Acceptance

The concept of acceptance is a key part of procurement agreements. Acceptance by a Buyer is usually linked to two other aspects of the contract: 

• Acceptance by the Buyer normally triggers the Buyer’s obligation to make payment. 
• Acceptance also extinguishes the Buyer’s right to reject products or services as defective and in many cases serves as the point at which the Supplier’s warranty obligations may commence. 

Acceptance is also a key issue for Suppliers from a revenue accounting perspective. The Supplier may not be able to claim a sale for revenue as long as the Buyer may return the product or services.

Once the product or service has been “accepted” the Buyer’s rights shift from being able to return a product or have a service be re-performed as defective to having corrections be performed under whatever warranty or service commitments exist.

 

As acceptance is important, many contracts will establish acceptance criteria. Products or services must meet acceptance criteria for the work to be considered complete. Acceptance criteria should be detailed, tangible, objective, unambiguous, and objectively measurable.  If acceptance criteria are established, they become the basis for the Supplier to declare that the Product or Services have been provided and they are due payment. The failure to meet the acceptance criteria allows the Buyer to withhold payment. On-going failure to meet the acceptance criteria may be grounds for termination of the agreement.

   

Completion criteria are the basis for declaring the completion of individual activities/tasks or statement of work itself.  Completion criteria should be detailed, objective, written conditions, stated in the contract, that the Supplier is required to meet to satisfy their obligation(s) to Buyer. A contract may spell out a number of tasks that must be completed and the completion of those tasks may be described as a milestone.

The completion criteria may be the successful completion of all milestones.

To manage performance its important to link acceptance criteria and completion criteria to payment. For example:

• Final payment would be tied to acceptance of the completed Product or Service. 
• Interim or milestone payments would be linked by to the completion and acceptance of all the tasks that make up the milestone. 

If the measurement of the value of the work performed may not be exact, payment term may provide for money to be retained until the project's overall completion criteria are satisfied. 

Don’t tie payments to dates without any link to the completion of the individual tasks or milestones, as you lose that leverage in terms of getting the Supplier to perform. You get more attention when you owe them money, versus the Supplier potentially owing you and you having to chase them to get the work completed.