1. Diploma in Procurement & Supply
Negotiating and Contracting in Procurement and Supply
Session 1
Documentation and Types of Contractual Agreements

2. Session Learning Outcomes
On completion of this session you should be able to:
Explain the documentation that can comprise a commercial agreement for the supply of goods and services
Explain the main types of contractual agreements made between customers and suppliers
Syllabus references 1.1 and 1.3
This session addresses learning outcomes 1.1 and 1.3. When you have finished working through the session it is suggested that you review these learning outcomes to ensure you feel comfortable with the content. In particular, should be able to answer assessment questions on any topic you have covered.
Syllabus reference 1.1 is dealt with in the CIPS study text Chapter 1 and 1.3 in Chapter 3.

3. The nature of commercial agreements
Commercial agreements, between buyers and suppliers, are commonplace in procurement and supply
Can be oral or written agreements
Written agreements can involve a wide range of documentation
It goes without saying that some understanding of the basic principles of contract law is essential when contracting with suppliers. Contracts are legally binding, whether verbal or written (NOTE – contracts for the purchase of land/property, in England only become legally binding when contracts have been exchanged, but all other contracts between purchasers and suppliers are no less legally binding if agreed orally).
The recognised tenets are:-
Offer
Acceptance
Consideration
Capacity
Intention.
This will be dealt with later in the study programme.

4. Documentation used in commercial agreements
Specification
Key performance indicators (KPIs)
Request for quotation (RFQ)
Invitation to tender (ITT)
Contract terms and conditions
Schedules
These are the key documents which are most frequently encountered in commercial agreements. These will be dealt with over the next few slides.

5. Specification A description of requirements
Communicates requirements to both stakeholders and suppliers
Provides a means of measuring and evaluating performance
Helps to minimise risk
Detail required will vary depending in the complexity of the requirement
A specification is a key requirement of every contract
A specification is required for every contract/order. Without one the supplier will not be aware of what the purchaser requires. Importantly, in the event of a dispute, the court will wish to see what the purchaser required the supplier to deliver.
The length and detail of the specification will tend to vary depending on the value and complexity of the goods/services required.

6. Specification approaches
Input-based specifications
Also known as conformance specifications
Emphasis on the purchaser prescribing the solution, ie for the supplier to deliver precisely as prescribed
Limits potential innovation from the supplier
Places the ‘execution risk’ with the purchaser
Output-based specifications
Also known as performance specifications
Emphasis on the purchaser describing the desired performance levels required
Supplier is free to decide ‘how’ to deliver (but the solution must ‘perform’ as determined by the purchaser
Allows scope for supplier innovation
‘Execution risk’ is the supplier’s
Outcome focused specifications
Purchaser describes the intended outcomes required
Encourages highly innovative solutions from suppliers
‘Execution risk’ is with the supplier
Different solutions (from bidders) proposed might be difficult to compare and assess
There are three broad approaches to writing a specification.
With an input-based specification the purchaser effectively prescribes to the supplier precisely how the contract must be delivered. There is no scope for supplier innovation and, provided the supplier delivers what has been specified, if there are problems with what the supplier executes it is likely to be the purchasers fault (as they told the supplier how to do it).
With an output-based specification the purchaser defines the performance required and the supplier works out the best way to achieve this.
With an outcomes based specification (quite often used in the public sector of ‘social care/welfare’ contracts) the supplier defines the overall outcome they are seeking. How it is achieved is entirely down to the supplier. The main problem with this approach is evaluating the proposals from different tenderers.

7. Specification - summary
The specification is a key document
Specifications are legally binding once the contract is agreed
The specification must focus on addressing business and stakeholder needs
Everything that might incur a cost for the supplier must be included
Often the best specifications have elements of inputs, outputs and outcomes
It could be argued that developing the specification is the most important of the sourcing process. It will have a significant impact on the types of suppliers who are capable of delivering the contract and the leverage the purchasing organisation might have in the market. For example, at the extreme, if the purchaser specifies a specific brand the supply market will comprise only the brand owner and, in which case, the purchaser will have limited leverage.

8. Key performance indicators
Any performance standards, relating to delivery, must be communicated to suppliers (before reaching agreement) as part of the contract documentation
Key performance indicators (KPIs) provide direction for the supplier
KPIs must relate focus on the purchaser’s key requirements
All performance standards must be communicated to bidders so they can determine the likely costs of contract delivery.
KPIs must focus on what is important to the organisation – typically KPIs focus on cost reduction, quality, innovation etc.

9. Main methods of ‘going to the market’
Open tendering:-
The contract opportunity is advertised and open to any potential bidder
All bidders which ‘express and interest’ will be issued with documentation to allow them to submit a bid
Restricted tendering:-
The contract opportunity is advertised
Bidders expressing an interest are pre-qualified and short-listed
Only those on the short-list are entitled to submit a bid
Once the purchasing organisation is aware of its requirements (expressed through the specification) it can decide how best to go to market to find the best supplier. Advertising the opportunity (generally online today) is a way of accessing the broadest possible range of potential suppliers.
Open tendering is a one stage process, ie place the advertisement and issue the ITT to all who express an interest (and meet the organisation’s stated minimum standards). Appropriate for markets where supply is relatively limited.
Restricted tendering enables a short-list of bidders to be compiled through use of a pre-qualification questionnaire (PQQ). This is appropriate when there is likely to be interest from many bidders.

10. Request for quotation (RFQ)
A less formalised process than tendering
Typically used for lower value contracts
A supplier’s quotation constitutes an ‘offer’ at contract law
Purchasing organisation’s often adopt a templated approach to ensure consistency
RFQs are used in lower value transactions. The quote received is legally binding and once accepted by the purchaser forms the contract.

11. Invitation to tender (ITT)
A more formalised and detailed process than RFQ
Used for higher value and more complex procurements
The supplier’s tender constitutes an ‘offer’ at contract law
A procedure for submitting tenders is communicated to all participants and must be strictly observed
Most organisations have a template which is used to ensure that suppliers respond in a consistent way
ITTs and recognised as being more formal and complex than RFQs. However, the response to the purchaser's ITT still constitutes an offer in the same way as the RFQ.
ITTs will be more comprehensive in detail (than RFQs). The documentation will set out the process to be adopted, including the date/time by which formal responses must be received.

12. Evaluating quotes and tenders
Evaluation criteria should be communicated to bidders, as part of the RFQ/ITT documentation
Bids may be assessed using ‘price only’
Alternatively price and a range of other criteria might be used, eg service, quality, business continuity etc
Weightings are generally used, eg 40% for pricing and 60% for other criteria
Once received, quotes and tenders must be properly evaluated. The evaluation criteria and weightings must be communicated to bidders as part of the RFQ/ITT ‘pack’. Assessments should be as objective as possible.

13. Contract terms and conditions
Contract terms and conditions set out the rights, responsibilities and obligations of all parties to the contracts
It is best practice to ensure that terms and conditions are agreed with suppliers on all contracts
Broadly, contract terms and conditions comprise:-
Express terms
Implied terms
Terms and conditions documentation should be in place on all contracts.

14. Express and implied terms
Express terms
Expressly stated within the terms and conditions documentation, including, for example:-
Insurance
Liability
Payment terms
Exclusions
Liquidated damages
Implied terms
Exist in all contracts, with protection through common law (often supported by statute). These might include protection against the following:-
Unacceptable quality goods/service
Acts of negligence
The use of unfair contract terms
Breaches of a confidential nature
Not all terms have to be expressly stated within the contract terms and conditions documentation to be effective at law.
Those terms which are stated are known as ‘express terms’. These are likely to be more specific to the individual contract and might relate to things like liability and exclusions. Liquidated damages are a ‘genuine pre-estimate’ of the loss/costs that the purchasers might incur in the event the supplier fails to deliver against the contract.
Implied terms are not written into the contract. There is automatic protection for all under implied terms.

15. Schedules The use of schedules is commonplace in contracts
They are used to provide more detailed supporting content to certain aspects which may be referred to in the main contract documentation
Typical schedules include:-
Pricing schedules
Health and safety records
Details of sub-contracting staff
Confidentiality/non-disclosure agreement
Sometimes supporting documentation is required to provide additional detail/information to support a contract. The contract documentation itself might make brief reference to the item and further detail will be included within the schedule.

16. Main types of agreements
One-off purchases
Framework agreements
The use of mini-competitions
Call-offs
Services contracts
Contracts for the hire and leasing of assets
There are several types of agreements between purchasers and suppliers.

17. One-off purchases
Generally used for low value purchase items or where the need is unlikely to recur in the immediate future
However, a one-off purchase might also arise where a high value item is purchased which has a long lifecycle and therefore will not need replacing for many years.
There is only a commitment to purchase and supply the single transaction.
Frequently used, for a range of purposes. May relate to occasional use low value items but are equally popular for one off work (for example redecoration) and for the procurement of assets with a long life cycle.

18. Framework agreements Used for ongoing supply requirement
The framework agreement itself is not a contract
Participating suppliers are pre-approved and agree to participate within the agreement for a specified period of time
The framework agreement might state the pre-agreed price for the goods/services
Alternatively the participating suppliers may have to bid for work through ‘mini competition’
Framework agreements are commonplace in the public sector. The important thing with these is that the agreement itself does not constitute a contract, ie there is no commitment to work. The contract is struck when the purchaser makes a ‘call off’ against the framework agreement.

19. Call offs
A call off is the award of a contract to supply goods or services under a framework agreement
The call off comprises the contract between the purchaser and supplier
As mentioned on the previous slide, participating suppliers may still have to bid competitively for work within a framework agreement (this is known as a ‘mini competition’)
These comprise the award of individual contracts under a framework agreement.

20. Services contracts
The same principles of contracting apply for both goods/works and services
However, goods are tangible items which can be ‘consumed’
Whereas services are intangible actions which are generally delivered by individuals (some services are delivered by ‘processes’ toady) but do not result in the ‘ownership’ of anything
In theory, contracts for goods, works and services are the same. However, contracts for services require different considerations due to the characteristics of services versus goods. Often ‘service’ can be subject to interpretation and this needs to be catered for within the specification, KPIs and SLAs.

21. Service contracts - considerations
Making service expectations clear to suppliers (Service Level Agreements are effective for this)
Determining performance
Ensuring the right people are used for service delivery
Maintaining consistency of service delivery, ie dealing with service variability
Because service is so often delivered by people maintaining consistency, of service delivery, is often a problem. Purchasers should ensure that the supplier engages the right people (check experience, qualifications etc).

22. Contracts of hire
Hiring is effectively a method of renting an asset for use from another party
A contract of hire arises where the owner of an asset agrees to allow another party to take possession of the asset and to use it for an agreed period of time
At the end of the agreed period the hire company takes the asset back
Contracts of hire are typically for relatively short-term periods
Not all contracts are for the outright purchase of an item. One option, for the purchaser, is to hire the item. This involves paying instalments over an agreed period of time until the item is no longer required, at which stage it returns to the hire company.

23. Contracts for lease Leasing is a form of medium to long-term finance
A leasing company (the lesser) agrees that the customer (lessee) can have possession and use of an asset for an agreed amount (usually paid in regular instalments over the term of the lease)
The lesser remains the owner of the asset during the term of the lease
At the end of the lease the lessee generally has the right to take ownership of the asset
Leasing contracts are longer term. At the end of the period the lessee generally takes ownership of the asset (once the final payment has been made).

24. The lease or buy decision
Advantages of outright purchase
Total cost might be lower than the leasing option
The user has total control over the use of the asset
The asset may have residual re-sale value at the end of use
Capital allowances may be set against tax
Disadvantages of outright purchase
High initial expenditure ties up capital
User bears all costs and risks of maintenance, operation and disposal
Risk of technological obsolescence
Can be wasteful if equipment is needed only for a short period
The classic ‘lease or buy’ decision. Much will depend on the organisation's ability to finance an outright purchase versus the costs of leasing. A further consideration is often the tax implication – sometimes there are tax benefits involved in the purchase of assets.

25. What to do now
When you’ve worked through all the learning materials and associated reading relating to this session, follow the link below to assess your learning