When I reviewed Next Level Purchasing‘s course offerings to date: Mastering Purchasing Fundamentals (Parts I and II), Savings Strategy Development (Parts I and II), and 14 Purchasing Best Practices (Parts I and II), I did so in two parts. In the first part, as I did in Part I, I presented an overview of the course, the key topics contained within, and a general discussion on why it is worth your time and money. In the second part, I dived into a few select topics, with kind permission, that serve to illustrate the quality and usefulness of the course to a procurement / purchasing professional. This post will continue the pattern.
In the first lesson, you are introduced to the six major purposes of a contract. These are:
- Formalization of obligations and rights.
- Written contracts formalize the parties rights and obligations in such a way that misunderstandings are minimized and legal remedies can be sought if required.
- Control and allocation of risk.
- A well-written contract will specify which party is responsible for all possible consequences and make sure that one party does not unfairly bear too much of the burden.
- “Locking in” benefits.
- A good contract will guarantee one or more benefits, such as performance, price, and/or warranty, for a long period of time.
- Elimination of the need for further negotiation.
- Negotiation takes time away from strategic activities that can reduce cost and increase performance – a contract locks in an agreement and minimizes the need for future negotiation.
- Formalization of an agreement on exception handling.
- Things inevitably go wrong. You can thank Murphy. However, documenting who is responsible and what corrective actions will be taken up front minimizes risk and loss as it allows for expedient and focussed resolutions.
- To solidify an advantage.
- Whenever you can identify a specific advantage that would not be realized in the conduction of business in the absence of a contract, you should formalize a contract.
In the third lesson, the course dives into three monetary remedies and three non-monetary remedies you can choose from in the construction of your performance clauses. Financially speaking, you could negotiate the right to withhold payment, cover damages, and liquidated damages. Alternatively, you could go a non-financial route and negotiate termination, specific performance, and injunctions.
Let’s dive into four of these briefly. Specific performance is a remedy that allows you to force a supplier to do exactly as the supplier promised to do. Injunction is a remedy that allows you to prevent the supplier from doing something. Chances are they would not appear in the same contract and serve complementary purchases. You’d use specific performance if you were buying a one-of-a-kind item, such as an original Van Gogh for your conference room (since you wouldn’t want a forgery) and you’d use injunction if a manufacturer was making a custom part to stop that supplier from making that part for anyone else (should that supplier stop doing business with you for any reason).
On the other hand, as you might have picked up from one of the other courses I reviewed, cover damages and liquidated damages are not the same thing. Cover damages refer to a calculated amount the seller has to pay for failure to deliver and occur when a buyer has to acquire the goods from another seller. They are generally calculated as the difference between what the buyer had to pay versus what the buyer would have paid if the supplier delivered. Liquidated damages refer to a fixed amount the seller has to pay for failure to honor an obligation, such as a fixed late fee for each day the seller is late. Whereas the premise behind cover damages is that the buyer loses money when the buyer has to obtain goods from a different seller, the premise behind liquidated damages is that the buyer suffers financial harm when the seller fails to deliver.
Finally, in lesson five on key commercial provisions, there is a very good discussion of the shipping clause, what needs to be addressed, and what questions you need to ask when writing this clause. If you are buying goods, this is one of the most critical clauses, since it determines when the risk transfers from the seller to you, the buyer, and who pays the various expected and unexpected shipping costs that can arise.
Shipping terms should address the method by which purchased goods are shipped, the carrier who will deliver (or at least which party has the right to choose the carrier), the party who bears the shipment costs, and the party who bears the risk of loss in transit.
That’s it for my review of Supply Management Contract Writing. So, assuming I have convinced you its worth your time, after acknowledging that neither Next Level Purchasing nor Sourcing Innovation practice law, that Next Level Purchasing and Sourcing Innovation are not rendering professional legal services with regards to this (online) class, that neither Next Level Purchasing nor Sourcing Innovation will be responsible for any contract, either in whole or in part, based on any material presented in the (online) class, whether used in whole or in part, go on over to Next Level Purchasing and find out more.