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Items from 2014

The most dreaded question put to Procurement Professionals!

What to say when the CEO asks about how you manage Procurement Risk

Are our Procurement risks under control? asks the CEO.

How do you answer that?


Clearly, a “No” or “I don’t know” response is career limiting.


However answer “Yes” and you had better be prepared to back it up. The business world is littered with stories of contract disasters due to the failure to identify and manage risks that with a bit of thought could have been eliminated or at least mitigated.


Protect yourself, protect your organisation - invest in a Procurisk® solution. Identify those areas you need to concentrate on before a problem arises rather than have to explain afterwards why you didn’t.


So the next time the CEO asks “Are our Procurement risks under control?” you could answer:


“Yes, I use Procurisk® software which is specifically designed to assist in identifying and assessing procurement risks. It considers more than 400 potential risk areas and in using it I can establish where we are strong, and more importantly .where we need improvement. It also suggests ways forward that can be built into a formal plan.”


So don’t close the stable door after the horse has bolted. Bolt the door instead! Try Procurisk® at our expense. Just click here and press the "Try it for Free button". I would welcome your feedback.


Need to know more please email me, Ray Gambell at r.gambell@brianfarrington.com or give me a call on 01744 20698 to see how you and your organisation could benefit.

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When will the new Procurement Directives be applied in the UK?
There isn’t (yet) a firm date.  I can hear you groaning, but at least you know that as of 4 August 2014. ;)

However, the new Directives are now part of EU law and so it can already be applied in the UK. In applying it, no-one could be accused of breaching EU law. However, the UK -related 'laws' will include some extras such as preventing the use of PQQs (Pre-Qualification Questionnaires  - RFI's for our private sector readers) for tenders below the EU threshold.  A Directive is not legislation or statutory law (despite it often being referred to as such) It is just an order/directive, albeit binding on the Member States (all 28 of them) to transpose it into their respective legal systems.

What would you do?

Caution. It would suggest that the existing rules apply until the day Public Contract Regulations 2014 come in to effect under UK legislations. No doubt those pesky lawyers advising suppliers are watching carefully for anyone jumping the gun.

Our understanding *taps nose* is that it will not be transposed (until a Directive is transposed it is not legislation or statutory law - legislation will be the Public Contract Regulations 2014) by the end of this calendar year – you may have read that "sometime near Xmas" was the start date, which doesn’t now appear to be the case.

When will the new Procurement Directives be applied in the UK?

The 2014 EU Procurement Directives have been adopted by the EU institutions and were published in the Official Journal of the EU on 28 March 2014. They came into force on 17 April 2014. EU Member States now have 2 years to implement them in national legislation.

So, who would need convincing that every Member State will have done so by then?

Assuming the General Election would be May (?) that seems a likely date for the regs and associated timescales to have been formally applied in the UK. Where Scotland would fit into the timescales is also open to the influences of democracy. Case law  then follows as the legislation or outcomes intended under it get challenged through the courts This in itself gets complicated because you have binding precedents through cases heard under UK law and persuasive precedents cases heard through other European courts

Merely conjecture, of course!  Sign-up to our email newsletter, below, if you'd like more (I'll flag up when the legislation date actually kicks in).

Small print: As always, please do not take this as formal advice and consult your legal Counsel - just my opinion :)

Thanks

- Steve

Why Brian Farrington?

There are three themes that clients tell us over and over again.

First, they tell us they believe they are making a smarter investment working with Brian Farrington Ltd — bringing a thorough understanding of their procurement and supply chain issues and a proven track record of enabling excellent returns on their investment.

Second, our clients are confident that they are working with specialists that bring experience, expertise and stay focused on client success; not on our next income target.

Finally, people –people just like you – tell us they actually like working with us. They find us easy to work with and collaborative in solving issues that inevitably arise in procurement.
About Brian Farrington 

Brian Farrington is one of the world’s longest established procurement and supply chain consultancy and executive training specialists. 33 of the current FTSE100 have retained our services, as well as leading government organisations in the UK, North America, southern Africa and Asia. Established in 1978, we have proven expertise and experience in procurement, risk and negotiation.

Brian Farrington solutions and services are formed through consultancy, training & development and coaching – all underpinned by proprietary technology. Our four core areas of procurement capability are:

•Strategic review and commercial governance

•Performance delivery and transition

•Major project support including contract negotiations

•Learning & development in support of organisational aims.

Let’s connect on Twitter and LinkedIn  – or give me a call on 01744 20698 :)

Have you had a look at this innovative approach to managing procurement risk?

 

 
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A glossary of commercial terms for the switched on buyer

Here we go, alphabetical order:




Acquisition The process of requirement setting, procure, support management and disposal, implying a whole-life approach to acquiring defence capability. (Also see Cost of Ownership.)

Agreement in Principle This is another qualifying comment. It means that it is not formally accepted, thus leaving the door open to the seller to withdraw the agreement in principle if something arises in discussions or negotiations that impact on the provisional agreement.

Alliance A procurement strategy in which a Buyer selects and contracts with a number of suppliers, the aim being to include those best placed to introduce innovation and mitigate recognised risks. The Buyer and the other Alliance partners share risks and benefits. The Buyer will typically appoint an Integrator to lead project management across the Alliance.

Anchor Milestones The characteristics of Anchor Milestones are that they should be associated with those activities that are on a project's critical path and that their achievement should improve confidence that the intended project delivery will occur on time. Monitoring of Anchor Milestones will provide an early alert if the risk in delivering a programme within its approved time, cost and performance envelope increases.

At a price to be agreed This should not be accepted by the buyer. It leaves the buyer vulnerable to any price submitted by the seller. On the occasions when a price cannot be agreed prior to signing a contract an Instruction To Proceed may be placed with a financial cap attached to it, thus giving the buyer an opportunity to, later fix the price on a rational basis.

Breach This occurs when one party fails to perform one (or more) of its obligations under a contract.

Common Law Damages Common law damages are remedies available to any contracting party to compensate for the financial loss suffered as the result of a proven breach of contract. They require demonstration of the breach and, unlike Liquidated Damages (LDs), the loss incurred as a result of the breach. 

Consequential Loss Consequential loss is any loss that does not arise directly as a result of a breach of contract. Such losses are more ‘remote’ than those that were reasonably foreseeable by the parties to a contract and may not be recoverable.

Contingent Liability Contingent liability arises if The Buyer grants an indemnity to any other body, including a contractor, because it commits Parliament in advance to unpredictable expenditure. All contingent liabilities must be approved by the financial authority responsible for the acquisition requirement. Where the liability is substantial and/or cannot be categorised as ‘normal business’, Treasury should be consulted before proceeding further.

Contract Management Plan An important tool for ensuring that the client identifies and addresses all relevant issues through the life of the contract. It is a dynamic document which is created during the contract formation stage and modified throughout the life of the contract.

Contractual terms noted This is a qualification and is a meaningless statement. Noted in what regard? Do they have an objection? If so, what is it? What is the process to resolve any differences?  The buyer must not believe that the seller has accepted his contractual terms and conditions.

Copyright A form of statutory protection for original literary, musical, dramatic or artistic works, which terms include technical papers, drawings etc. and computer software. Copyright provides the right to protection against unauthorised copying, publication or performance of a protected work. Copyright comes into existence automatically when the work is created and therefore applies to unpublished as well as to published works.

Cost of Ownership An annualised representation of the resources consumed directly in the procurement, operation, training, support and maintenance of military equipment at all stages of its life. The Cost of Ownership statement is the costed element of the Through-Life Management Plan.

Direct Costs / Indirect Costs Costs that can be identified directly to a specific, contracted, task (e.g. labour and materials) including ‘bought out’ or sub-contract costs. Costs that are expended throughout the contractor’s business or cannot be attributed to a particular job are ‘overheads’ (e.g. the cost of running the contractor’s headquarters and buying utilities such as electricity, canteen staff, cleaning materials). These costs are usually expressed as a percentage of direct costs.

E&OE This means Errors and Omissions Excepted. This is a significant qualification and should not be accepted by the buyer. To accept the statement is leaving the door open to the seller to change any aspect of the quotation.

Estimate This is a price submitted by the seller but who may word it as subject to confirmation. The buyer needs to establish if it is a price capable of acceptance and whether it is ‘firm’ or ‘fixed.’ The danger of placing a contract on this basis is that the seller requires an uplift when he is in possession of further information.

Express Guarantee (or Express Warranty) An agreement whereby a Contractor agrees to repair or replace defective goods free of charge (or with certain limited fees - e.g. transport costs) where the defects are of a type covered by the guarantee and where they arise within the period specified within the guarantee. It normally excludes all other warranties and conditions implied by Common Law

Ex-Works A method of delivery. Goods are collected from the seller’s premises by the buyer or his agent or authorised representative at the time stated in the contract. Title to the goods delivered ex-works will usually pass at the time of collection.

Firm Price A contract price that is not subject to variation for a specific period of time.

Fixed Price A contract price that may be varied on an agreed basis to take account of inflationary and/or exchange rate movements

Force Majeure An unpredictable event or occurrence beyond the control of the contracting parties, and which is not attributable to any act or failure to take preventive action by the party concerned. A Force Majeure condition allows an extension to the contract duration or completion/delivery date should a Force Majeure event occur.

Gainsharing Where the Buyer encourages a supplier to propose cost or performance improvements that could be made providing the Buyer agrees to vary its specification and to share the gain with industry.

INCOTERMS A shorthand for the guidance on International Rules for the Interpretation of Trade Terms (‘Incoterms’). INCOTERMS describes the different methods by which delivery may be made.

Indemnity An arrangement where one party (the indemnifier) agrees to pay another (the indemnified) sums of money to compensate the indemnified for a loss in the circumstances described in the indemnity term.

Integrator Also referred to as a Physical or System Integrator. Typically used as part of an Alliance procurement strategy to build, manage and lead project management across the Alliance partners and is often a project management specialist. See also Alliance.

Interim Payments A generic term for payments made to a contractor before the work is completed. The preferred method is ‘stage’ or ‘milestone’ payments, which provide pre-determined advances of the contract price at predetermined stages or milestones of the work. The payments are made against achievement; if the stage or milestone is not achieved then the Buyer may take a view as to the amount to be paid. All these payments (advances) are recoverable in the event of non-performance of the contract.

Invitation to tender An invitation by the Buyer for suppliers or contractors to offer binding proposals to undertake work to a published specification; unconditional acceptance will lead to a contract.

KPI Key Performance Indicator. KPI’s are tools that help us to measure the performance of suppliers against their contractual obligations. KPI’s are normally detailed in the service specification

Letter of Intent When properly written this does not create legal relationships, it merely gives comfort to the other party that they may win a contract. In the USA they are called ‘comfort letters.’ For it to be a letter of intent it must not instruct the seller to take any actions, otherwise it becomes an Instruction to Proceed which does create legal relationships.

Limitation of liability An arrangement where a party to contract limits his liability to the other party; this may be for the value of a contract, or for damages in the event of breach of an obligation

Liquidated Damages A contractually pre-agreed sum payable by way of compensation in the event of a specific breach of contract (e.g. late delivery).

Maximum Price A term usually used in Target Cost Incentive Fee Price (TCIF) arrangements and is that price beyond which The Buyer is not required to pay. Costs incurred above the Maximum Price fall to the contractor alone. Exceptionally, a Maximum Price may be adopted until a Firm Price can be agreed

Objectives and Key Results Objectives and Key Results ("OKRs") ensures discipline thinking (the major goals will surface), you communicate accurately (lets everyone know what is important), establishes indicators for measuring progress (shows how far along we are) and focuses effort (keeps your firm in step with each other).

Offer and Acceptance Offer and acceptance – with any requisite detail – are essential elements of contract, but it may be very difficult to tell whether or when they have come into existence.  They do not usually require formal declarations by the parties.  They may result informally e.g., from a course of dealings, or even from silence (but note the Unsolicited goods and Services Act 1971).  Use of the words “offer?? and/or “acceptance?? is not usually conclusive.

Parent Company Guarantee A parent company guarantee binds the guarantor (the ‘parent company’) to fulfil and complete a subsidiary company’s obligations and liabilities in the event of a failure by that subsidiary to fulfil and complete its obligations and liabilities under a contract

Partnering An open, co-operative and interactive relationship between The Buyer and a Supplier, aimed at achieving common goals notwithstanding complex and volatile environments

Patent A monopoly right granted to protect an invention which can be an apparatus, process, product or substance. A valid Patent gives its owner (the Patentee) a right to stop other people using the invention that is the subject of the Patent. Provided renewal fees are paid, a patent will last for up to 20 years.

Prime Contractor. A contractor having responsibility for co-ordinating and integrating the activities of a number of sub-systems contractors to meet the overall system specification efficiently, economically and to time

Procurement The process of acquiring goods, works and services, covering acquisition from third parties and from in-house providers. The process spans the whole life cycle from identification of needs, through to the end of a services contract or the end of the useful life of an asset.

 Quotation It must be established if the quotation is an offer to sell or an invitation to treat. Often the supplier will couch it in terms of ‘This quotation is not an offer.’ The buyer must read the quotation for any qualifying comments that seek to place risk with the buyer.

Request for Proposals A request by the Buyer for a contractor or contractors to supply non-binding proposals on how it or they would meet the requirement.

Reasonable price There is no such thing as a reasonable price! The price will be set according to many things including the market conditions; seller’s pricing strategy, risk profile of the contract, liabilities, etc. This term is best avoided by the buyer.

Risk The probability of an unwanted event occurring and its subsequent impact. See Procurisk

Specification A description of requirements and standards to which the goods, works or services should conform. Also known as a statement of needs, a statement of requirement, an operational requirement, or a brief. Its purpose is to present prospective suppliers with a clear, accurate and full description of the organisation’s needs, to enable them to propose a solution to meet them

Stakeholder An individual or organisation that has an active interest or a stake in a particular organisation or issue. For example, funders, members, contractors, purchasers, trustees, beneficiaries, volunteers and paid staff are all stakeholders in a voluntary organisation

Standard Forms The forms (of contract) may be drafted by the economically stronger party, or based on trade association rules, or the Incoterms published by the International Chamber of Commerce, codes approved by the Office of Fair Trading, or other such rules of practice.  Typically the forms seeks to limit liability for breach, allocate risk, provide for payments, settlement of disputes, etc.

Subject to Contract The use of these words is not a valid acceptance of a contract. An acceptance made subject to any variation is treated as a counter offer. The buyer must know the rules of offer and acceptance.

Subject to Negotiation This is a further qualification and cannot be treated as acceptance. Until the negotiations are complete and the outcomes documented and agreed by both sides there is not an offer that can be accepted by the buyer.

Target Cost Incentive Fee A method of pricing used when there is insufficient confidence to agree a Firm or Fixed Price. A ‘target cost’ is agreed (i.e. the cost at which both parties believe the work can be done). If the contractor’s costs are below the target cost he will share the underrun with the Buyer in line with a pre-determined ratio. If his costs are greater than the target cost the Buyer will share the overrun also in line with a pre-determined ratio. It is usual for the Buyer to include in a TCIF arrangement a cost ceiling figure (i.e. Maximum Price) above which the contractor will take full responsibility for any overrun.

Through-Life Management Plan The Through-Life Management Plan should bring together key themes of Integrated Project Teams, Systems Engineering and improved commercial practices. An outline Through-Life Management Plan should be produced in the concept stage and maintained throughout the procurement cycle. It will show the full resources needed to meet the objectives of the project and is recognised by all stakeholders.

Trade Mark Trade marks consist of words or symbols that distinguish one set of goods from another or the services provided by A from those provided by B. Even colours or sounds (i.e. jingles) can act as Trade Marks. Trade Marks can be registered or unregistered; wider rights of action being granted to the owner by registration.

TUPE Transfer of Undertakings (Protection of Employment) Regulations 1981. The aim of TUPE is to protect employee rights (in particular terms and conditions) on the transfer of the business in which they work (the ‘undertaking’) from one employer to another. Government policy on Public Sector transfers is that TUPE will apply to contracting out except in genuinely exceptional circumstances

Unregistered Design Unregistered design rights are automatic and apply to any original design excluding those features of a design applied to an Article that are made to ensure that it fits or matches with another part. Protection for an unregistered design lasts for 10 years from first commercialisation of the design

Valuable Consideration English law (but not Scots law) sees a contract as involving enforcement of a bargain rather than enforcement of a promise by one party only.  As a rule, one side’s promise cannot be enforced by the other unless he has “bought?? it.  This requirement of mutuality or reciprocity, the quid pro quo, is called “valuable consideration??.  It means that the promise must give or do or promise to give or do something of economic value (not necessarily equivalent to the promise) in return for the other’s promise before he can enforce it.  Alternatively the promise may show the promisor has received a benefit as a result of his promise.  A promise given in return for an act or promise which was undertaken without contractual intent is given for past consideration, which is of no legal effect.  A promise to accept part payment in full settlement is also generally unenforceable.

Value for Money The provision of the right goods and services from the right source, of the right quality, at the right time, delivered to the right place and at the right price (judged on whole life costs and not simply initial costs).

Variation of Price A mechanism by which the risk of inflation in a contract price is reduced (or removed) through the application of a formula which provides for a periodic adjustment of the Fixed Price in the contract

Whole-Life Costs The aggregation of the annual Cost of Ownership statements covering the total resource required to assemble, equip, sustain, operate, and dispose of a specified military capability at agreed levels of readiness, performance and safety.

Without prejudice This is a phrase used to enable parties to negotiate settlement of a claim without implying any admission of liability. Letters and other documents headed ‘without prejudice’ cannot be adduced as evidence in any court action without the consent of both parties.

 

That's it!

A glossary of commercial terms for the switched on buyer. What have we missed? Please drop me a note, with your suggestions and additions it would be great to grow this into a really useful resource - and as always your help and support is appreciated.

 

Why Brian Farrington?

There are three themes that clients tell us over and over again.

First, they tell us they believe they are making a smarter investment working with Brian Farrington Ltd — bringing a thorough understanding of their procurement and supply chain issues and a proven track record of enabling excellent returns on their investment.

Second, our clients are confident that they are working with specialists that bring experience, expertise and stay focused on client success; not on our next income target.

Finally, people –people just like you – tell us they actually like working with us. They find us easy to work with and collaborative in solving issues that inevitably arise in procurement.
About Brian Farrington 

Brian Farrington is one of the world’s longest established procurement and supply chain consultancy and executive training specialists. 33 of the current FTSE100 have retained our services, as well as leading organisations in the UK, North America, southern Africa and Asia. Established in 1978, we have proven expertise and experience in procurement, risk and negotiation.

Brian Farrington solutions and services are formed through consultancy, training & development and coaching – all underpinned by proprietary technology. Our four core areas of procurement capability are:

•Strategic review and commercial governance

•Performance delivery and transition

•Major project support including contract negotiations

•Learning & development in support of organisational aims.

Let’s connect on Twitter and LinkedIn  - or give me a call on 01744 20698 :)

Thanks

- Steve

 

 

 
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Mirror your partner's dreams; the relationship will grow
Brian Farrington Ltd is committed to working with leading organisations involved in risk and procurement, co-delivering procurement and supply chain risk solutions to clients across the UK and globally.

Partner With Brian Farrington Ltd

Our Partner Programme is designed to provide you with innovative procurement and supply chain risk solutions. We create close business relationships for mutual business benefit, and as procurement and supply chain ‘challenges’ becomes a corporate level priority for leading organisations there is no better time to join us.

Becoming a Value Added Reseller (VAR)

VAR partners of Brian Farrington Ltd are primarily resellers of our innovative PROCURISK®, a web-based application that facilitates a structured assessment of Procurement & Supply Chain Risks. Our VAR partners will be skilled in the application of our proprietary methodologies, and able to provide full delivery services, as well as ongoing training and support to your clients.

Consulting Partners

You will be a professional consultancy practice in the risk domain who have specialised industry and application expertise. Typically, you will specialise according to industry or region and closely work with your clients to define and implement risk and related procurement and supply chain solutions.

If you are interested in our Partner Programme and would like to talk please get in touch with Stephen Ashcroft who can be reached at +44 (0)1744 20698 s.ashcroft@brianfarrington.com Twitter @ProcureChange.

 

For details of Procurisk®, a web-based application, facilitating a structured assessment of Procurement & Supply Chain Risks Ray Gambell can be reached at 01744 20698 r.gambell@brianfarrington.com Twitter @Procurisk. Go to www.procurisk.com.

PROCURISK® is procurement and supply chain risk intelligence software that helps people see and understand risk.

 

 

 
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And what was breakfast like for you?
It’s all over and I’m more energised than tired.  Yesterday was the first event in our International Festival programme.  It was a breakfast event focussed on 60 Minute Business Boost: Energise, Fortify and Flourish 2 July @theHub  We’re quietly pleased at the positive response.

It was a real kick meeting so many clients and contacts, and having the whole team working together to make this #IFB2014 event such a great experience.

[caption id="attachment_3152" align="alignleft" width="230"]Here's our MD Brian enthusing the audience Here's our MD Brian enthusing the audience[/caption]

Everything went off without a hitch – from the presentations to the breakfasts to the entrance arrangements at the Hub. The room (not just a standard room by the way, it really is like something of a James Bond lair!) the right size – with an amazing ‘event’ feel - and everything was in close proximity to each other. I think at the last count we had over 30 people chowing down for a breakfast of pastries, toast and fruit plates.  The fresh orange juice was definitely a hit.

Having the exhibitors, briefing material and demo stations in one section I thought was a great idea. It turned this room into a type of ‘hub’ and it was never difficult to find a new person to talk and discuss what they do to boost business to grow the bottom line and achieve their ambitions.

 

 

 

ifb 60 forum


You know what?  We were a touch concerned about the ‘appetite’ from business owners and company directors for a thought provoking procurement update providing inspiration and momentum for their businesses.

 

 

[caption id="attachment_3155" align="alignleft" width="230"]Brian and Ray - all smiles Brian and Ray - all smiles[/caption]

Energise, Fortify and Flourish was our strapline and it really did appear to have resonance with the delegates. It was all underpinned with a bit of steel though.  For example the role of purchasing to impact on the bottom line - the opportunity to reduce purchase prices without reducing quality.  And also considering risk: the need for due diligence when working with suppliers and unacceptable risks that some companies enter into.  The presentation part of the event ended with some pretty sharp questions and, what looked like some valuable insights in response.  A good, mature and valuable event - with no ‘flannel’. There was a flurry of exchanging business cards during networking as the successful event came to a close – always a good sign.

 

 

 

 

[caption id="attachment_3153" align="alignleft" width="230"]Steve greeting the first delegate of the day Steve greeting the first delegate of the day[/caption]

Everyone at Brian Farrington would, of course, like to thank the Attendees, Co-Sponsors, Keynote Speakers, Programme Committee and Presenters for making it great event. If you would like a copy of the presentation slides please get in touch and I’ll get them across to you.

- Steve

PS Our next event is the Innovators days, 16 July. Delighted to say we've had a great response to join us at another cracking venue.  Hope you can join us, either way sign up to our newsletter, below for advice and insights on procurement.
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What else is there outside the trinity of KPIs?
Key performance indicators (KPIs) are a positive means of illustrating that the value of your procurement operations is beyond "just" cost reduction and administration of orders.

I will take it for granted that the trinity of delivery, quality and cost will already be included. Right?  RIGHT!? :)

Measurement of parameters in a vacuum can be misleading. Procurement should also track performance in comparison to others - benchmarking internally, by each country's operation in a multinational organisation for example, or externally with other organisations through an "honest broker".

Four inter-related areas form the basis of procurement performance indicators:

  • Strategy - implementation against agreed milestones, for example the amount of expenditure influenced by procurement, usage and linkage to IT strategy (including different forms of e-procurement) and the broader business strategy.

  • People - this facet can take many forms, such as service quality or stakeholder satisfaction through questionnaire surveys and an objective assessment of procurement competencies. An example would be public-sector staff having a thorough understanding of the implications of the Alcatel judgement.

  • Procedures - clarity on procurement and supply chain management procedures such as for outsourcing key services, major projects or low-value purchasing.

  • Governance - there are regulatory requirements and best-practice aspirations that procurement should consider when developing KPIs. The acronym PESTLE (Political, Economic, Social, Technological, Legal and Environmental) is helpful when considering governance issues.


The overarching aims of your "Procurement Performance KPIs" are to demonstrate effective management of third-party spending and to provide a framework for monitoring performance and continuous improvement. The challenge is to obtain access to relevant information, avoiding potential data overload, and engendering commitment from stakeholders to a continuous improvement process.

In grappling with developing your own KPIs, what have you found particularly helpful?

If you'd like some ideas that have proven useful for other people seeking the value of procurement operations, get in touch - I'd love to help.

- Steve

PS More on KPIs here and for the best insights  straight to your inbox sign up to our newsletter ‘Think Procurement – scroll to the bottom of the page for details, thanks.
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Using a force majeure clause


This area is a minefield and, if you get it wrong, you will undermine your contract.

If worded badly, a "force majeure" clause can provide a huge loophole to legally excuse contract performance. The parties in a contract must know the precise definition, scope of its usage and limitation of the clause. A brief definition of force majeure is

"irresistible compulsion or coercion".


In 2002, in the case of Mamidoil-Jetoil and Moil-Coal v Okta, the judge stated that force majeure could only be cited to excuse performance of contractual obligations in circumstances where events are outside the control of the contractual party.  In other words, the clause can only be brought into play when events could not have been avoided or mitigated by reasonable steps by the party concerned.  The clause can be written to include provisions for the buying company to claim relief from liability for its non-performance.

We will, however, focus on what you must take into account in offering the supplier the provision of force majeure. Here's 5 points to inform your thinking on how to set up and use Force Majeure clause:

  1. Your definition. When writing a contract, you should define a force majeure event and detail the causes that will meet such an instance. You should take legal advice on this, considering acts of God, war or armed conflict, acts of terrorism, acts of government, earthquake or disaster. If your supplier wants these included in a force majeure clause, you should ask for the supplier's risk mitigation strategy to deal with each circumstance. They should have such a strategy and this will help you decide whether to include the specific event.

  2. Events to be rejected from the clause. There are some events that should be rejected, such as the supplier claiming a shortage of skilled labour and failures in his subcontractor's supply chain. You should also reject strikes, floods and fire on the basis that there should be a risk mitigation strategy capable of being implemented at very short notice.

  3. Supplier obligations. The clause should include a requirement for the supplier to alert your company to a force majeure situation within, say, 48 hours of it happening. This notification should include details of the occurrence and evidence of its effect on the obligations of the supplier, who should also set out what they are doing in mitigation. The two parties should meet soon after the event to discuss terms to mitigate the effects and facilitate the continued performance of the contract.

  4. Termination. You should include a provision to terminate the contract if, for example, the force majeure event continues for a longer period than, say, 28 days. This mechanism will need to state how many days' notice - for example, 14 days - should be given to terminate the contract. It is probable that some compensation may be due to the supplier and this will need to be set out in the contract.

  5. Mitigation. Your organisation must also have a mitigation plan, in case it has to terminate the contract.  In addition, it is advisable to see your legal services department when you have collected the relevant information.


5 areas to focus on in the use of a Force Majeure clause. What have I missed?

So here's the lesson:

If you're unsure about the Force majeure clause you're using, there's probably a decent reason.

And you may well find, like me, that by finding a way to make your Force Majeure clause more useful to the Buyer (and the Supplier) you'll find the contract performance benefits.

And the Supplier will pay a lot more attention to it.

And they'll help you deliver your required outcomes.

That can't be bad.

- Steve

What about the most favoured nation clause?

PS for the best insights  straight to your inbox sign up to our newsletter 'Think Procurement - scroll to the bottom of the page for details, thanks.
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Where now for the EU Procurement Directives?

Public procurement is legally accountable for its decisions.


Depending on the value of the specific purchase it will be subject to EU Procurement Directives. The existing Directives, harking back to 2006, could not be deemed to be a robust solution to effective procurement. The new Directives are complex, unproven and laden with potential bureaucracy. There are legal, governance, commercial and financial ramifications for public sector procurement strategies and policies. These considerations abound with implications for private sector organisations bidding for contracts in the future.


A selective critique and commentary follows on some highlights of the new Directives.

Where now for the EU Procurement Directives?

On the 14 January 2014 the European Parliament voted to accept the new Directives to replace Directive 2004/17 (Utilities Directive) and Directive 2004/18 (Public Sector Directive). These are likely to be implemented in the UK by the Cabinet Office during 2014. The official line is that the new EU Directive on public procurement intends to make the process of purchasing goods and services by public bodies, faster, more flexible and more effective. Time and events will tell! Those on the receiving end of public procurement processes wax lyrically about the overwhelming bureaucracy, unclear specifications, pre-qualification documents requiring a plethora of policies, unclear tender evaluation models, lack of feedback to unsuccessful bidders and timescales that are not adhered to. There is solace in the fact that the Remedies Directive remains unchanged.

We predict it will be used with more vigour when the future outcomes of public procurement decisions emerge, together with the manner in which the new Directives are applied in real life scenarios.

The final version of the “Proposal for a Directive of the European Parliament and of the Council on public procurement (Classical Directive) (First Reading)?? can be found on the Council of the European Union – Institutional File: 2011/0438 (COD) – Public Sector Directive. The Utilities Directive reference is 2011/0439. The Concessions Directive reference is 2011/0437.

Commercial organisations will welcome the abolishment of the ‘Negotiated Procedure.’ This is replaced by a new process, ‘Competitive Procedure with Negotiation.’ The Negotiated Procedure has been actively discouraged by UK Public Sector policy, arguably on the basis that the ‘Competitive Dialogue’ procedure was more fitted to complex procurements. This missed the point. The private sector sees negotiation as a positive practice, engaged in by mature organisations who genuinely seek to reach a long-term solution. Negotiation will offer a challenge to those public sector buyers who lack advanced skills. The scope of negotiations could include cost models supporting the price, key contract clauses such as limits of liability, insurance, damages and the provision of accurate management information.

The National Audit Office reports are testimony to failures of the public sector to engage in meaningful clarification and negotiation.

The implementation of the ‘Competitive Procedure with Negotiation’ is likely to need extensive bedding in. The procedure has the potential to generate challenges to contract award decisions. This will prove costly for all the parties involved.

The abolition of differentiation between ‘Part A’ and ‘Part B’ services is a welcome change. Currently, Part A services are subject to the full scope of the Procurement Directives. This includes financial services, cleaning services and insurance services. Part B services have been subject only to limited regulation and it may be postulated that, in consequence, some Part B services have exposed the public sector to excessive pricing regimes from parts of the private sector.

An example, from real life, is a service provider to the private sector charging £750 per hour, whereas the same supplier was charging the public sector on a multiplier of 1.5. The immunity of some Part B service providers is, of course, now threatened.

It is optimistically held that the new Directives will be a boost for small and medium enterprises (SMEs). The Directives will encourage (our emphasis), public sector buyers to break large contracts into smaller lots and capping turnover requirements for businesses. Hence, there is only encouragement and intent. It must not be forgotten that under the current procurement regime it has always been possible to break a procurement requirement into Lots. This approach has been contrary to the public sector penchant for aggregating requirements to obtain lower prices, notably by the Office of Government Commerce and its successors.

The consequence has been SMEs actively being discouraged, if not deliberately excluded, from some procurement exercises. This has fostered the award of contracts to large UK, European and USA corporations. The concentration of public contracts by value and strategic significance has largely been swept under the carpet.

What will the future hold?

It is beguiling to believe that public sector buyers will now concentrate on advertising requirements in Lots. The main reason, we suspect, will be the danger of an avalanche of tenders from SMEs and the resources required to deal with that situation. The public sector has not adopted best practice conducting due diligence on suppliers prior to contract award. There are numerous examples of a sole source suppliers entering into administration, without the buying organisation having Plan B in place. Worse still, is the absence of risk modelling on a broader scale than just probing the financial health of contractors and vendors.

We are pessimistic for SMEs gaining a much greater share of public sector contracts.

The proof of financial capacity is materially changed in the new Directives. To encourage the participation of SMEs, the maximum yearly turnover that economic operators are required to have, shall, in future, not exceed two times the estimated contract value, except in duly justified cases, such as where there are special risks. A scrutiny of this language leaves no doubt that there will be many such duly justified cases. The role of credit agencies is not mentioned, but warrants comment here. The robustness of financial credit checks is in some cases less than robust. We are aware of one situation where the financial basis of the credit score was four years out of date.

The price of goods and services has always been a contentious matter in public sector procurement. There has been a provision to award contracts purely on a ‘price’ basis or ‘Most Economically Advantageous Tender’ (MEAT). Typically, MEAT has been evaluated on the basis of price and quality. In one situation a Local Authority gave price 90% of the evaluation weighting. The new Directives introduce the concept of life cycle costing. We confidently predict that the Remedies Directive will be used by economic operators to appeal decisions to award contracts when life cycle costing was misapplied in tender evaluations.

The draft Directives include the following statement,

“Qualitative criteria should therefore be accompanied by a cost criterion that could, at the choice of the contracting authority, be either the price or a cost-effectiveness approach such as life cycle costing.??

Therein lies the potential for future disputes over contract awards.

There is a huge difference between knowing a Lump Sum price and understanding the cost drivers behind the price. This latter approach would require declaration of labour costs, material costs, overhead recovery, contingency provision to cover the risks inherent in the purchase, profit, environmental, social, disposal of goods and/or recycling. The public sector has a track record of not developing cost models to expose all these cost drivers.

The implications for the private sector are profound. They need to acquire the skill of disclosing this layer of detail, and in future, be competent to handle strategic negotiations where the cost drivers are scrutinised.

Legal compliance and governance. In respect of legal compliance and governance, there is now a requirement for member states to take ‘appropriate measures’ to ensure that in the performance of public contracts economic operators comply with applicable obligations in the field of environmental, social and labour law established by Union law, national law, collective agreements or by the international environmental, social and labour law provisions. It may be noted that a failure to comply with these obligations will be grounds for exclusion from a tender.

Finally, the draft Directive states:

“Traceability and transparency of decision  making in procurement procedures is essential for ensuring sound procedures, including efficiently fighting corruption and fraud??.

Risk modelling for procurement decisions is in its infancy. For free access, until 30 June 2014, to our risk modelling solution Procurisk® ideally suited to identifying risks in procurement and supply chain please contact Steve Ashcroft s.ashcroft@brianfarrington.com or call 01744 20698.

 

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