Five Essential Criteria for a Successful Procurement Contract

Written by Tina Wong Woan Chuen, DPSM

by Tina Wong Woan Chuen, DPSM

Five Essential Criteria for a Successful Procurement Contract

Written by Tina Wong Woan Chuen, DPSM

by Tina Wong Woan Chuen, DPSM

by Tina Wong Woan Chuen, DPSM

A procurement contract is a document detailing the legally-binding agreement between a company (the buyer) and supplier who is promising to sell of products and/or services with detailed technical specifications and to fulfill the terms and conditions outlined in the agreement. The buyer in return is obligated to acknowledge the goods/ or service and pay for liability created.

The purpose of procurement contract is to ensure the rights and duties of each party to contract are provide to ensure that it obtains the right quantity of input, of the right quality, at the right time, while minimizing cost within budget.

Procurement Contract starts from stage of preparing procurement process plan base on project management plan and budget developing specifications to contract closeout, Indicate actual delivery date of goods/works/services (or agreed milestones), written reminders to contractors/consultants where there us a default. (Including penalties), file response from contractors or consultants. Record agreed changes in delivery dates and penalties exacted and actions required by both parties. All these actions, in aggregate, provide measurable control on contract performance.

The picture below shows the clarification between two parties before the contract signing.

contract signing

Monitoring and Control of Performance

Once the contract has been awarded, the responsible procurement officer to collect information related to those aspects of performance that, when measured, will describe the progress of the work. The reason for observing, collecting information, and measuring progress is to have a basis for comparing actual achievement with planned achievement in order to exert control. Each party must direct its attention internally to ensure that it is fulfilling its own obligations, and externally to ensure that the other party is fulfilling its obligations.

Observing and collecting information control point should be directed at some general control points. These include cost control, delivery schedule control, materials compliance with project specification, term of reference , statement of work (quality assurance and control), compliance with terms and conditions, paperwork requirements (e.g. product of country of origin, company project reference, product test report and etc), and administrative aspects of the performance.

There are two different monitoring methods: direct observation and indirect observation.

Commonly construction project of work readily subject to direct observation. The construction manager or project inspector goes to the project site and do visually inspects the work, comparing observation to the construction project specifications and drawings to the schedule to determine the progress of the job. Sometimes, project site required Non-destructive testing (NDT) process for testing of evaluating materials, components or assemblies part. Procurement officer will assign the third party to do the test. In these cases, direct observation should be replaced by indirect observation.

Receipt, Inspection and Acceptance

Receiving documents provided by supplier or contractor. Delivery order of goods or service slip is a transition in the Purchase – to – Pay process from purchasing activity to a payables activity. All purchase order issue by purchasing department must be “received” to release payment to the supplier. Project site or warehouse receiving staff must determine if the products or services received are acceptable and conform to the terms and conditions of the purchase order or contract.

1. Goods Receipt and Inspection

When an item is received from supplier at project site or warehouse, receiving staff will check with the goods in accordance with the specification, terms and conditions provided in the Contract or purchase order.

2. Services Receipt and Inspection

Receiving staff will written confirmation that the required services have been delivered on the time and of an acceptance quality.

3. WorksAcceptance or Rejected

At the Project site, once the sub-contractor has done the work on site, the project engineer has to determine the work and report that timely construction is based on project specification of acceptable standard. The engineer has to ensure that the site work complies with drawings and project specification, and thereafter the project engineer has to endorse on the “QA Receiving Inspection Acceptance”, referencing the items number being accepted on the front (preferred) or back of the sub-contractor work order or service slip, and recording accepted quantity.

Change Management

A change management can be defined as a variation or modification to the original contract. This might be due to a change in the timing of the work, quantity of the work, and the change in design and different in specification drawings and the work is carried out at job site.The procurement officer will includes avoiding unnecessary changes as well as incorporating necessary changes into contract on that all parties comply with, so that the contractors entitled to a variation to the contract and claim on additional compensation.

Contract Termination

When a procurement officer negotiates a contract with supplier on the terms of the contract, specific details must be discussed on the materials specification and quantity to be purchased, pricing, discounts, delivery schedule and materials packing instructions. The contract will also contain clauses to determine if liquidated damages should apply in accordance with contract and stipulate on what the procedure is to termination the contract for certain reasons.

For example, supplier delivered of the materials is did not meet up the project quality or product specification or the deliveries are never on time, and affected the company production schedule or project schedule, the procurement officer has to decides to terminate a contract for a reason.

Alternative Dispute Resolution

Alternative dispute resolution is one way to seek legal advice from company lawyer and methods of resolving disputes or conflict other than transitional litigation. The purpose is to ensure that the procurement officer is aware of the legal rights and responsibilities.

Negotiation is a process where two parties in a conflict reach a settlement between themselves that they can both agree on. Each party should seek a legal advice by lawyer before settling down the matter, so that they are aware of their rights and responsibilities in respect to the dispute they are willing to solve.

Arbitration refers to the process the decision is made by a third party. Arbitration commonly use in commercial disputes, particularly in the context of international commercial transactions.

The arbitrator arranges a meeting between the parties to determine what the issues need to be resolved. The arbitrator will request both sides written submission present information and evidence to supports their case. Once the arbitrator has all the evidence, the arbitrator will consider the matter and issue and make decision that binding upon the parties. It can often take some of time to receive and arbitration decision.

Financial Management and Payment

The contract for every job you take on should include a payment schedule; that is, a net amount or percentage of the total price that you receive as a draw in advance, or upon billing for each milestone of the job’s progress, such as slab, rough, trim, etc.

Payments need to be made in line with the contract terms. A payment made to a supplier may be in advance, or with credit term of 30 Days from invoice date, or partial.

1. Advance Payment

Payment in advance is simply a payment that is made ahead of its normal schedules, such as paying for a good or service before you actually receive the goods or service.

2. Credit Term of 30 Days from Invoice date

These imply that the net payment is due in 30 days after the invoice date. For example, if the invoice was dated 01 November and then the payment would be expected before 29 November. This payment term is commonly used in the construction industry.

3. Partial Payment

A partial payment is based on the acceptance of a product or service. Normally practices in the market is amount that is half of the actual payment, usually a fixed in percentage of the actual amount that be paid. For example, the total amount is S$ 10K, will fixed the percentage is first payment in 50%, second payment 30% and Final payment 20%.

Performance Securities

Where required these should be provided by the supplier/ contractor in a timely manner. These should be returned within 30 days of final acceptance (contract completion as per contract terms), including any warranty or maintenance period.

Contract Completion and Close Out

Contract closeout activities are straightforward especially for small value contract and purchase order. However in high value contracts involving progress payment and / or retention payment, the procurement officer ensures that all contractual obligations have been fulfil by supplier or contractor and that residual obligations – such as all product or service have been provided, documentation in the contract file shows receipt & formal acceptance of all contract terms, there are no claims or investigations pending, any property provided by the Project is returned & discrepancies resolved, warranty matters are resolved and defect period elapsed, any necessary audit has been satisfactorily finalized, final invoice has been submitted and paid, and clearly defined in terms of responsibility, liability, procedures and timeframes.

Conclusion

With procurement contract, procurement officer and project team have easy clearly determined the contractor or supplier scoop of work and product specification. As for maintaining an easy flow of the agreements, procurement contract has been an effective and efficient tool.


References

Calgary Legal Guidance. (2018). “Negotiation, Mediation, and Arbitration”. Retrieved from http://clg.ab.ca/programs-services/dial-a-law/negotiation-mediation-and-arbitration, accessed 18/12/2018.

Chew JinSwee, DPSM. (2018).”Essential Strategies for a Successful Procurement Negotiation.” Retrieved from SPIMM: https://sipmm.edu.sg/essential-strategies-successful-procurement-negotiation/, accessed 18/12/2018.

James Vashiri (2010). “Contract Management”. Retrievedfrom https://www.slideshare.net/ifad/contract-management-6788790, accessed 18/12/2018.

MaTheresa Napalinga, DPSM. (2018). “Key Techniques for an Effective Supply Contract”. Retrieved from SIPMM: https://sipmm.edu.sg/key-techniques-effective-supply-contract, accessed 18/12/2018.

Margaret Rouse. (2016). “IT Procurement Contract”. Retrieved from https://whatis.techtarget.com/definition/IT-procurement-contract, accessed 18/12/2018.

Martin Murray. (2018). “Contract Termination”. Retrieved from https://www.thebalancesmb.com/contract-termination-2221030, accessed 18/12/2018.

UN Global Marketplace. (2018).“UN Procurement Practitioner’s Handbook”. Retrieved from https://www.ungm.org/Areas/Public/pph/ch03s10.html, accessed18/12/2018.

About the Author: Tina Wong Woan Chuen has substantive years of experience in the field of procurement, specifically in the construction industry. She is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). Tina completed the Diploma in Procurement and Supply Management (DPSM) course on December 2018 at SIPMM.

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