Purchase Orders (p. 40-41)

Define a Purchase Order and its functions

A legally binding document prepared by a purchaser to describe the terms and conditions of a purchase.

It may function as an offer, an acceptance, a confirmation of an oral agreement, or a trigger for periodic performance (release) under an established contract.

Purchase Orders (p. 41)

Does a purchase order constitute a contract?

No, a contractual relationship only exists AFTER acceptance of the order by the supplier.

Purchase Orders (p. 41)

A purchase order will typically strive to protect the organization's interest in what areas?

• Fixed prices and qtys, including all taxes
• Right of inspection and rejection
• Warranty period if not specifically agreed upon w/ the supplier
• Right to make specification and/or design changes
• Indemnification against injuries or damages caused by the supplier's actions, and other legal considerations
• The suppliers right to assign the contract to 3rd parties or generate publicity
• Instructions regarding shipping and deliveries

Letters of intent (p. 41)

Define Letter of Intent

What is the purpose of a LOI?

A pre-contractual document used to express expectation of contract formation in the future.

The purpose is to gain time prior to the issuance of a more complete contract or purchase order

Letters of Intent (p. 41-42)

What situations would a LOI be used?

(4)

1. Reserving a place "in line" for standard equip. purchases when the formal purchase document requires more time

2. Basing volume discounts on future business (note that prices are usually renegotiated if actual volume does not satisfy the discount structure)

3. Encouraging a selller to stock items of interest to the organization

4. Providing the supplier with evidence to secure bonding

Letters of Intent (p. 42)

Define the 2 types of LOI's

1. Binding: a LOI is AUTOMATICALLY binding unless it explicitly states that neither party intends to be bound and that the memo is not a contract. (Even in the minutes notes of a negotiation meeting, the parties can be held to have a contract for the points they agree on)

2. Nonbinding: MUST include an explicit and clear statement that the LOI is nonbinding. (If both parties sign a LOI w/out proper authority then it is nonbinding, however the parties must prove that they have never treated similar letters prior or they will be considered "apparent authority" 

Contract/Agreement Types (p. 43)

Define Fixed Price Contract

Indicates that the price is set at a certain amount and is not subject to change

Contract/Agreement Types (p. 43)

Firm Fixed Price

(1 of 7 Fixed Contracts)

The supply manager agrees to pay a set price for specified goods or services

The supplier will be respsonsible for any costs over the fixed price

Contract/Agreement Types (p. 43-44)

Fixed Price with Escalation

(2 of 7 Fixed Contracts)

Include an adjustment/escalation clause which provides for upward or downward changes in price as a result in either material or labor costs.

Used when...

A long term contract is required

During periods of economic uncertainty

Market prices are erratic

Contract/Agreement Types (p. 44)

Fixed Price with Redetermination

(3 of 7 Fixed Contracts)

Used when the costs and amounts of labor or materials are unknown

Typically starts with a fixed price that is adjusted after production starts and costs become known

Contract/Agreement Types (p. 44)

Fixed Price with Incentive

(4 of 7 Fixed Contracts)

Provides the supplier with an incentive to control costs by establishing a target cost, a target profit, a ceiling price and a final profit formula.

The final profit formula allows the supplier to participate in any cost savings that accrue below target costs.

Typically the buyer and supplier share the savings at prenegotiated rates

Used in high-cost, long leadtime projects

Contract/Agreement Types (p. 45)

Fixed Price Level of Effort

(5 of 7 Fixed Contracts)

Price is fixed per unit level of effort when neither the work nor the results can be specifically defined prior to performance.

Parties agree on a specific level of effort at a specfic rate per unit of effort (such as a number of hours of testing at a fixed rate per hour)

Typically used for...

Research and Development Work

Lab Testing

Contract/Agreement Types (p. 45)

Fixed Price with Downward Price Protection

(6 of 7 Fixed Price Contracts)

The price may only be adjusted downward due to changes in cost

Maximum protection for the buyer

Contract/Agreement Types (p. 45)

Fixed Price with Remedies

(7 of 7 Fixed Contracts)

Provides for fixed pricing with an option to obtain reimbursement for extraordinary expenses, particularly when the contract is breached

Ex. The delivery date is extended, extra costs incurred by the supplier would be allowed

Contract/Agreement Types (p. 45)

Cost Reimbursable

(There are 6 types of cost reimbursable contracts)

Cost-reimbursement contract as pricing arrangements or contract types that provide for payment of allowable, allocable and reasonable costs incurred in the performance of the contract, to the extent that such costs are prescribed or permitted by the contract

Establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor cannot exceed without approval of the buyer.

Contract/Agreement Types (p. 46)

1. Cost plus a fixed fee

2. Cost plus percentage of cost

3. Cost plus incentive fee

1. Gaurantees the supplier reimbursement for allowable costs plus a negotiated fee

2. This is the most undesirable form for the supply mgmt. professional, as it provides no incentive to control costs. Higher costs lead to higher profit for the supplier

3. The parties establish a target cost. If the supplier is below the target, savings are shared b/w the 2 parties. If the supplier is above the target, the supplier's fees are reduced accordingly. (If costs significantly exceed target, the supplier can lose all of its fee but not its cost)

Contract/Agreement Types (p. 46)

4. Cost plus award fee

5. Cost without fee

6. Cost sharing

4. Here a "profit" element is included in a fee that is stated up front

5. This form is sometimes used in contracts b/w nonprofit organizations, such as research groups or universities, usually paying for overhead, remuneration of faculty and reimbursement of costs but no profit

6. This contract provides for the buyer and the seller to share the   costs and benefits.

Contract/Agreement Types (p. 47)

 Indefinite Delivery Contracts (IDC)

(There are 5 types of indefinite delivery contracts)

Indefinite Delivery Contract

This contract is employed when the buying organization is not sure of its productions or operations schedule, the timing of the service or the quantity of the material or frequency of services required

Contract/Agreement Types (p. 47)

1. Indefinite delivery/Indefinite quantity

2. Task order and delivery order

3. Time and material contract

1. These contracts provide that during a given period of time, the organization will place its requirements with a specific supplier. Quantities and delivery dates are unknown, but min and max quantities are usually specified

2. Under IDC's, the method of initiating a specific delivery order is a written or oral delivery order, if written the order is usually in the format of a purchase order w/out the terms and conditions associated w/ a purchase order because the order will be backed by a contract.

3. These contracts generally provide payment for labor and overhead at a given rate per hour, plus the sales price of parts, suppliers, and materials.

2. Under an indefinite delivery contract, the method of initiating a specific delivery order is a written or oral delivery order.

Contract/Agreement Types (p. 47-48)

4. Blanket Agreement

5. Requirements Contract

4. Is typially used to fulfill anticipated repetitive needs for supplies and services

5. Used to purchase requirements that are not yet known. Often, a minimum quantity is contracted for and an expected range of quantity or service is expected

(ex. a contract for the purchase of fuel for a fleet of vehicles)

Contracts/Agreement Types (p. 48)

Letter Contracts

A prelimenary written contractual instrument that authorizes the contractor to begin immediately performing the manufacturing or services requested.

Is typically followed by a definitive contract document

Contract/Agreement Types (p. 48)

Dealer's Agreements

Contract/Agreement Types (p. 48)

Service Agreements

(There are 4 types of service agreements)

Contracts/Agreement Types (p. 48)

1. Master Service Agreements

2. Professional Service Agreements

3. Maintenance Agreements

4. Performance-based Agreements

1. Contracts usually tied to maintenance of capital equipment

2. Contracts for legal, accounting, auditing or other types of professional services

3. Contracts for preventive maintenance or scheduled replacement or repair of equipment

4. Contracts for services in which outcomes or timelines are specified in the terms

Contracts/Agreement Types (p. 49)

Licensing Agreements

(There are 3 types of licensing agreements)

Examples of licensing agreements include software, patents, technology, and copyrights

Contracts/Agreement Types (p. 49)

1. Software (license contract)

2. General (license contract)

3. Technology (license contract)

1. Most software development organizations license the use of their product within limitations and timeframes. Required updates may or may not incur additional costs.

2. May cover permission to use logos, brand names, registered terminology and so forth.

3. Provide for the use of patented processes by others for an agreed upon fee.

Contract/Agreement Terms (p. 49)

Master Purchase Agreements

Often used in connection with the purchase of computers and MRO supplies.

These arrangements are negotiated for specific products which the buying company can then order as required against the pre-established agreement.

Contract/Term Agreements (p. 49)

Construction Contracts

Typically include project-based perfomance guidelines. Clauses rescpecting safety, environmental impact, social responsibility, milestone payments and penalties are normally included.

Normally written based upon established standards and zoning requirements, and appropriate laws within the geographic region.

Purchase Order Confirmations & Acknowlegments (p. 50)

When to use...

 P.O. confirmations and acknowledgments

When it is important to the supply manager to document that a contract exists.

The supplier's retuen of an acknowlegdment completes the contracting requirements of an offer and acceptance

Purchase Order Confirmations & Acknowlegdments (p. 50)

1. Unilateral Contract

2. Bilateral Contract

1. Formed when an offer (normally that of the buyer) is accepted through performance (normally by the supplier).

In such cases there is only one promise (the offer) and performance by the other party serves as the acceptance that creates the contract.

2. One in which both of the contracting parties make promises to each other. Such a contract is formed when an offer is accepted formally by the offeree.

Purchase Order Confirmations & Acknowlegdments (p. 50)

1. Exceptions to terms and conditions

2. Seller's exceptions to purchaser's items

3. Purchaser's exceptions to seller's items

1. When the suppliers terms differ from the supply mangagers and disputes arise, a determination will have to be made as to whose terms apply.

2. The supplier should notify the supply manger of any exceptions to the terms and conditions

3. The supply manager should notify the supplier of any exceptions to the terms and conditions.

Considerations in preparing obligation documents (p. 51)

Intellectual Property

Refers to various types of intangible personal property that have an inherent commercial value and are protected by the government in different ways. (e.g. copyrights, patents, and trademarks)

See page 51 for definitions of patents, copyrights, and trademarks

Considerations in preparing obligation documents (p. 52)

Licensing of intellectual property

Considerations in preparing obligation documents (p. 52)

Royalities

Considerations in preparing obligation documents (p. 53)

Consideration of domestic and international laws

(United Nations Convention for the International Sale of Goods)

(CISG)

CISG is a treaty governing international sales transactions. This law automatically applies when both contracting parties are in countries that have accepted CISG, unless the parties specifically opt out of the law's coverage.

*Supply manager should be aware of all governing laws in contracts

Considerations in preparing obligation documents (p. 53)

Consent to subcontract

Typically supply management reserves the right to prior approval of subcontractors hired by the prime contractor.

Not typical, but in some situations the buyer prohibits subcontracting all together, in the absence of such a reservation, however, contracts permit the supplier to subcontract as necessary to satisfy performance requirements.

Considerations in preparing obligation documents (p. 53)

1. Notice of Award

2. Payment Terms

1. Typically depends on the buying organization's policy and on the nature and value of the pending contract.  

Providing a notice of award is more typical for large value dollar or construction contracts but not for routine purchases.

2. Specified in the contract and typically negotiated as part of the contract development process.

Considerations in preparing obligation documents (p. 54)

Payment Terms

Considerations preparing obligation documents (p. 54)

Insurance and Indemnification

(Idemnify means to hold harmless, defend, and in some cases refers to being reimbursed)

In certain contracts the supplier is required to carry a certain amount of insurance and to indemnify the buying organization against injuries.

Most contracts specify the type and the minimum amount of insurance required (this is determined by the buying organization's risk managment)

Sound sourcing practice dictates that suppliers or subcontractors who come on the buyer's property have insurance coverage for damage and personal injury.

Consideration preparing obligation documents (p. 54)

Recommended coverage for suppliers and subcontractors

Considerations preparing obligation documents (p. 54-55)

Will the buying organization be liable if a contractor is injured at their site?

Liability depends on whether a court considers the injured contractor an independent contractor or employee of the organization.

****See page 55 for specific distinctions on how the court decides if the contractor is an employee or not****

Considerations preparing obligation documents (p. 56)

Termination and Exit Clauses

Considerations preparing obligation documents (p. 57)

Non-disclosure Agreements (NDA)

The recipient of confidential information must sign the the NDA before the information is disclosed.

The NDA will not cover any information disclosed prior to signing the contract.

Considerations preparing obligation documents (p. 57)

Gramm-Leach-Bliley Act (GLBA)

Allows commercial banks, insurance orgs, and brokerage and investment firms to consolidate.

Each org. must provide customers with documentation of their policy on nondisclosure at the onset of the relationship and annually thereafter.

They may disclose information to credit reporting agencies etc.

Considerations preparing obligation documents (p. 57)

Force Majuere

Translated as "a superior or irresistible force"

In contracts, this terms refers to major (and usually uncontrollable) events that excuse a party, in whole or in part, from performance or obligations.

Considerations in preparing obligation documents (p. 58)

What are the four primary U.S. laws dealing with antitrust?

Sherman

Clayton

Federal Trade Commission

Robinson-Patman Acts

***For more information on Japan, UK, and Europe see pg. 58)

Considerations preparing obligation documents (p. 58)

Homeland Security Presidential Directive (HSPD-12)

Was established in response to 9/11.

It establishes mandatory, government wide standard for verifying, and providing indentification badging credentials to its employees and contractors who routinely work in federally controlled facilities or have physical access to federal information systems.

Considerations preparing obligation documents (p. 58)

Assignability Provisions

Assignment refers to a transfer of one's rights and/or duties under a contract.

An example of a typical assignment caluse:

"Supplier shall neither assign its performance under the purchase order or any part thereof, nor delegate any obligations hereunder without prior written consent of Purchaser."

Considerations preparing obligation documents (p.59)

Source code escrow accounts

When acquiring software rights to use it, the supply management professional may request an escrow account. The escrow agent (an independent 3rd party) physically stores the property (e.g. source code) and has title to it and authority to release the code under specified conditions.

Such an arragement can be critical to the buying organization's continued use of software in the event the supplier goes out of business, has financial difficulties or discontinues support of the product.  

Considerations preparing obligation documents (p.59)

Protests

Suppliers may protest if they believe they have been unfairly treated.

In private sectors the process is informal and involves discussion b/w the supplier, buying org. and possible managers from each.

In the public sector the process can be more formalized. A hearing board may listen to the supplier's complaint and decide if an appropriate rememdy is required. During the hearing the award may be held abeyance until the supplier's protes is ruled upon.

Public sector supply management professionals are advised to consult with legal counsel with regard to proper handling of a bid protest.

Considerations preparing obligation documents (p. 59)

Claims

Considerations preparing obligation documents (p.59)

Limitation of Liability

Suppliers will frequently try to limit their liability for damages and loss in the event of warranty claims or other breaches of contract.

Such limitations may restrict the buying organization's rememdies or the amount of damages recoverable in a lawsuit.

One of the most common limitations is the requirement with regard to warranty claims that the supplier be permitted to repair or replace defective goods. Under such a term, the supply manager who chooses to assert breach of warranty claim is not permitted to cancel the contract and seek damages for any loss.

Considerations preparing obligation documents (p. 60)

Waiver of consequential damages

A common limitation of liability may be found in the supplier's disclaimer of consequential damages.

Consequential damages are special damages unique to a given situation. Distinguished from incidental damages, such as inspection, transportation and replacement expenses.

Consequential damages relate to lost profits, lost sales and injury to property or persons.

Considerations preparing obligation documents (p. 60)

Collusive Offers

Considerations preparing obligation documents (p. 60)

Suspension and Termination Clauses

Protect the buying organization against unforseen funding problems, delays on the part of internal personnel or changes in management thinking.

A suspension clause allows the buying org. to stop all or part of the work under the contract on a temporary basis. The assumption is that the work will be restarted some time in the future.

In the U.S. public sector, suspension (or "default") has a somewhat different meaning; it applies when a supplier is found to be in noncompliance regarding performance of the contract.  The suspended supplier must correct it performance within a specified period of time.

Considerations preparing obligation documents (p. 60)

Reservation of rights

The buying organization should reserve all rights to contract performance in accordance with stated terms and conditions.

A "modifications" clause prohibits the supplier from making any changes in the contract without the consent of the buying organization.

A "waiver" clause may protect the buying organization against all possible loss of contractual rights in the event it inadvertently fails to enforce certain rights.

Considerations preparing obligation documents (p. 60)

Estoppel

The doctrine of prmoissory estoppel holds that if one party makes a promise, even orally, they cannot renege on that promise if the other party has acted in reliance on it.