Management of Supply of Goods Contract

Contract Management- Objectives

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The objectives of contract management are:

• Goods are delivered; • Within the budget (costs) • Within and Time (duration); • As per the required quality.

Required skills/ Expertise for Contract Management

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• Hard skills: Technical skill, very thorough knowledge of all contract documents, conditions of contract, technical specifications, terms of reference etc., and full understanding of Schedule of deliveries;

• Integrity: not yielding under pressure (both Supplier’s or administrative/political), administrative skills, fluency in the language of the contract etc.

• Soft skills: People skills, communication abilities, team spirit, cooperation, leadership, facilitation, conflict mitigation, planning, coaching, motivation, innovative drive, perseverance etc.

• Experience: Successfully managed or supervised similar contracts of comparable scale.

Who should do contract management: In-house vs.

Outsourcing

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• “In-house” contract management means that the contract may entirely be managed by the implementing agency alone, due to availability of highly qualified and experienced staff;

• “Full Outsourcing” means that the contract management should

entirely be entrusted to specialized teams of experts, project management companies, engineering firms, procurement agents etc. contracted by the implementing agency.

• “In-house + Outsourcing” means that the contract may be managed

by the staff of the implementing agency, supported (in various degrees) by outside experts. These experts could provide services ranging from very specific expertise (e.g. specialized engineering, IT solutions etc.) to ensuring smooth customs clearance on behalf of the Employer.

Management of supply contracts

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A successful management of the contracts for the procurement of goods would have to consider as a minimum the careful consideration of the following issues…

Internal arrangements

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The Purchaser must first of all ensure that the proper internal arrangements are made in its own organization. This mainly refers to people and processes:

•Assigning detailed tasks to the individual or the team responsible with the specific duties during the contract management process. This would be equivalent to creating job descriptions for everyone involved. The tasks assigned to each individual should be precise and realistic (taking into account the specific experience, expertise and workload of each staff).

For example, the procurement specialist should know that he/she would be responsible for keeping track of the main contract milestones (effective date; deadlines for delivery, payment, warranty period etc.); the technical expert should supervise all aspects related to the technical specifications, functional guarantees, inspections and tests, etc.

Internal arrangements

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• Establishing internal procedures (hierarchy, communication, level of authority, flow of documents, verification and acceptance procedures, payment procedures, internal audit etc.);

• Evaluation of main risks associated with the implementation of the contract and identification of the main remedies or mitigation measures, as well as the parties responsible with their enforcement;

• Coordination arrangements with third parties (other agencies, customs, end users, beneficiaries etc.)

Contracts for Goods/Equipment

• Contract changes/amendments are exceptional

• Litigation relatively rarely (Dispute settlement by arbitration if amicable settlement fails)

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Bidding Documents

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Issues originating from the quality of the bidding documents

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• Due to the poor quality of design and / or specifications the scope of the contract is not fully understood by the Suppliers;

• Contradictory provisions in various documents (e.g. drawings vs. technical specifications; special conditions of contract vs. terms of reference or specifications etc.) which is misleading the suppliers, who naturally choose the most favorable of the conflicting clauses;

Issues originating from the quality of the bidding documents

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• Failure to request documents that are critical for Employer’s interests (e.g. insurances, manufacturer’s authorizations, performance securities, bank guarantees etc.);

• Failure to provide delay damages or penalties for failing to meet the functional guarantees;

• Unclear provisions regarding price adjustment (especially in case of commodities).

• Unclear provisions regarding applicable Taxes (Import duties, Exercise duties, VAT etc.)

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For evaluation:

For Goods manufactured in the Purchaser’s Country: -EXW- Including all customs duties and sales and other taxes already paid or payable- Any Purchaser’s Country sales tax and other taxes which will be payable-The price for inland transportation, -Insurance, -And other local services required to convey the Goods to their final destination

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For evaluation:

For Goods manufactured outside the Purchaser’s Country, to be imported:

-CIP named place of destination, in the Purchaser’s Country, or CIF named port of destination-The price for inland transportation, -Insurance, -And other local services required to convey the Goods from the named place of destination to their final destination

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For evaluation:

For Goods manufactured outside the Purchaser’s Country, already imported: -The price of the Goods, including the original import value of the Goods; -plus any mark-up (or rebate); -plus any other related local cost, and custom duties and other import taxes already paid or to be paid on the Goods already imported (need to be supported with documentary evidence) or to be paid-any Purchaser’s Country sales and other taxes which will be payable-the price for inland transportation, -insurance, -and other local services required to convey the Goods from the named place of destination to their final destination

Other important items:

- Evaluation Criteria(a) Delivery schedule(b) Deviation in payment schedule. (c) Cost of major replacement components, mandatory spare parts, and service. (d) Availability in the Purchaser’s Country of spare parts and after sales services.(e) Projected operating and maintenance costs.(f) Performance and productivity of the equipment. (g) Etc.

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Other important items:

- How Lots will be evaluated and awarded (Possibility of multiple contracts);- Spares required for operation;- Alternative bids. - Qualification Requirements

(a) Financial Capability(b) Experience and Technical Capacity(c) The Bidder shall furnish documentary

evidence to demonstrate that the Goods it offers meet the usage requirement

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Issues originating from the bidding process:

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• Acceptance of conditional bids or proposals that deviate from the standard contract clauses based on which the bids were invited;

• Failure to properly assess bidders’ qualifications (experience, technical expertise, financial standing);

• Failure to detect collusion schemes between bidders (e.g. lowest bidders withdraw their bids and are later found as subcontractors to the awarded and more expensive bidder).

Contracts for Goods/Equipment• Performance Security• Payment Terms• Pre-Shipment Inspection (Compliance with Specifications,

with Bid)• Understanding Delivery terms• Liquidated (Delay) Damages• Receipts• Stores (Accounting for Goods received/dispatched)• Warranty Obligations

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Conditions of Contract

DefinitionsLanguageJoint Venture, Consortium or AssociationNoticesGoverning LawSettlement of DisputesScope of SupplyDelivery and DocumentsContract PriceTerms of PaymentTaxes and DutiesPerformance Security

Verification of advance payment guarantee and performance securities

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Purchaser’s staff should: • Check the securities (performance security, advance payment guarantee) for

the correct (i) amount; (ii) validity; and (iii) wording. The text of the security should not contain any significant deviation from the sample forms included in the bidding documents.

• The Purchaser should reject any additional texts introducing conditions that would render the security invalid or make it harder to forfeit.

• Submit the securities to the Purchaser’s commercial bank and request verification of the authenticity of the signatures of the issuing bank. This process should not normally exceed a few business days and the cost of this service is usually negligible, so the Purchaser should always request this verification.

• This is especially important in the case of (i) unknown suppliers; and (ii) securities issued in questionable jurisdictions (e.g. offshore fiscal havens).

Verification of advance payment guarantee and performance

securities (Continue)

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• It is important that the Supplier maintains a (reduced) performance security during the warranty period. The Purchaser shall make sure that the security is duly provided and is enforceable throughout the warranty period.

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Conditions of Contract (Continue)

CopyrightSubcontractingSpecifications and StandardsPacking and DocumentsInsuranceTransportationInspections and TestsLiquidated DamagesWarranty

Verification of insurance policies

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• Purchaser’s staff should check whether the requested insurances have been properly contracted by the Supplier, particularly with regard to the amount and the coverage, which should be as requested by the conditions of contract and the applicable Incoterms delivery condition.

Important Elements of Contract Management

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Inspections and tests (where applicable)• Pre-shipment inspections; • Inspections at delivery to project sites;• Factory certificates;• Inspections and tests at manufacturers’ workshops;• Model testing;• Site inspections;• Testing of materials and workmanship;• Sampling;• Verification of deliverables• Tests on completion.

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Conditions of Contract (Continue)

Change in Laws and RegulationsForce MajeureChange Orders and Contract AmendmentsExtensions of TimeTermination

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Payment for Goods supplied from abroad:Payment of foreign currency portion shall be made in () [currency of the Contract Price] in the following manner:

(i) Advance Payment: Ten (10) percent of the Contract Price shall be paid within thirty (30) days of signing of the Contract, and upon submission of claim and a bank guarantee for equivalent amount valid until the Goods are delivered and in the form provided in the bidding documents or another form acceptable to the Purchaser.

(ii) On Shipment: Eighty (80) percent of the Contract Price of the Goods shipped shall be paid through irrevocable confirmed letter of credit opened in favor of the Supplier in a bank in its country, upon submission of documents specified in GCC Clause 12.

(iii) On Acceptance: Ten (10) percent of the Contract Price of Goods received shall be paid within thirty (30) days of receipt of the Goods upon submission of claim supported by the acceptance certificate issued by the Purchaser.Payment of local currency portion shall be made in [currency] within thirty (30) days of presentation of claim supported by a certificate from the Purchaser declaring that the Goods have been delivered and that all other contracted Services have been performed.

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Payment for Goods and Services supplied from within the Purchaser’s country:Payment for Goods and Services supplied from within the Purchaser’s country shall be made in _____ [currency], as follows:

(i) Advance Payment: Ten (10) percent of the Contract Price shall be paid within thirty (30) days of signing of the Contract against a simple receipt and a bank guarantee for the equivalent amount and in the form provided in the bidding documents or another form acceptable to the Purchaser.

(ii) On Delivery: Eighty (80) percent of the Contract Price shall be paid on receipt of the Goods and upon submission of the documents specified in GCC Clause 13.

(iii) On Acceptance: The remaining ten (10) percent of the Contract Price shall be paid to the Supplier within thirty (30) days after the date of the acceptance certificate for the respective delivery issued by the Purchaser.

Review and approval of payment applications

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• Well established mechanism for the verification and approval of payment documents – internal audit, four eyes principle etc.

• Verification of unit rates, prices and quantities;• Verification of supporting documents (invoices; bills of

lading; insurance policies; manufacturers’ authorization; delivery protocols; operational acceptance certificates; etc.);

• Existence of required approvals from the Project Manager (if applicable);

Time control

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• Check compliance with the contract milestones (delivery, installation, pre-commissioning, commissioning, functional testing, acceptance, training etc.);

• Actions to speed up progress and ensure compliance with contractual time for completion;

• Application of liquidated damages for delay.

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• Most suitable for purchase of imported goods and equipment

Use of Letters of Credit

Remedies against non-performing suppliers

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• Deny approval or acceptance of non-compliant goods, or sub-standard materials;

• Actions against the Performance Security;

Termination of Contract

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– Check the exact provisions of the Contract with regard to the Termination by the Purchaser;

– Assess Supplier’s claims and remedies;– Ensure that all Supplier’s reasonable claims

have been properly addressed and all due amounts have been paid;

Operational Acceptance Certificate(s)

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• Check if all the functional guarantees are met and all tests on completion have been successfully passed;

• Acceptance of goods (check against delivery lists and technical specifications);

• Inventorying procedures (check that all goods have been properly registered in end users’ records and that they could easily be tracked down and identified);

• Succession planning (who takes over the goods; is appropriate funding available for the proper maintenance and operation of the goods; do the end users know what to do in case of defects etc.)

• Remedies against functional performance below the target: Contract should have provisions for compensation to the Employer

Common Problems

• Inappropriate payment practices– Excessive advance payments 10-20% should be a maximum– Advance payments inadequately secured (must be a bank

guarantee)– Delays in making balance payment. – Interest is not paid to Contractor on delayed payment.

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Common Problems (cont’d)

• Poor performance by Contractors• Mostly consequence of:

– Insufficient qualification of suppliers– Poor practices in qualifying suppliers– Lack of monitoring and remedial actions by

Employer/Engineer– Collection of Delay (Liquidated) Damages is

deficient/non existent / or practiced too soon

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Common Problems (cont’d)

• Receipt of Goods/Delivery Notes deficient and/or unrecorded

• End users unaware of warranty obligations of supplier

• Contract Filing and Documentation inadequate

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Suppliers’ failure to understand or to assume all their contractual

obligations

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• delayed submission of securities or insurance policies;

• submission of wrong documents; • attempts to offer less competitive

substitutes for staff, goods or materials; • delays in implementation;

Issues related to the quality of contract management itself:

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• Weak contract management team, unfamiliar with the technical specifications, terms of reference and conditions of contract.

• Weak contract management team, yielding under contractors’ pressures.

• Improper supervision of the contract (leniency towards the suppliers), accepting deviations from the technical specifications or terms of reference, approving change orders/variations without due justification, and failure to impose appropriate remedies.

Kick-off meeting

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• Although not as critical (or usual) as in the case of civil works or consulting contracts, a kick-off meeting with the Supplier is recommendable at the start of the project, especially for larger and more complex contracts.

• The meeting should be attended by the Project Manager or Purchaser’s staff involved in contract supervision, but also by representatives of the end users or beneficiaries of the goods being procured, if applicable

Kick-off meeting

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Critical issues to be established during the kick-off meeting:•Define procedures to unblock critical situations or bottlenecks (delays in performance or in obtaining permits and approvals; abuses of power from the Project Manager; non-performance of Supplier etc.);

•Ensuring that all parties involved in the contract implementation share the same understanding of their rights, roles and responsibilities derived from the contract documents; of each other’s expectations; of the timeframe; of any particular constraints in the implementation.

Important Elements of Contract Management

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Kick-off meeting • Review of applicable legislation and any obligation deriving in

connection to the execution of the contract in the Employer’s country (e.g. contract or product registration; registration of contractor in the Employer’s country for fiscal purposes, tax regime etc.);

• Establishing a tentative Effective Date or Commencement Date, by which all conditions required by the Contract would be met (signing of Contract Agreement, submission of performance security and advance payment

Red Flags indicating poor Contract Management

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Scope of the contract is not achieved (goods and services not delivered), although the money has been spent;

Unjustified variations and change requests granted by the client;

Contract specifications are not met (poor quality of the works, goods or services delivered);

Products are substituted by inferior, less expensive and lower quality products than specified in the contracts;

Failure to report any deviations from the contract;

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Thank You