Understanding procurement contracts for HR analytics software

Running head: PROCUREMENT CONTRACTS 1 PROCUREMENT CONTRACTS 8

Understanding Procurement Contracts Project procurement contracts are crucial elements in the procurement management process. A procurement contract basically defines the legally binding relationship between the client and the vendor of a given good or service. All the essential aspects must be included to ensure a smooth contract execution process (Project Management Institute [PMI], 2008). The contract should clearly define, among other aspects, the parties involved, purpose of the contract, general provisions, work to be done, deliverables, pricing model and payment terms, obligations and rights of each party, terms and conditions, ownership of intellectual property, and disclaimers (Dinsmore & Cabanis-Brewin, 2011). This paper assesses these elements in a procurement contract in the author’s company. The contract relates to the procurement of a human resource (HR) analytics software. Contract Elements Parties A contract is essentially a legally binding agreement between two or more parties (Flemming, 2016). The description of parties should be the first element of a contractual agreement. In the identified contract, the parties are clearly identified. The contract is between the author’s company (the client) and Kronos Incorporated (the vendor). Purpose of the Contract The purpose of contract denotes the reason why the contract exists – the intention of the contract (Lindstrom, 2014). Contract purpose also constitutes one of the first elements the procurement contract should pay attention to. Indeed, the purpose of the contract should generally be stated in the first page of the body of the contract. In this case, there is no separate section titled “Purpose of the Contract.” Nonetheless, the purpose of the contract is captured in the first paragraph of the contract. From the paragraph, it is evident that the contract intends to stipulate terms and conditions under which the vendor will sell to the client, and the client will purchase from the vendor, the right to use copyrighted software owned by the vendor. Whereas the purpose of the contract is apparent, there is no evidence of assumptions or restrictions. This can be viewed as one of the shortcomings of the contract. Description of Work Another important element of a procurement contract is the statement of work. The statement of work defines the specific activities or tasks to be undertaken by the vendor. The document also defines aspects such as the scope of work, location of work, performance period, acceptance criteria, special requirements, applicable standards, and delivery timelines (Flemming, 2016). The procurement contract in consideration provides a clear statement of work in the exhibits section. Indeed, the clarity and breadth of the statement of work is one of the noticeable strengths of the contract. As per the statement, the scope of the work covers the installation of the software as per the project schedule. The installation is preceded by a number of activities that should be performed by the vendor as well as the client. Prior to installation, the client should mainly undertake site preparation and employee data collection. The vendor on the other hand should survey the site, provide all the tools and equipment necessary for installation, start installation as per the project schedule, as well as provide the necessary training and post-installation support. The statement of work also outlines milestones, quality verification procedures, acceptance criteria, and the characteristics of the required software. Deliverables Deliverables are the tangible or quantifiable goods or services delivered by the vendor to the client (Flemming, 2016). A deliverable may be a document, a report, or a product. Clear definition of deliverables is crucial for ensuring clarity over what the vendor should deliver in the course of contract execution and by the end of the contract period. In this case, the specific deliverables of the procurement contract are not quite clear. The contract mainly lists milestones – e.g. site survey, employee data collection, completion of site preparation, and commencement of installation. Even so, as per the purpose of the contract and the statement of work, there is one major deliverable – a software product. By the end of the contract period, the client expects a fully installed and working HR analytics system. Moreover, as the deliverable is a software product, the client expects user information or support manuals. These aspects should have been more plainly defined in the contract. The completion of the installation is expected to be six months from the effective date. Pricing Model, Payment Schedule, and Payment Terms The definition of the applicable pricing model, along with the payment schedule and payment terms, is an especially critical element of the procurement contract. Is the contract a fixed-price contract or a cost-reimbursement contract? Are the prices adjustable? How will the payments be made? Who is responsible for paying the applicable taxes? The pricing section answers these questions (Flemming, 2016). Clarity in payment aspects is vital for avoiding contract administration difficulties and litigation. The contract in consideration provides an elaborate section on pricing and payments. The section clearly identifies the contract as a fixed-price contract. This means that the stated prices cannot be adjusted in the course of the agreement. Nonetheless, the agreement provides that there may be modifications to prices in the event of adjustments to project specifications and other events that may significantly affect the scope of work and deliverables. For such modifications, the vendor is required to notify the client 30 days in advance. As for payment schedule, the agreement states that a 30% down payment will be provided once the client places the purchase order. An additional 30% will be paid upon full installation of the system and the remaining 40% upon acceptance of the order. Finally, the agreement states the client is liable for paying any charges, duties, and taxes that may be imposed by government authorities in relation to the procurement. Duties and Rights In any contractual agreement, every party has obligations that it must fulfil. Also, each party has rights or entitlements. These two aspects should be unambiguously defined to ensure a fluid contract execution process (Lindstrom, 2014). In this case, the duties of both the client and the vendor are clear. The contract states that the customer is obligated to prepare all sites where the system is to be installed, provide technical and non-technical information as reasonably needed by the vendor, as well as obtain and maintain any government permit required as a prerequisite for the installation of the system. Other duties specified for the client relate to program management, employee data collection, site preparation, and provision of adequate facilities, working space, and security for the vendor’s installation of the system. The client has a right to terminate the agreement. Furthermore, the client has a right to utilise the vendor’s intellectual property rights in relation to the procured system, but solely for the client’s internal operations. The duties of the vendor include site surveying, system installation, compliance with the client’s security guidelines, and notifying the client upon the completion of system installation. Similar to the client, the vendor has a right to terminate the contract. In addition, the vendor is entitled to demanding reasonable guarantees of payment. There are no other discernible vendor rights in the contract. Terms and Conditions Terms and conditions are the rules and guidelines agreed between the client and the vendor (Guth, 2016). Both parties must agree on the rules before the contract is signed. The terms and conditions outlined in the contract in consideration relate to ten issues: agreement, governing law, independence of parties, severability, waiver, notice, force majeure, assignment, subcontractors, and counterparts. For instance, the agreement states that the governance of the contract will be in accordance with the applicable state and federal laws. Also, the agreement specifies that each party is an independent entity, and not an agent of the other. Ownership of Intellectual Property A procurement contract should also include a clause on intellectual property. Intellectual property includes patents, trademarks, copyrights, and other intellectual assets owned by either of the parties to the contract (Lindstrom, 2014). The agreement states that upon full payment of the contract price, the client acquires a non-transferable and non-exclusive right to use the intellectual property rights associated with the vendor’s software, but solely for the client’s internal operations – i.e. not for resale. The agreement further stipulates that with the exception of the license provided to the client, the vendor retains all the rights to the licensed software. Disclaimers A disclaimer is basically a statement that denies liability or responsibility (Lindstrom, 2014). Disclaimers are important in procurement contracts. In this case, disclaimers are mainly stated in relation to warranties. As per the agreement, the vendor will not be responsible for non-conformities arising from the client’s (and its agents) modifications, misuse, neglect, errors, omissions, and failure to adhere to the provided user guidelines. The vendor also absolves itself from non-conformities generated by power irregularities such as power surge as well as repair, maintenance, or installation not undertaken by the vendor. Possible Legal and Ethical Problems Unexpected events may occur during the contract execution process. For instance, there could be vendor neglect or project delays. Such events may lead to changes in scope, objectives, deliverables, schedule, and budget (Guth, 2016). As a result, legal and ethical problems may arise. It is important to fathom these concerns to ensure the necessary remedial measures are put in place. One factor that may be a source of legal problems is breach of contract. Each party in a procurement contract has obligations it must meet. Breach of contract occurs when any of the parties fails to fulfil its obligations (Lindstrom, 2014). Failure to fulfil contractual obligations may be as a result of several factors, some which are within the control of the party and others which are beyond its control. For instance, the vendor may fail to deliver the procured system intentionally in an effort to defraud the client. Equally, the vendor may fail to fulfil its obligations due to bankruptcy. Non-fulfilment of contractual obligations may create a legal dispute between the vendor and the client. Either of the parties may choose to take legal action against the other. Legal problems may also arise from vendor neglect. Vendor neglect is a situation in which the vendor fails to exercise their expected duty of care (PMI, 2008). In this case, for instance, the vendor may demonstrate negligence in the installation of the system by failing to implement the required security or data protection controls. Such negligence may result in the loss of critical data to the disadvantage of the client. In such a case, the client can seek redress in court. Unexpected events may present not only legal, but also ethical concerns. All parties in a procurement contract must act ethically throughout the procurement process (Lindstrom, 2014). Acting ethically means integrity, honesty, fairness, transparency, and confidentiality. When unexpected events occur, substantially affecting the procurement process, parties to the contract must truthfully reveal the material information to one another. Failure to do so would be tantamount to ethical failure. For instance, the client may undertake substantial organisational, operational, or process changes, consequently affecting the cost and timeline of installing the system. The changes may also mean a greater scope of work for the vendor. Nonetheless, aiming to minimise contract costs, the client may fail to disclose the necessary information to the vendor. Such dishonesty or lack of transparency would be an ethical shortcoming on the part of the client. Other ethical concerns may relate to conflict of interest, violation of pertinent policies and regulations, embezzlement and misappropriation of resources, abuse of authority, corruption, and collusion (Dinsmore & Cabanis-Brewin, 2011; Guth, 2016). These concerns, coupled with legal issues, may result in severe losses to the company and the vendor. Minimising Procurement Contract Risks It is imperative for the company to take steps to minimise the risks associated with the procurement. First, procurement officers must apply all the organisation’s procurement policies and rules without fail (Lindstrom, 2014). All decisions the procurement function makes must always conform to the interests of the organisation. Second, the management must take disciplinary action on officers who demonstrate unethical or unprofessional behaviour during the procurement process. In addition, extensive due diligence should be conducted to ensure a professional vendor is selected. Finally, the procurement contract should be improved to ensure all important elements are included and every element is clear. This means stipulating simple and reasonably achievable milestones and deliverables, straightforward dispute resolution mechanisms, clear penalties for contract violation, and unambiguous procedures for addressing adjustments to contract requirements (Allen, 2015; Guth, 2016). Conclusion Overall, procurement contracts are critical components of the project management process. Every element of the procurement contract must be clearly defined to ensure a smooth relationship between the vendor and the client in the course of contract execution. Such a relationship is vital for avoiding or minimising legal and ethical concerns associated with procurement contracts.