22 Dec Procurement Tip: The Secret to a Fool-Proof Contract
Today’s procurement tip is on how to write a fool proof contract where both the client and supplier come out winners.
There are many methods proposed to write effective contracts. The approach is usually based on finding the perfect balance of pricing, incentives, distribution of risk and setting quality control measures. As contracting strategies have changed over the years, the process has become complex and technical—often requiring specialized education to master. But despite the time and effort put into the development of contracting, there is little evidence to show it is the solution we have been waiting for. Surprisingly, what we have learned is that the contract itself is not a critical component to project success. In fact, the contract becomes irrelevant when buyers identify and utilize an expert supplier. As simple as the solution is, there are many misunderstandings and fallacies of what contracts are able to do. In this article we will cover the top three contract fallacies and some tips on how to identify and utilize an expert supplier.
Top Three Contract Fallacies
The base reasoning behind the emphasis of contracts is that poor performance comes because the supplier is “failing to perform” in some way. The supplier’s failure to perform has been pinned on everything from an adversarial relationship, politics, lack of motivation, and even plain laziness. In any case, the contract is thought to correct these issues by providing the right incentives both negative and positive which will force the supplier to perform either by fear of the penalty or desire for the reward. There are three main fallacies in this line of reasoning.
Contract Fallacy #1: The Supplier is the Problem
When project risk and deviations are measured and tracked the results are always the same. Most issues (>90%) are caused by client stakeholders’ issues such as change orders, inaccurate requirements, flawed designs, and internal limitations. The contract will not be able to protect the client from themselves. However, if an expert is hired, the expert will be able to minimize the client’s issues through proper preplanning and risk mitigation.
Contract Fallacy #2: The Contract provides Control and Safety
A contract only gives the illusion of control and safety. Just think of how many projects are overbudget and delayed; surely no contract would allow that, yet it happens all the time. Any experienced professional will tell you that if you have to read your contract after it is signed, you are already in trouble. Contractual disputes cost a lot of money for both sides and add no value to the project. In cases where contractual disputes do occur, no one wins. The best contract is one that is signed, and never used again. If a client tries to enforce the contract, it will never go well because vendors will:
- Argue that the inability to meet the requirement is partially or fully due to actions of the buyer’s stakeholders. Since the client stakeholders cause the most issues, the supplier will most likely win. Additionally, contracts are technical. The vendor is the expert at the project’s technical aspects, which means they usually won’t make a mistake in that area. When it comes down to it, the one most likely to “win” a contractual dispute will be the vendor.
- Attempt to artificially meet the minimum requirement of the contract as to avoid any penalties, at the expense of true performance.
- Pay the penalty and make it up later. At the same time to minimize their risk, the supplier will forgo the use of all expertise, instead they will direct all decisions to the buyer, forcing the buyer to act as the expert and accept all accountability.
In any case, the buyer and supplier will both lose—which is why the idea that the contract provides any control and safety is an illusion. The contract has no real power when it comes to enforcing performance. The contract at best can only be used as an inefficient tool for damage control.
Contract Fallacy #3: The Contract can Make an Nonexpert into an Expert
What governs a supplier’s performance is not the contract but the capability (expertise) of the supplier. No matter what kind of incentives are written in a contract, a supplier will not be able to perform above their capability. There is no trick to it, only expertise can improve performance. In other words, a contract cannot turn a nonexpert into an expert. Nonexperts will deliver nonexpert results and experts will deliver expert results. Buyers should not rely on contracts to determine performance, but they should focus on identifying the capability of the suppliers they are hiring.
The Solution to Contracting: Hire an Expert Supplier
First, avoid spending a lot of time on writing a contract. Remember, it has no control or impact on the performance of the project. Any attempt to use traditional contracting methods of control, incentives, penalties, collaborations or negotiations will only impede the buyer’s ability to identify and utilize the supplier’s expertise.
Second, identify and hire an expert. To learn how to properly do this see the following procurement tips:
Third, perform a clarification phase before you award the project. The clarification phase’s objective is to force the supplier to work through the planning and risk mitigating actions an expert would naturally do. This would include providing deliverables such as:
- Project performance metrics, with an explanation as to why they are realistic.
- A milestone schedule and detailed schedule (inclusive of all actions of stakeholders involved).
- Supplier expectations from the client’s stakeholders throughout the project.
- Project unknowns with assumptions and estimations.
By having the supplier explain their plan and show how they will track it throughout the project, the client can have a greater assurance of the supplier’s expertise and the level of performance they can expect to receive from the supplier.
A Process that Utilizes Expertise Instead of a Contract
The Best Value Approach (BVA) is a procurement and project management process which identifies and utilizes experts. Through the BVA process a structured method is used which eliminates all traditional contracting methods and focuses on facilitating the expert in planning and executing the project.
To learn more about the Best Value Approach and contracting see:
- Free membership for latest tips and news: https://pbsrg.com/membership/
- For latest books, events, and licensed partners: https://pbsrg.com/resources/
- Latest BVA journal publications: www.cibw117.org/
- Annual Best Value Conference in January: https://bestvalueconference.ksm-inc.com/
- Latest presentations and videos: https://www.youtube.com/channel/UCxBi26nXLDTqG4ZRV6p0iiQ