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.

Negotiation - Thoughts on Acceptance

Acceptance is an important concept in purchase contracts. Except for fraud, it is the point at which you can no longer return the product as defective and get a refund and must look for all protection under the warranty provisions. Acceptance may also be the activity that triggers when Buyer’s responsibility for payment commences or when the warranty period starts.

The Supplier’s motivation under acceptance is to make the term short, for several reasons. Their primary concern is financial, as under most revenue accounting rules they can’t take credit for the sale as long as you can return the product. Once there is acceptance, you no longer have the right to return the product for a refund. Other motivations may be more sales motivated such as to ensure that the sale occurs so they get their revenue, commissions etc.

In negotiating acceptance the Buyer should always allow for a sufficient period for the product to be received and thoroughly tested to ensure compliance with the specifications or testing and acceptance according to the agreed acceptance procedure. If you were purchasing software or equipment you might, as part of the acceptance have a specific acceptance and test requirement that must be met so you can ensure that it is operating as promised under all conditions, loads, etc.. Since acceptance is usually expressed as a time period after delivery, in negotiating the time period for acceptance, you need to take into account the delivery point, any in-transit times and other supply chain times prior to your receipt and ability to test the product.

In acceptance terms production Buyer’s traditionally also want to reserve the right to reject products by lot. The rationale in negotiating this is simple. You paid the Supplier to ship you quality product meeting the specification. If a reasonable sampling of any shipment highlights a problem, you should be able to return the entire lot to the Supplier. Without lot rejection rights, you would be forced to screen out all of the bad products from the shipment at your cost, and then only return the actual bad parts. Since the Supplier wasn’t supposed to ship you bad products in the first place, why should you assume the added cost to screen out the good from the bad? If a Supplier doesn’t want to provide you with the right to reject by lot, offer them the alternative to pay you for all your costs associated with the screening. The only reason why you have to screen out the lot is because they had problems with their final inspection and allowed bad product to be shipped.

Suppliers may want to propose a no problem found or no defect found charge as a means of protecting them against Buyers that would reject a product lot simply to manage their inventory levels or to delay the payment.I would never agree to a No Problem Found charge unless the Supplier agreed to pay me for every time they shipped a bad product that had to be returned. Both companies should have quality control programs.The Supplier should have a quality control program to prevent defective product from being shipped to the Buyer. The Buyer should have a quality control program to prevent good product from being returned to the Supplier as defective. If the Supplier wants the Buyer to pay them every time the Buyer returns a good product as defective because of the costs they incur in inspecting and testing the product and finding that it is good, shouldn't the Buyer want the Suppler to pay them the costs the Buyer incurs when the Supplier ships defective product.Those Buyer costs could vary from simply testing and returning the product, in a situation where the buyer does no inspection could include the cost of re-work to remove the defective product the Buyer is building In both cases the party is incurring additional cost as a result of a problem with the other party's quality system.