Contract Formulation

Contract Formulation - Part B

What are the considerations in preparing and forming a contract? Especially quality and work control, pace and compensation

Continued from Issacon #1412 - Part A

Caveat

Note: We are not lawyers, we cannot provide legal advice

· Legal texts should be reviewed by legal experts

· Knowledgeable in the law of the relevant jurisdiction

Control of the work - 1

· The acquirer's control-of-the-work variable

· Is the extent to which the acquirer wishes to exercise control

· Over the work to produce the product

· For example

· Control over a "time-and-materials" contract is complete

· Control over a fixed-price contract is minimal

· If the acquirer wishes to avoid any supplier claims for "interference"

Control of work - 2

· The supplier's control-of-the-work variable

· Is really the converse of the acquirer's control

· And is the extent to which the supplier has control

· And hence responsibility

· For the performance of the product

· For example

· The supplier's control, and interest in control, is minimal

· In the case of a "cost-plus" or "time and material" form of contract

Quality control

· The quality control variable

· Is the extent to which the acquirer takes responsibility for quality assurance, control and testing

· For example

· Quality control rests almost entirely with the supplier

· In a fixed price contract

· Although inspection and testing may be a condition of interim progress payments

Pace of work

· The "pace of work" variable

· Depends on whether the rate of production is optimized

· For example

· If the target delivery date is set sooner

· Than an optimal program of work suggests

· Then the work must be accelerated

· By applying additional resources, or overtime

· Either may imply additional cost to perform

· And possibly additional risk due to increased complexity in coordination

· If the work is prolonged

· Extra costs result from idle capacity

Form of compensation - 1

· The form of compensation

· Is not so much a variable

· As it should be a reflection of the other variables

· However, it does have a range of possibilities

· Example 1

· If the scope requirements, or scope of work, are well defined

· A fixed price is in the best interests of the acquirer

· And the best opportunity for efficient operation and for profit by the supplier

Form of compensation - 2

· Example 2

· If the conditions suited to a fixed price form of contract are not met

· A fixed price contract may well end up being more costly to "retro-fix"

· Or even end up in failure

· Example 3

· The software industry is rife with failed projects

· Due to the application of inappropriate forms of contract

· Not corresponding to the degree of scope definition

· To the detriment of both acquirer and supplier

Form of compensation - 3

· Example 4

· A modified form of fixed price contract is possible

· Where provision is made for limited scope variations

· By incorporating one or more unallocated sums

· For use at the discretion of the acquirer

· Such a contract may or may not include incentives

· Example 5

· Time and materials compensation is most appropriate

· Where the extent of the requirements are not yet known

· Or are highly uncertain

Supplier motivation - 1

· The supplier's motivation variable

· Is the extent to which a supplier is motivated to perform efficiently

· Example 1

· Motivation is high in any "fixed-price" or "lump-sum" contract

· It offers the opportunity to increase profit

· By performing most efficiently

· Providing that quality is not compromised

Supplier motivation - 2

Example 2

· Supplier motivation is probably highest

· In the supply of standard off-the-shelf products

· Since this provides the safest and quickest return to the supplier

· Standard products may or may not meet the acquirer's needs

· And may still require some degree of customizing

· But this solution is usually less risky to both parties

· Compared to an all-custom developed solution