the contract. Make sure those amendments properly reflect your intent in making the amendment. If the intent of the amendment only applies to one situation, make it clear in the amendment that it only applies to that situation. Otherwise you will be amending it for the entire contract.<br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-52756281259174577262014-04-07T09:05:00.000-04:002014-04-07T09:05:26.097-04:00Parol Evidence<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>“Parol Evidence” is evidence that exists outside the four corners of the contract. It can be things like discussions, messages, prior communications, quotes, and drafts that existed prior to the<br />
execution of the contract. <br />
<br />
The question is whether such parol evidence can be part of, or be considered, in interpreting the contract. In the U.S. the Uniform Commercial Code (UCC) does not make a presumption that the mere signing of the agreement presumes the intent of the parties for it to be the final and complete expression of the parties intent. The code and its notes also make it clear that both parties must evidence the intent for it to be the final and complete expression of both parties.<br />
<br />
If the agreement was silent on that intent, the UCC would allow parol evidence to be used. However, most contracts have what is called a merger language included in the contract. An example of merger language would be:<br />
<br />
<b>“This Agreement replaces any prior oral or written agreements or other communication between the parties with respect to the subject matter of this Agreement.<i></i></b><br />
<br />
If your contract includes similar language, all parol evidence will be excluded in interpreting the contract. The merger language meets the requirements of the UCC to exclude parol evidence by making clear the parties intend the agreement to be the final and complete expression of the parties.<br />
<br />
If there is important parol evidence such as conditions a seller included in a quote or prior document generated by the buyer, you need to ensure that those are either included in the agreement itself or incorporated by reference into the agreement. If you don’t, the merger provision will exclude it.<br />
<br />
Most language in a contract is there for a specific reason. Merger language is included to meet the requirements of the UCC needed to exclude the use of parol evidence.<br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-19393389361220339432014-04-04T09:05:00.002-04:002014-04-04T09:05:52.395-04:00INCOTERMS (Updated) April 3, 2014<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>If you negotiate international contracts you or your department should have a copy of the latest version of INCOTERMS or as a minimum their wall chart of the different terms. INCOTERMS is a publication of the International Chamber of Commerce that was started back in the 1930‘s and provides detailed information on the common delivery terms that may be used. <br />
<br />
The advantages of using INCOTERMS and specifying the specific INCOTERM delivery term and date of the INCOTERM publication is:<br />
1.In comparing quotes from different suppliers, if they quote a different delivery, you should take the cost differences into account in deciding who to award the business to.<br />
2.From a contracts perspective, when you include them in you agreement you are incorporating the following by reference into the contract.<br />
a.The responsibilities of each party from the suppliers dock to the buyers dock for all the activities involved such as loading, transport, preparation of paperwork, export, import, customs clearance, payment of duties and insurance. <br />
b.The point at which the risk of loss for the shipment transfers from the supplier to the buyer for each of the different terms. <br />
If you didn't use them, you would need to address all of the applicable portions of those in your agreement’s delivery section. <br />
<br />
Each of responsibilities has a cost involved, so when you use them it's clear which party is bearing those costs. That way you know what the true cost of the purchase or sale is and who is insuring the shipment against risk of loss or damage while in transit. <br />
<br />
I use the 2010 version. When I use them, I would do it by including language such as:<br />
“The delivery term shall be Ex-Works (as defined in INCOTERMS 2010) Supplier’s Dock in Taipei, Taiwan”.<br />
<br />
Like anything else, if a specific INCOTERM does not match your exact needs, you can still incorporate it and then modify it to meet your needs. For example:<br />
“The delivery term shall be Ex-Works (as defined in INCOTERMS 2010 except as modified below) Supplier’s Dock in Taipei, Taiwan. The modifications to INCOTERMS 2010 shall be ......”<br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-20199919636028840192014-04-03T11:26:00.000-04:002014-04-03T11:26:01.378-04:00Transfer of Title<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div><br />
On linkedIN, I responded to a discussion about where title should transfer. Title means the legal ownership in the product of equipment that is sold. In the past many companies would have sales terms where title would not pass until payment was made. Since title did not transfer if the seller wasn’t paid, they could bring an action of replevin to seek to recover the unpaid goods or equipment. As commerce has expanded internationally, pursuing an action of replevin to recover unpaid goods or equipment can be both costly and lengthy. You would need to get an order of replevin in your country and have that accepted by the courts of the buyer’s country. The days of companies having large inventories just sitting there are done. Goods delivered one day may be incorporated into products shipped to many countries in a matter of days or weeks. A third thing that makes withholding title until payment undesirable is GAAP (Generally Accepted Accounting Principles). Under GAAP you cannot claim the item has been sold until title has transferred. There are other forms of protection to help ensure you get paid beyond retaining title such as letters of credit, bank guarantees or bonds.<br />
<br />
The other concern that I have with the location where you transfer title after payment is when you are selling internationally you run the risk that it may be considered a local sale in the jurisdiction where the customer is located. If that happens it would mean that you need to be registered to do business in that country, become subject to local laws, and the profits that you will make on that sale will be subject to local tax. If it is considered a local sale you also have countries in which it is illegal to pay in anything other than local currency. That creates both currency exposure issues and the issue of repatriating that money. The local laws may further impact contract obligations such as warranties, or other requirements that must be met. <br />
<br />
While the parties to a contract have the right to specify the applicable law, jurisdiction and forum, that is for the interpretation of the contract. The laws you become subject to will always be based upon the location of the sale. If the sale occurs prior to export clearance, the seller is responsible to comply with that country's laws irrespective of the applicable laws selected for interpretation of that contract. A good example of that is the need to comply with export control laws. If the sale occurs "while the goods are on the high seas" meaning any point after the export frontier and before the import frontier, it becomes an international sale. For international sales unless the customer specified specific requirements that must be met, it becomes the customer’s responsibility to import the item and ensure its compliance with the local law. For international sales the seller is not subject to that local law. <br />
<br />
If you actually have the sale occur within the import country, that is a local sale. Irrespective of what the contract may say about the applicable law for the interpretation of the contract if you are conducting business within their country you are subject to their laws and taxes. The fact that GAAP considers it not to be a sale until title transfers could be used by local countries arguing that it is a local sale if title does not transfer until after payment is made (which is after it has been delivered into the customer’s country). <br />
<br />
In the discussion the individual’s customer wanted to have the product installed and accepted at their location as a condition of payment. That would clearly make the entire contract a local sale.<br />
The impact of that requested term would be that the Seller would be responsible for:<br />
1. Providing transit to the port of export.<br />
2. Clearing customs at the export country.<br />
3. Providing transit to the port of import.<br />
4. Clearing customs and paying any duties for import.<br />
5. Providing transit to the customer’s site.<br />
6. Arranging for riggers to place the equipment at the customer’s site.<br />
7. Installing the equipment at the customer’s site.<br />
8. Performing all work needed for test and acceptance.<br />
Since work would be performed at the customer location and the supplier has the responsibility for import, they would need to be registered to do business within that country. They would be subject to local laws and local taxes on the profits made from the entire sale. <br />
<br />
Another thing that impacts where title should transfer is custom’s clearance. Only the owner of the product or a representative of the owner (such as a customs broker), can perform export and import clearance of the product. That means that whoever holds the title determines the ownership and establishes who must perform customs clearance. If the supplier withheld title until after payment, and payment was conditioned on delivery and acceptance at the customer’s location, the supplier would be responsible for both export and import customer clearance as they still have title. <br />
<br />
While there are a number of options that could be available, here’s another option they might want to consider. Have the sale to the customer and have title transfer simultaneously after the goods have cleared export customs.<br />
In that the supplier responsibilities would be:<br />
1. Providing transit to the port of export.<br />
2. Clearing customs at the export country.<br />
<br />
The customer responsibilities would be:<br />
1. Providing transit to the port of import.<br />
2. Clearing customs and paying any duties for import.<br />
3. Providing transit to the customer’s site<br />
4. Arranging for riggers to place the equipment at the customer’s site.<br />
5. Installing the equipment at the customer’s site.<br />
6. Assuming the risk of loss or damage from the port of export until installed at the customer site.<br />
<br />
When a company sells a product and that requires installation and testing another solution would be to unbundle the two and price the two separately. To offer protection to the customer that the work will be completed and accepted you could consider offering a bank guarantee of bond. With the two separated only the local work to be performed could be subject to local law and taxes. You could either have the installation part of the work subcontracted to a local company and have someone oversea the installation, or you could have a team fly in to perform the installation. Whether that would be considered as conducting business in that location, would be decided by the government. If they did consider it local, the only thing potentially subject to local taxation would be the installation portion of the contract.<br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-26555157391709286652014-03-24T10:33:00.001-04:002014-03-24T10:33:24.448-04:00Change Management<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>There are many views of change management. In my thinking change management needs to be a closed loop process that documents all requested changes, irrespective of the source, documenting the ultimate disposition of those requested changes. <br />
<br />
Changes include:<br />
• Any request for substitution of required materials, changes of equipment, or personnel specified to perform the work.<br />
• Requests by either party to change anything that is required by the contract.<br />
• Requests or orders by the buyer to change the scope of the contract.<br />
• Third party initiated change requests such as engineer or architect initiated changes. <br />
• Potential changes contemplated by the contract.<br />
• Instructions made during performance of the work by authorized parties.<br />
<br />
To have an effective change management process all parties need to establish a single focal point<br />
that will be responsible for managing the change process so requests are acted upon in a timely and all information about the potential change is documented. Documentation of requested and agreed changes is required to deal with potential claims for additional costs or extensions of time.<br />
<br />
Documentation would normally by a log that includes:<br />
• The party making the request.<br />
• The date of request.<br />
• The reason for the request<br />
• The scope of the requested change or the specific section or document that is being requested to be changed.<br />
• The expected impact of the potential change such as cost (will it be an increase or decrease), and any impact to schedule (will it reduce or extend the schedule).<br />
• The urgency of the request including specific dates response is needed by, and the impact there will be if response if not provided by that date.<br />
• Notes on status of the request, follow-ups, actions required etc,<br />
• The disposition of the request<br />
• Date of disposition.<br />
• If agreed, I would also document the specific amendment, change or variation number that reflects the agreed change being made part of the agreement.<br />
<br />
Each request should be assigned a specific change request number for management and tracking of the changes. Change requests may be closed and new request numbers assigned when the scope of the change request needs to be broken down to multiple changes. If you have regularly scheduled meetings such as progress meetings, part of the agenda for that meeting should be a review of all open change requests, and their status. The failure to act on a change request in a timely manner may result in claims from the requesting party. <br />
<br />
In reviewing a request for a change a number of factors should be considered. The very first thing to consider is what does the contract say? <br />
1. Is this a change that already has a procedure within the contract already established?<br />
2. Is the request submitted following that procedure?<br />
3. Will the contract need to be amended to implement the change if agreed?<br />
Once you have reviewed how it fits within the structure of the contract, the change needs to be evaluated for its potential impact.<br />
If you are a supplier you would review a buyer requested change from several perspectives. What is the cost of the requested change? What, if anything, will be the impact to the schedule? Will the change create any additional risks to the work that might require a change the terms of the contract?<br />
<br />
From a buyer’s perspective the first question you should be asking is whether it is acceptable to the business. Is it acceptable financially? Is any schedule impact acceptable? Is it acceptable from a risk perspective? Is the proposed change acceptable from an operational perspective? When you consider the change from a financial perspective you would look not just at the price but any life cycle cost impact of the proposed change.<br />
<br />
Once you have agreement from the business that the proposed change will be acceptable for the business, it is the contract manager’s responsibility to ensure that the value you get from the change (increased value, equal value, or diminished value) is consistent with the pricing and other impact required for the change. Let me give you an example of what I mean.<br />
<br />
You are having an addition built on an existing facility. Your existing facility has Carrier air conditioning rooftop units. Your specification of the addition specifies the use of Carrier rooftop units. The supplier has made a request to substitute the Trane Air Conditioning units. As part of determining whether the substitution is providing you with equal value you would check:<br />
a) the price of the Carrier Unit versus the Trane unit to see if there was a difference in cost.<br />
b) The operating costs (energy consumption) of both units.<br />
c) Service or maintenance requirements of both units.<br />
d) Cost of service and spare parts for future service of both. <br />
e) Added cost of needing to maintain spare parts inventories for both types of equipment.<br />
As their price included providing the Carrier units to agree upon the substitution, the life cycle cost needs to be equal for the value to be equal. If the value is more, and there is no increase in cost you would probably agree upon the change. If the value is less, before agreeing to the change I would want a concession from the contractor so the value will be equal. Those concessions could take the form of a longer warranty period, a credit for the diminished value or whatever you consider to make it value equivalent. <br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0tag:blogger.com,1999:blog-3350494960151472132.post-45660656197709235552014-02-25T12:47:00.002-05:002014-02-25T12:47:50.938-05:00Update to readers<div dir="ltr" style="text-align: left;" trbidi="on"><br />
</div>Dear Readers<br />
<br />
In preparing to publish updated electronic versions of my book I have decided to eliminate the glossary of common terms from the book. Instead I will publish the glossary on the new "Glossary" page in my website. <br />
<br />
For those of you that have already purchased my book (I thank you and hope you have learned from it). I think this change will allow me to update the glossary on-line to make it a more robust tool that you can use. <br />
<br />
For any prospective book purchasers, this will have no impact. The glossary will remain in the hard cover version to help understand the book better and once electronic versions are published they will include links to both the List of Blogs and Glossary.<br />
<br />
The current glossary list has been been posted. To see it go to knowledgetonegotiate.com and click on the "Glossary" page/ <br />
<br />
Thank you,<br />
John <br />
<br />
<br />
Jackhttp://www.blogger.com/profile/04890630881239586638noreply@blogger.com0