… Don’t Forget the Contract, Part II

As pointed out in yesterday’s post, Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out yesterday, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

Poorly created contracts that don’t define anything more than a bulk price and a term don’t ensure defensible pricing, loss management, or risk control. To be more exact, they don’t even ensure that absence of a typo or careful insertion of a single word by a litigious lawyer that could negate and entire contract and make it totally useless.

So where do you start?

Define the need

What do you really need? (And what are the core requirements?) When? Where? How do you need it delivered? Who is responsible for the production, delivery, support, and return? Why does it need to be this way? What are the risks and how will they be mitigated? Split?

Create a Statement of Work

Clearly specify what is required, when, by who, in what quantity, how it is to be packaged, stored, delivered, supported, maintained, and recovered. Specify delivery dates for products if known or delivery timeframes if exact dates are not known but response or replenishment times are needed. If the contract revolves around the construction of a particular deliverable (system, machine, building, etc.) specify key milestones and acceptance criteria. If it revolves around ongoing services, specify delivery timeframes and required service levels. Specify as much detail as is known and where specifics can’t be specified up front, specify how the details will be worked out later and agreed to, as well as the procedure that will be followed in case of disagreement or conflict.

Make sure Milestones are Clearly Specified
… with Deliverables and Acceptance Criteria

Go so far as to explicitly number the milestones and make sure they are easy to index, track, and assign to buyers, supplier managers, and other organizational individuals who are affected by the contract. It should be easy for the CLM to auto-index these milestones and even auto-assign the milestones (and monitoring management responsibilities) to the most logical individuals in the organization (who can reassign if necessary).

Make sure the deliverables are clearly annotated, that precisely what they entail is defined, that the acceptance criteria that will be used are spelled out in sufficient detail to allow work products to be rejected if they are not up to requirements, and who has final determination of whether those criteria are met. Also, if there is a dispute, the process that will be used for resolution must be indicated.

Define the Payment Schedule
… and Tie it to the Milestones

Don’t just specify how much will be paid, but when it will be paid, and what the dependencies are on the milestones and deliverables. Also specify if there are any penalties for late or unsatisfactory delivery, precisely how they are calculated, and when the remaining payment(s) will be made. Also clearly specify how disputes will be filed, handled, and resolved and whether any payments will be made during the dispute, and in what amounts.

Define any SLAs and Warranties the Supplier Must Adhere to

Do so up front and in plain English. It’s critical that the supplier understand exactly what is being expected, how it will be measured, what guarantees the supplier is making, and what it will cost them if they are not adhered to. If the products are rejected, do they have to deliver replacements? Are they penalized? Is the contract terminated?

Then, and only then, start thinking about writing the contract. But don’t write it yet!

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