Developing a Close-Out in Procurement Management - Business Plan Example

Termination of contractual relationships “A contract is a mutually binding agreement that obligates the seller to provide the specified productand obligates the buyer to pay for it” (Institute, 2000) Usually the contract ends with the successful delivery of the supplies. The cessation or cancellation of the contract in whole or in part is considered a termination of contract (Dictionary, 2005). But there are occasions when either the supplier or the buyer wants to end the contract before the contract is completed. In other words, before all the requirements mentioned in the contract are fulfilled, either party wants to end the contract at once. This calls in the legal advice from either the corporate legal counsel or an outside lawyer. This is a matter of withdrawing from the provisions of the outsourced contract. Usually the terms and processes for terminating a contract before time are spelled out in the initial contract. This section of the contract is called the termination clause. This clause is there for the protection of both the buyer and the seller, since termination before time can severely damage the interests of either party. Most procurement contracts usually require that the party who wants to terminate the contract before time must notify the other party within a reasonable amount of time, failure to which can result in severe financial penalties for that party. Another aspect of termination clause is the substitute provider. The party who wants to forfeit being part of the legal contract will have to find an alternative provider for the other party if it wants to get out of the contractual relationship. Such provisions and contingencies depend on the parties to the contract. There is no hard and fast rule to this as both parties make the rules themselves of earlier termination in the initial contract (Beyond the Information Systems Outsourcing Bandwagon, 2005). If a contract has a written provision that any modification or termination by agreement should be in written form, then any termination or modification cannot be made effective otherwise. But as stated earlier, this agreement is made by the parties to the contract and termination or modification can be made possible and legally effective orally, in written form, by an act, by staying silent or by inaction, if the initial contract contains such a provision (Viscassilas, 2006). Categorizing the differences in termination of contracts There are three general scenarios in which one party feel the urge and have legal approval to end the contract; Scenario A: Termination for Cause or Default (Seller’s Gaffe) This is a classic fault from the seller’s side in which the buyer is not satisfied by the quality of the products or the delivery timings. In brief, the seller doesn’t fulfill his contractual obligations in the way he is bound to fulfill them. ‘Failure without legal excuse’ is the key term here that defines the seller’s breach. Seller fails to complete his critical obligations and the buyer is fully defensible in terminating the contracting immediately. Breach from the seller’s side should be ‘material’, which means that the damage to the buyer must be significant enough to give him the legitimate excuse to lay off the contract. Scenario B: Closure for the Suitability (of the Buying side) This tort is inspired by the Federal Acquisition Law which states that the federal government reserves the right to end the procurement contract for its convenience. Many other governmental agencies have followed this law since and have acquired the same legal position in their procurement contracts. These governmental agencies can end the contract if and when they see fitting. These governmental bodies represent state, county and local and many industries are following this legal trend. If the buyer terminates the contract before it is legally expired, he/she needs to notify the seller at a reasonable time so as to not hurt him financially. After sending the notice, both parties must come to the negotiation table to sort out the rest of the contract. The buyer looks forward to giving the seller a reasonable profit for his work and effort up to the closure of contract. Such early closures must be done in good faith and out of a legitimate excuse. If the buyer only scores low prices by terminating the contract then it is definitely not considered good faith. Scenario C: Absolute Right to Terminate the Contract (by either the Buyer or the Seller) Sometimes there is a contract provision which gives permission to both parties to end the contract by sending the other party a notice of termination. This provision doesn’t require a legal excuse to terminate the contract which basically defeats the purpose of entering into a contract in the first place. Settlement of Seller Claims At many instances, buyer and seller dispute over financial issues and claim compensation from other party. Selling party most likely claim because of the changes made in the contract in the prices section. These changes and adjustments are frequent and claims are made by the seller. There are four ways that both parties can settle their disputes; i. Negotiation ii. Mediation iii. Arbitration iv. Through Court Negotiation is the most suitable way for both parties to settle the claim. They put forward their issues and concerns and demand something in return for their business compromises. Mediation is another form of negotiation. The only difference is that it is facilitated. A third party plays the ‘referee’ and tries to give impartial decisions in the negotiation process. Arbitration is a form of out-of-court-settlement. Usually both parties agree to a professional arbitrator and his decision. Lawyer’s services are not required in this scenario. Court is the least likely form of dispute settling or claims handling option. This is a typical legal trial in which both parties are represented by lawyers and they fight for the claims of their clients by charging high fee. Successful completion of a contract Completing a procurement contract successfully requires a lot of hard work and dedication. Contract rules and guidelines must be followed at all times throughout the contract term. Following checklist serves well in completing all kinds of procurement projects/contracts successfully; i) Project Office ii) Instructions and Procedures iii) Financial  iv) Project Definition  v) Plans, Budgets, and Schedules  vi) Work Authorization and Control vii) Project Evaluation and Control  viii) Management and Customer Reporting  ix) Marketing and Contract Administration  x) Extensions xi) New Business  xii) Project Records Control  xiii) Purchasing and Subcontracting Liaison and Policies  xiv) Engineering Documentation  xv) Site Operations In negotiations, every discussion is in a friendly manner and both parties are willing to resolve the dispute without getting bitter with each other. Both parties do get expert negotiators to represent their claims in a better way but everything is settled without any hard feelings. Perhaps the most serious issue at close out is taking care of seller’s claims. Without efficiently handling these claims, a procurement project can never be successfully completed. These claims are usually for contract adjustments. These claims must never be ignored and should be settled properly at an appropriate time. Unattended claims can severely hurt an organization financially. It should be made a policy for an organization that unattended claims must be completed at the time of writing the project completion statement. Claims go only worse if left unattended and project people usually move on to new projects and sometimes even new companies. And the people who are not protected by the ‘corporate veil’ get hurt in the end. Successful organizations always try to prevent unsettled claims. But sometimes even powerful organizations get bogged down by supplier’s claims and there is one fundamental reason for that; the project managers by their nature are creative people who only think about novelty and innovation. They don’t like to fill all the paper work at close out of a project and that is why some claims go unattended. An American, Yogi Berra once said, “It ain’t over till it’s over”, which applies perfectly to procurement projects. Successful completion of procurement doesn’t only mean that all the goods have been delivered, residual issues need to be addressed too. These issues include ‘orderly’ completion of procurement sub projects, completed file work in its proper format and settling of all claims. Settlement of claims Alternate Dispute Resolution (ADR) points to mediation and arbitration. These are more serious forms of negotiation where both buyer and seller hire a third party to settle their disputes. Both parties agree to accept the decision of the ‘referee’. The difference between ADR and negotiations is that both parties want to get rid of their bias and need an objective opinion/decision for their claim. Court settlements are the least desired and are usually avoided as lawyer’s fee are considerably high. Decisions of court are not usually accepted with open heart by the losing party and it normally ends the business relationship. Following diagram will help understand the whole concept of claims, settlement. Proper steps to close a successful contract  There can be many complexities while executing procurement plans. Following ten steps are carefully constructed to make sure that such management projects are completed successfully leaving both the buyer and seller happy and satisfied. a) Initial plans or scope of the procurement project must clearly define which items do the company need to make and which items need to be procured. This helps in cost cutting as well as saving time. b) Those items that need to be procured from other sellers or manufacturers must be carefully analyzed and put into three categories; i) Major-Complexity Items ii) Minor-Complexity items iii) Commercial-Of-The-Shelf (COTS) c) Major-Complexity Items need to be managed by a technical expert in that particular item. Procurement manager must assign such a person in-charge of such specific procurements. These individuals must be free to ‘manage’ such items. d) The leader of Major-Complexity items must be provided with a team skilled in several relevant functions. They must be good at multitasking too. e) Major-Complexity Items will be assigned a cost expert to find objective cost estimates of such items. It is important because when the proposals are received, procurement manager must have an idea of what to expect. f) All procurement projects must be scheduled properly so as to not interrupt each other’s timings. g) Risk analysis of Major-Complexity Items must be performed by a risk manager. This manager will come up with the appropriate risk mitigation plan for such procurement items and lower their risk level to manageable range. h) Major-Complexity procurements need to be analyzed on case to case bases due to their complex nature. That is why procurement manager needs to tag these projects with the appropriate ‘contract types’. i) Management oversight requirements must be distinctly addressed in the initial Request for proposal (RFP) as well as the final contract. j) ‘Procurement Management Plan’ in its complete form must be developed, published and executed formally as well as in its true sense (Fleming, 2003). Work’s cited Beyond the Information Systems Outsourcing Bandwagon. (2005, December 14). Termination of contract. Retrieved from http://www.sourcingmag.com/dictionary/Termination_of_contract-196.html Dictionary of Military and Associated Terms (2005). US Department of Defense, retrieved from; http://www.thefreedictionary.com/contract+termination Fleming, U. W. (2003). Project procurement management, contracting, subcontracting, teaming. (p. 168). FMC Press. Retrieved from http://www.scribd.com/doc/51344936/Proj-Proc-Mgmt-Contracting-Subcontracting-Teaming-C Institute, P. M. (2000). A guide to the project management body of knowledge (PMBOK guide).. (p. 199). Newton Square: Project Management Inst. Retrieved from http://www.cs.bilkent.edu.tr/~cagatay/cs413/PMBOK.pdf Viscassilas, P. P. (2006). Modification and termination of the contract (ART. 29 CISG). Journal of Law and Commerce, 25(167), 167-179. Read More