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Items from 2016

Risks Involved with Having Supplier Assets on Your Site

               There are many contracts where a supplier will have their assets on the buyers’ site. There are consequences of this scenario for which procurement must ensure the potential consequences are dealt with. Some examples of supplier assets on a buyers’ site are:

  • IT hardware being used to support the suppliers’ project.
  • Plant and equipment used on construction projects.
  • IT licenses being used on the buyers’ project.
  • Project documentation.
  • Maintenance tools stored by buyers’ organisation.
  • Site cabinets and furniture.

               Assuming you are in procurement you will find the following questions helpful to determine whether your organisation has covered all the necessary risks:

  1. Who is insuring the supplier assets?
  2. What does your contract say about the supplier assets?
  3. Do you know what supplier assets are on your site?
  4. If the supplier goes into administration can you use the supplier assets?
  5. Who checks the supplier assets for compliance with health and safety requirements?
  6. How are the supplier assets stored?
  7. Do any of the supplier assets have to be checked for security implications?
  8. What happens to the supplier assets when the project finishes?
  9. Do you know if the supplier assets are owned by a third party or hired?
  10. Who in your organisation is accountable for managing the implications of supplier assets on your site?

               What are the dangers of failing to manage supplier assets on your site? Here are just a few:

  1. The assets are uninsured by the supplier when the assets are on your site.
  2. The supplier enters into administration and his assets are seized.
  3. The assets belong to a third party who removes them from your site.
  4. The IT licenses are misused.
  5. The assets do not comply with all the relevant legislation.

               We can help you manage all of the above risks (and more). Contact Ray Gambell on 01744 20698 or at r.gambell@brianfarrington.com to discuss your options, we always welcome interest.

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Where are the Risks in Software Procurement?

               All IT procurement presents risks. Software procurement, and the outcome, is at the heart of business performance and reputation. Where are the software procurement risks? This subject would warrant a comprehensive textbook – are there any volunteers? We have selected five procurement risks that recur in our professional life. Do they have resonance in your business situation?

  1. The company executives and/or IT senior executives are adamant that a particular supplier will be contracted. There by undermining the tender process, negotiation and pricing options. It is probable in this scenario that the supplier will flow significant risks to the buying reputation. It is often just a matter of time before the situation comes back to bite the organisation.
  2. The solution requires significant modification and is unproven in the buying organisations business situation. A cost benefit analysis is almost impossible. It is highly probable that there will be claims for ‘additional work’ and claims for extensions to time. For many, this is the time when deals such as this are eventually aborted after considerable sums of money has been expended.
  3. There is no acceptance plan, nor is the acceptance resting detailed in the contract. This is a massive potential risk, forcing IT and stakeholders to accept the software when there has been inadequate testing. There is the danger that acceptance will be made when major deficiencies exist in the software performance. The supplier’s promises to correct the deficiencies are probably empty words.
  4. Up-front contract payments are required by the supplier. Time and again we are told that this is custom and practice in the IT sector. Why? We have seen 50% of contract payment made before any work is done. Equally appalling, the payment is not secured with either a bank guarantee or a parent-company guarantee. There are also milestone payments such as “25% of milestone payment when the work is 50% complete”. This should not warrant a payment because there is no IPR that the buyer can acquire.
  5. The supplier does not have sufficiently skilled personnel. And will sub-contract high proportions of the work. This presents high risk and will probably place a significant onus on the buying organisation to manage the supplier resources. There is, of course, the risk that the sub-contractor has provided only limited liability to the supplier.

               Can we help you?

               We can have a positive impact on IT software procurement, working with procurement, IT and Stakeholders. We can also resolve disputes quickly and efficiently. Contact us on 01744 20698.

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Toronto Zoo and the Tundra Construction Project

               Real projects always have learning when the outcome is known. The Toronto Zoo project is a case in point. The Zoo’s Tundra Project included the construction and rehabilitation of various exhibits such as the polar bear, arctic wolf, exotics bird, fox and reindeer exhibits.

               The Toronto Auditor General’s office reported on the project in January 2010. The report relates to contract management. The Project was delayed by approximately 8 months; some of the factors contributing to the delay were outside management control. Among the lessons learnt, were:

  1. The company conducting inspection and testing should be hired by the zoo, not the contractors. The Audit report observes “this practice impairs the inspector’s independence in appearance, if not in fact.” It is a construction risk where procurement should have had an involvement.
  2. Change order justification needs to provide more detail. The Toronto Zoo approved over 80 change orders totalling $1.2m or 11% of the original construction contract amount. The report is insightful and observes that it could not be readily determined whether the extra work was due to:
         a. Design deficiencies arising from errors or omissions by the architect or consultants.
         b. Errors or omissions by the Zoo or the contractors.
         c. An unknown condition that could not have been identified during the project design.
         d. User requests for scope changes not included in the original project.

               There are 11 more observations in the Audit Report, most of which could have been subjected to procurement advice and control.

               Can we help you?

               If you are planning or are engaged in a construction project, we can work with you by applying our Project Procurement Risk Metrics in Procurisk®. Give us a call on 01744 20698, we welcome discussions.

               You can read the complete Audit Report here: http://goo.gl/Z1KyW4

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Purchasing and Procurement with SME's

               SME’s offer a serious alternative, in some procurement situations, to the ‘big league’. Unfortunately, the odds are stacked against SME’s winning work in far too many situations. Despite public sector claims that they have made it easier for SME’s to win work, it is not borne out by the evidence.

               We have recently seen a Pre-Qualification-Questionnaire (PQQ) consisting of 70+ pages of questions. Whoever prepared it was oblivious to the actions risk presented by the supply of the services. Why were there six pages of questions about health and safety? It would have been difficult to imagine a lot more questions if the contract was to build a nuclear power station! Similarly, a multitude of questions about IT systems, IT security and related matters. There is a skill in tailoring PQQ to specific situations but this requires original thought and expertise. It is far easier to reissue PQQ’s – no imagination is required!

               We are an SME, so we encounter all this first hand. Generally, SME’s are founded by individuals who have expert knowledge in a particular technology or in a specific area. They understand speculations and quality management, although some will be less versed in financial and contractual matters. There is a well proven technique called ‘supplier development’. It requires a purchaser to help the supplier because they’re more proficient in facets of their business. It also requires the purchaser to invest some time advising the supplier. Remember, the SME’s costs are lower, their overheads are lower and the service area they do not have to pay ‘partners’ £350,000 a year.

               Can we help you?

               We can help you to change your procurement strategy to accommodate SME’s. We can design PQQ (and tender documents) to meet specific circumstances. You can call us to discuss this and more, on 01744 20698.

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Venue Naming Rights in Contractual Agreements

               Our research into a wide variety of procurement issues and contractual agreements takes us into some interesting detail. We are all familiar with sporting venues being named after a sponsoring organisation. We have been reading the agreement for the San Jose Sharks, a professional hockey team and member club of the National Hockey League. The contract started in 2000.

Who won the naming rights?
               Hewlett-Packard won the naming rights.

What was the term of the contract?
               15 years with the option to extend for 3 years.

Were there definitions?
               Yes, including “event” which means any non-game presentation, including, but not limited to, concerts, athletic events, theatrical productions, shows, public gatherings, or any other scheduled happenings, taking place at the venue.

Printed materials?
              The scope of this contractual provision is for reacting and says that the venue marks will be incorporated and used in the printed business, marketing, promotional and press materials of the venue. This includes, without limitation, letterheads, game and event tickets, directories, VIP, team, employee and staff credentials, building and security passes, and other forms of documentation.

What did the naming rights cost?
               The annual fee was $3.25m.

Did intellectual property have a role?
               Yes, and they included “Ownership of Venue Marks”. The agreement stated, “The parties agree that SAP shall own all right, title and interest on the venue marks, including, without limitation, the trademarks and copyrights associated thereafter.” SAP will license or acquire from the creator(s) of the logo’s “artist’s design” sufficient rights, included but not limited to right in any copyright, to permit unrestricted use of the trademarks associated with the venue marks.

What role did force majeure have in the contract?
               It has a significant role in the contract. The wording is well worth studying by procurement specialists. The skill in drafting a force majeure clause is tailoring it to specific circumstances. Essentially, if performance is prevented, restricted or interfered with by reason of any event beyond the reasonable control of the parties, included but not limited to (BFL Comment: the force majeure events are wide ranging.) fire, flood, epidemic, earthquake, explosion, act of god or public enemy, riot or civil disturbance, strike, labour dispute, war, terrorist threat or activity, any government law, order or regulation, or order of any court or jurisdiction. There are complexities in the force majeure clause that are worth studying.

               Can we help you?

               We have extensive contract drafting experience, often in novel situations. We also review existing contracts and advise on renegotiation. Give us a call on 01744 20698, or drop Ray Gambell an email at r.gambell@brianfarrington.com.

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Contract Management - Lesson Learned

               Time and again, we draw our readers’ attention to the need for and essential role of contract management in business transactions. We have an active research program to inform our Contract Management Risk Metrics in Procurisk®. The business content within which contract management skills is exercised varies enormously. This article has been informed by the Bruce Stadium Redevelopment audit in Australia. The informed reader will ask rhetorical questions, “Why did they do that?”, and “Why did they not do that?” The audit relates to the conduct of a sales and marketing program for the Bruce Stadium. A consortium was appointed in July 1998 at a fixed fee of approximately $1.8m plus commission to market and sell the products outlined in the Expression of Interest.

               There were some ‘interesting’ milestones, noting that the appointment was made in July 1998. For example a draft contract was provided on 5th November 1998. Note the word ‘draft’ and the time lag. Attempts to conclude a contract continued to June 1999. No explanation is given for such a length of time; however, a procurement professional would surely conclude matters in a much shorter space of time, but that would assume a contract accompanied the motivation to tender.

               At section 6 of the audit report, comments are made on the effectiveness of the executives in monitoring the performance of the sales and marketing consortium. The significant findings included:

  • A number of functions essential to the effective monitoring of the consortium were not performed.
  • The details of the way in which performance was to be monitored was not included in the contractual arrangements for the program; formal contractual arrangements were never completed.
  • Written records of some significant dealings, meetings, and telephone conversations with the consortium were not maintained.
  • The content of the reports required from the consortium was not specified until some months after the commencement of the program; in government executives’ view, the reports provided were not sufficiently comprehensive to facilitate effective monitoring.
  • The consortium was not promptly advised in writing, of dissatisfaction with its performance.
  • The only evidence of a formal assessment of the consortium’s efforts is documentation prepared in January 1999 in relation to a meeting between the consortium and executives.

               Included in the detail of the audit report were the following comments:

  1. The draft contract required the consortium to prove a marketing plan which was to contain targets, timelines and milestones which may have provided the necessary measurable detail to enable monitoring of the consortium’s service delivery and performance. The consortium did not provide the plan in the course of the program.
    BFL Comment: If the contract had been signed, the provision of marketing plan would have been a contracted obligation. Effective contract management would have ensured the plan was provided in a timescale stipulated in the contract. If the plan was not delivered on time the consortium would be in breach of the contract, giving remedial rights.
  2. There was a scarcity of written records of dealings with the consortium conducted by telephone or through meetings.
    BFL Comment: Written records must be kept by contract management, whether by email or letters or reports. An audit trail is essential, particularly when disputes arise. The contract manager must not allow a suppliers’ written record of any contracted matter to be unread or, on occasions, unchallenged.
  3. The consortium was requested to advise the regular PCG meetings on how the marketing and sales campaign was progressing. The request did not specify that written reports were required and the content of the reports was also not specified.
    BFL Comment: This is another classic mistake in some contracts. The fact that written reports are required is an obvious requirement and this should always be accompanied by details of the content require and the timing when reports have to be supplied. It is unsatisfactory to have a supplier table performance reports at a contract review meeting; this gives the buying organisation the time to verify the details.
  4. A file note was prepared which contained an assessment of the performance of the consortium. The note did not include a detailed assessment but contained in the main general impressions of how things were going to date. For example, the assessor of the advertising campaign consisted of one comment for $0.2m of expenditure.
    BFL Comment: Throughout a contract, the suppliers’ performance must be assessed against all the contractual obligations, often set out as key performance indicators. The assessment must be based on fact – not opinion. The outcome of the assessment must be fed into contract review meetings, shortfalls in performance highlighted and the necessary action to correct matters should be agreed. This assumes that the faulty performance can be corrected and, if not, then contract termination becomes a very serious consideration.

               In the second Bruce stadium audit report it is disclosed that the parties (the Stadiums Authority and the consortia of Spotless Services Australia Ltd. And NVM) had agreed to settle a claim for damages by mediation. The government Solicitors’ Office agreed to negotiate a settlement of up to $0.9m. The claim was for $1.2m and mainly arose from non-payment by the territory for services relating to the sales and marketing program.

               Our article has focussed on contract management but there are many other factors of the Bruce Stadium project that will interest procurement professionals.

               Can we help you?

               We can help you to write the contract management section of a contract. We can also review your existing contract management practices, and, if necessary, can undertake contract management activities. Contact Ray Gambell on 01744 20698 or r.gambell@brianfarrington.com for more information.

               Read the Bruce Stadium Performance Audit in full here: http://goo.gl/Wrqm6K

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