Procurement and project management have many integrated relationships, one of which is controlling procurement risk through the use of contracts. In an article written by John Kavanagh, the author describes a speech delivered to the British Computer Society by BCS fellow and vice president Rachel Burnett where she positioned contracts as an investment as opposed to an expensive list of restrictions. By investing the time to develop clear contracts, both the buyer and the seller can control risk and reduce the need to use litigation to resolve disagreements.
Contracts Reduce Risk
Kavanagh says that Burnett advises as part of a standard project management process to use contracts to reduce procurement risk. A contract should be “a checklist and a reference point for project risk management, not a dry legal document forgotten about in a drawer” (Kavanagh, 2004, p. 1). By investing in the development of a contract during the procurement process, Kavanagh says that the overall procurement experience will cost less and will reduce risk. However, both Kavanagh and Burnett recommend keeping the contracts simple and that the contracts should be organized in such a way so that the information in the contract is useful for managing the procurement and project risk.
The Burnett speech was delivered to the British Computer Society, an organization of IT professionals in the Kingston and Croydon branch. To support her point, Burnett used an example from a “long-running dispute between Co-operative Group and ICL, now part of Fujitsu, which has ended up in the Appeal Court, not least because no contract was finalized before the work began” (Kavanagh, 2004, p. 1). In addition, because the companies did not have a contract in place, they were unclear as to what was expected from each of the parties. Burnett points out that the cost of litigation far exceeds what it would have originally taken to put a contract in place. She also concludes that “the number of cases with good contracts that go to court is minimal” (Kavanagh, 2004, p. 3). The dispute example is from the Information Technology industry; however, the same principles apply to any significant procurement relationship.
Contracts As Standards Practice
In his book, Management of Project Procurement, Huston (1996) also supports Burnett’s approach to procurement. Huston says that the “objectives of the procurement process are to obtain the goods and services for a project in accordance with the technical, quality, schedule, cost, and other performance objectives of a project” (Huston, 1996, p. 3). As part of a six step process, Huston recommends clearly documenting the product or service requirements and creating a formal contract with the bidder that best meets the requirements. The contract development is completed before any of the work begins, just as Burnett advised in her speech. By following the six step process, both the customer and the vendor are able to work together to create a clear agreement.
Although Burnett’s focus was on the advantage of contracts for developing clarity between the parties, Cooper (2005) positions contracts as a key tool for allocating or transferring risk. Huston provides a list of pricing approaches also intended to manage risk; however, the pricing approach is less effective without a formal contract. Cooper advises allocating ownership of responsibilities within contracts to those that are in the best position to control the outcomes of those responsibilities. By allocating risk and establishing roles and responsibilities through a formal contract, all parties gain a level of clarity that they could not otherwise obtain.
Contract Examples
The company I work for uses contracts to manage its information technology procurements. As Burnet advised in her speech, my company includes contingency clauses in its contracts. A contingency is intended to outline the appropriate actions for addressing minor breaches in the contract instead of resorting to expensive litigation. For example, a contingency might include target completion dates for deliverables from its vendors. If the dates are missed, the contingency might include some form of financial penalty for the vendor. Through the development of a clear contract, my company is able to reduce the need for costly litigation.
In 1995, my company decided to outsource its internal help desk operations. They spent six months working with an outside vendor to develop a contract that clearly outlined the requirements for the work as well as a series of contingencies should any problems arise. About six months into the contract, my company was unhappy with the work of the vendor, even through the vendor was meeting the service levels. The contact was written to give either party the ability to terminate the agreement without cause within one year of the original contract signing. my company decided it was in its best interests to discontinue the relationship and executed the termination contingency without the need for further legal action.
Would a contact have reduced the likelihood of the Co-operative Group and ICL litigation as Burnett implies? Co-op had hired ICL to create a point-of-sale system that was to be deployed to Co-op’s locations. However, Co-op was unhappy with what they deemed sub-standard software and ICN was delivering weeks behind schedule. When the case was reviewed in court, the judge ruled that Co-op and ICL did not have a contact in place. As a result, the judge ruled in favor of ICL and ordered Co-op to pay compensation (Computer Weekly, 2003). If Co-op had taken the time to develop a clear contact with ICL both parties might have better understood expectations and could have worked out the differences. Regardless, without a contract, Co-op did not have the legal ground necessary to defend its position in court. Co-op ultimately lost its case against ICL.
Conclusion
Both of the examples from my company and Co-op support the position presented by Burnett during her 2004 speech for the British Computer Society, that organizations should use contracts to help control the risk in project procurements. Organizations should view contracts as an investment, not an expensive list of requirements. By investing the time to develop clear contracts, both the buyer and the seller can control risk and reduce the need to use litigation to resolve any disagreements.
References
Computer Weekly. (2003, February 26). Doubts Over IT Courts. Retrieved July 20, 2009, from ComputerWeekly.com: http://www.computerweekly.com/Articles/2003/02/26/192796/doubts-over-it-court-as-co-op-challenges-icl-ruling.htm
Cooper, D., Stephen, G., Raymond, G., & Walker, P. (2005). Project Risk Management Guidelines: Managing Risk in Large Projects and Complex Procurements. West Sussex: John Wiley & Sons Ltd.
Huston, C. L. (1996). Management of Project Procurement. The McGraw-Hill Companies, Inc.
Kavanagh, J. (2004, January 27). Use Your Contracts as Checklists for Managing Risk on IT Projects. Business Information UK , p. 3.
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