PROCUREMENT MANAGEMENT

DR. KHALED ABDALLAH

  Introduction
 Overview of Procurement and Supply Chain Management
 Purchasing Versus Procurement

 Procurement Management Process

 Six-procurement phases
 E-procurement
 Tendering

 Contract
 Contract Management
OUTLINE  Contract Administration
 Types of Contracts
 Methods of Payments
 Types of Bonds
 Disputes Resolutions
 Types of Delays

 Negotiation
 Contract Negotiation Process
 Negotiation Tactics

2
  Overview of Procurement and Supply Chain Management
PART 1
 Purchasing Versus Procurement
INTRODUCTION

3
THE NEW GLOBAL BUSINESS ENVIRONMENT
The Changing Global Competitive Landscape
• Fierce competition : Increased Competition changes
buyer/seller balance of power
• Introduction of products with shorter and shorter life cycles
• Heightened expectations of customer
• Continuing advances in communications and transportation
technologies (e.g. mobile communication, Internet, overnight
delivery)
• Globalization of Trade
• Increasing trends towards Outsourcing
• Best-in-class Supplier Networks

4
THE NEW GLOBAL BUSINESS ENVIRONMENT
Consequences for the business
From To
Local Economies Global Economies
Purchase is 45% of Cost Base Purchase is 70% of Cost Base
Services in house Services out-sourced
High labour content, low value High labour content, low value
added processes done in house added processes outsourced
Long Product Life cycles Short Product Life cycles
Short Product Ranges Extensive Product Ranges
Contractually ‘safe’ Contractually complex
Own country, culture and law. Many cultures, laws, locations
Logistically straightforward Logistically complex (MRP,
JIT,Kanban)

5
 Triple Bottom Line
SUSTAINABILITY
Social
Sustainability
(People)
En
vir
ic ty Su on
o m ili sta l men
c on nab t) (P ina ta
E tai fi lan bi
u s P ro et) lity
S (

6
WHAT IS SUPPLY CHAIN ?
• A Supply Chain is three or more organizations linked directly
by one or more upstream or downstream flows of products,
services, finances, and information from a source to a
customer.
• Supply Chain Management: “the identification, acquisition,
access, positioning, and management of resources the
organization needs or potentially needs in the attainment of its
strategic objectives”
• It's the art and science of getting products from where they're
made to where the consumer want them to be
Supply chain management is the
backbone of the global economy
7
SUPPLY CHAIN MANAGEMENT CONCEPT
Three entities and four flows
Information flow

Reverse product flow

Supplier Manufacture Customer

Primary Primary
product product
and cash and cash
flow flow
Primary cash flow

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SUPPLY CHAIN MANAGEMENT CONCEPT: FOUR FLOWS

Information flow
Invoices, sales lit, specs, blueprints, receipts, orders, rules and regs, etc.

Primary cash flow

Payments for products, supplies, etc.

Primary product flow

Material, components, supplies, services, energy, finished products

Reverse product flow

Returns for repair, replacement, recycling, disposal, etc.

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SUPPLY CHAIN MANAGEMENT INVOLVES:

• Inbound and outbound logistics

• Procurement and Sourcing
• Operations
• Sales and marketing
• Customer service

10
SUPPLY CHAIN MANAGEMENT INVOLVES:

Demand Material Capacity Purchasing & PO purchasing order

Management Requirements Management Contracting
Planning

Inventory Execution Physical

Management and Control Distribution

11
 Basic Rights
SUPPLY CHAIN BASIC REQUIREMENTS

Right
Right Place Right Time Right Price Right Quality
Quantity

12
SUPPLY CHAIN VIEWS

Procurement, Customer Order

Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives

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SUPPLY CHAIN VIEWS

 Classical manufacturing SC  Production & distribution are

Strategy demand-driven
 Manufacturing forecast are  None or little inventory
long-range  Fast information flow
 Longer response time to mechanisms
react to market changes  Decreased lead time
 Increased variability leading  Decreased variability in the
to large inventory safety supply chain
stock  More efficient use of
 Inefficient use of production resources
facilities

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A FRAMEWORK FOR STRUCTURING DRIVERS

Efficiency Responsiveness

15
OVERVIEW OF PROCUREMENT AND SUPPLY CHAIN

16
 OVERVIEW OF PROCUREMENT AND SUPPLY CHAIN

 The quality imperative

 Procurement
 Manufacturing
 Lean and six sigma
 Logistical interfaces

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 THE 8 DIMENSIONS OF PRODUCT QUALITY

 Features
Performance
 What
How well
different
the product
functions
performs
or tasksincan
comparison
the product
to how
perform
it was designed to perform
 Aesthetics
Reliability
 Is
Likelihood
the styling,
thatcolor,
the product
workmanship
will perform
pleasing
throughout
to the customer
its expected life
 Serviceability
Durability
 What
The actual
is thelife
easeexpectancy
of fixing or
ofrepairing
the product
the product if it fails
 Perceived
Conformance
Quality
 Based
Does the
on product
customer’s
meetexperience
its specifications
before, during
as designed
and after they purchase a product

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 TOTAL QUALITY MANAGEMENT
 Total quality management (TQM) is a
philosophy focused on meeting
customer expectations with respect to
all needs, across all company functions,
and recognizing all customers, both
internal and external
 TQM’s basic conceptual elements are:
 Top Management commitment and support
 Maintaining a customer focus in product,
service and process performance
 Integrated operations within and between
organizations
 A commitment to continuous improvement
 MANAGEMENT STANDARDS HAVE BEEN
ESTABLISHED BY THE ISO IN BOTH QUALITY AND
ENVIRONMENT
 The International Organization for
Standards (ISO) was formed after World
War II
 ISO 9000—International Quality Standard
 First one established in 1994
 Currently transitioning to ISO 9000:2008
 ISO 14000—International Environmental
Standard
 First one established in 1998
 Current one is ISO 14001:2004
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 ISO CERTIFIED SUPPLIERS ARE FREQUENTLY
PREFERRED BY PROCUREMENT DEPARTMENTS
 They have to conform to an externally
defined set of standards for quality and
delivery of service
 They are usually more open to sharing
supply chain information
 They welcome building relationships with
their customers
• They have formal processes in place for continual improvement of their
products, services, and processes
• They are easier for procurement folks to initially qualify and periodically
audit
– Certification is done by an external register agency
– Firms have to be re-certified every three years 21
Measuring the
dimensions is really
important

Multidimensional quality analysis

The quadratic loss function
Notes: The loss function takes the quadratic form L = C(X - T)2 where: L = the money loss (£s), C = cost, T = target value, X = the point where the
quality characteristic is actually set. Note that as upper (T + S) and lower (T - S) specification limits are approached costs rise exponentially. Costs
are only minimised when the parameter is at its target value
 PROCUREMENT IS NOW A STRATEGIC ACTIVITY
OF THE FIRM
 Several factors have elevated
the importance of procurement
to the firm
 Purchased goods and services are
among the largest cost elements for
most firms
 The growing emphasis of
outsourcing has expanded the
supply base of organizations
 This added complexity requires more
management attention on the
organizational interfaces with suppliers
 PURCHASING PERSPECTIVE

 Purchasing was historically perceived as just a buying function for

manufacturing and repair materials and supplies
 Purchasing agent tried to get lowest price possible for acceptable quality
 Transactional focus led to getting the best possible “deal” today
 Did not focus on future transactions

 No concept of Supply Chain

 Purchasing seldom looked beyond the first-tier supplier

 Purchasing simply responded to demands of production group

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 PROCUREMENT PERSPECTIVE

 Procurement is an organizational capability that ensures the firm is positioned

to implement its strategies with support from its supply base
 Procurement looks up and down the entire supply chain for impacts and opportunities
 Goods and service account for 55 cents of every sales dollars

 Focuses on building relationships with suppliers and downstream customers

 Involvement with outsourcing includes more than just purchasing raw materials and parts
 Also includes finding alternate sources for manufactured products or services to help manage demand

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PROCUREMENT FOCUSES ON SEVERAL ISSUES RELATED TO THE
FIRMS’ SUPPLY BASE

 Ensuring continuous supply

 Minimizing inventory investment
 Quality improvement of supply
 Supplier development
 Supplier selection
 Building supplier relationships
 Supplier continuous improvement

 Lowest total cost of ownership

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MAJOR CATEGORIES FOR THE COMPONENTS OF TOTAL COST OF
OWNERSHIP

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 PROCUREMENT STRATEGIES
 Volume consolidation
 Reducing total number of suppliers while
minimizing risk
 Supplier operational integration
 Building partnerships
 Sharing information and knowledge
 Identifying linked processes and shared
opportunities for improvement
 Value management extends beyond
buyer-seller operations
 Involving the supplier early in product design
 Reducing complexity
 Value engineering

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 SUPPLIER OPERATIONAL INTEGRATION

 Primary objective of operational integration is to cut waste, reduce cost, and

develop a relationship that allows both buyer and seller to achieve mutual
improvements
 Integration can take many forms
 Buyer providing detailed sales information to supplier
 Buyers and suppliers working together to redesign linked processes
 Eliminating duplicated activities performed by both the buyer and supplier
 Can provide incremental savings of 5% to 25% over the benefits of volume
consolidation

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 PURCHASE REQUIREMENT SEGMENTATION

 Pareto Principle is a small percentage

of items account for a large percentage
of the dollars spent
 For example, “A” items in ABC inventory

 Purchasing processes should be

tailored to the value and/or criticality
of the materials needed
 Segmented approach is used to
prioritize resources for purchasing
 The most procurement effort goes to the
most critical supplies/suppliers
 E-COMMERCE AND PROCUREMENT

 Electronic Data Interchange (EDI) is the

electronic transmission of data between a
firm and its suppliers
 Shares information and knowledge such as order
entry, planning/scheduling, tracking, delivery,
billing and payment
 Internet-based communications offer
several opportunities for making product
information available while overcoming
compatibility issues between computer
systems
 Electronic catalogs allow rapid access to product
info, specifications, pricing and ordering
 Buying exchanges allow sellers or buyers of
specific goods or services to find each other on a
common web site
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 MANUFACTURING PERSPECTIVES
 Brand power is the measure of customer
preference based on reputation, product
quality and supply chain capabilities

 Volume is traditionally treated according

to the principle of economy of scale
 Average cost to produce product declines as
manufacturing volume increases
 Particularly important when high fixed costs are
present

 Variety involves frequent product runs and

high repetition of small lot sizes
 Processes that can rapidly switch production
from one product to another while retaining
efficiency are said to have economy of scope
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 MANUFACTURING PERSPECTIVES CONTINUED

 Constraints interact with volume and variety to create realistic manufacturing

plans
 Capacity is how much can you produce in a given unit of time
 Equipment considers how flexible it is
 Is one particular piece a bottleneck?
 Setup/Changeover considers how quickly can you change from one variety of product to
another

 Leadtime is the measure of elapsed time between release of a work order to the
shop floor and completion of all work on the product to achieve ready-to-ship
status

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 THE FOUR COMMON MANUFACTURING PROCESSES

 Job shop creates a custom product for each customer

 Batch process manufactures a small quantity of an item in a single production
run
 Line flow process has standard products with a limited number of variations
moving on an assembly line through stages of production
 Continuous process is used to manufacture such items as gasoline, laundry
detergent and chemicals
 Modifications of the above can create new options
 Mass customization produces a unique product quickly and at a low cost using a high
volume production process

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 MANUFACTURING STRATEGIES SHOULD MATCH
YOUR MARKET REQUIREMENTS

 Make to Stock (MTS) features economies of scale, large volumes, long

production runs, low variety, and distribution channels
 Assemble to Order (ATO) is when base components are made, stocked to
forecast, but products are not assembled until customer order is received
 Manufacturing postponement practiced here
 Make to Order (MTO) relies on relatively small quantities, but more
complexity
 Requires much interaction with customer to work out design and specification
 Usually shipped direct to customer

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 THE CHOICE OF STRATEGY DETERMINES WHICH
PERFORMANCE CYCLES THE CUSTOMER EXPERIENCES

Manufacturing Strategy and Performance Cycles 37

SUPPLY CHAIN VIEWS

High

Engineer-to-order
Mass
customization
Product variety

Make-to-order

Assemble-to-order

Make-to-stock

Low High
Product volume

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 TOTAL COST OF MANUFACTURING
 Total cost of manufacturing (TCM)
includes:
 Procurement and production activities
 Inventory and warehousing activities
 Transportation activities
 TCM generally expressed as cost per unit
 Procurement and production costs go down
as volume goes up
 Inventory and warehousing costs go up as
volume goes up
 Transportation costs go down as volume
goes up, but level off at high volumes
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TCM PER UNIT RANGING ACROSS STRATEGIC ALTERNATIVES

/MTS

Total Cost of Manufacturing 40

 LEAN SYSTEMS

 Lean is a philosophy of
manufacturing that emphasizes
the minimization of the amount of
all resources (including time)
used in the operation of a
company
 Defining principle is the
elimination of “waste”
PRIMARY OBJECTIVES OF LEAN SYSTEMS ARE TO
 Produce only the products that
customers want
 Produce products only as quickly as
customers want them
 Produce products with perfect quality
 Produce in the minimum possible
lead times
 Produce products with features that
customers want and no others
 Produce with no waste of labor,
materials or equipment
 Produce with methods that reinforce
the occupational development of
workers
Some perceptions of ‘lead time’
EIGHT TYPES OF LEAD TIME
COMPONENT PARTS OF LEAD TIMES
COMPONENT PARTS OF LEAD TIMES
(CONTINUED)
 SIX SIGMA QUALITY CONCEPTS

 Six sigma approach is to identify

sources of variability and then
systematically reduce them
 The six sigma goal is to achieve a
process standard deviation that is six
times smaller than the range of outputs
allowed by the product’s design
specification
 LOGISTICAL INTERFACES

 Resources must be procured, positioned, and coordinated as needed to support the manufacturing strategy selected
 Four approaches to achieve this are:

Just-in-time (JIT)
Materials requirements planning (MRP)
Design for logistics
Performance based logistics

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 JUST-IN-TIME (JIT) INTERFACES
 Just-in-time only produces to a customer
order (ATO, MTO)
 Purchased materials and components
arrive at the manufacturing or assembly
point just at the time they are required
for the transformation process
 Raw material and work in process
inventories are minimized
 Demand for materials depends on the
finalized production schedule
 Lot sizes are as low as one unit
 Close cooperation with suppliers is
essential!
 MATERIALS REQUIREMENTS PLANNING (MRP)
INTERFACES
 For more complex manufacturing
(MTO, ETO) where large numbers
of components or assemblies are
used to produce a final product
 Procurement has a key role in
insuring all the components are
obtained on time to make an end
item
 Key information requirement is the bill
of materials (BOM)
 Planning sometimes spans multiple
manufacturing locations (e.g.
Boeing Dreamliner)
DESIGN FOR LOGISTICS INTERFACES
 Design for logistics includes the
requirements and framework for
logistical support in the early phases
of product development
 Considers
 What we are going to make
 How we are going to make it
 What logistics capabilities do we need
 How we are going to integrate our
suppliers into the process
 Any subassembly manufacture by
suppliers
 The need for outsourcing of some parts or
assemblies
PERFORMANCE BASED LOGISTICS INTERFACE

 Initiated by US Department of Defense

to purchase performance outcomes
instead of individual transactions
defined by product specifications
 Government specifies desired outcomes
and lets suppliers determine the best
way to meet those requirements
 Currently limited to government
purchasing but business organizations
are expected to adopt the practice
STRATEGIC INTEGRATION FRAMEWORK

53
PURCHASING VS. PROCUREMENT

54
KNOW WHO YOU ARE?

 The project has a contract that can be called agreement, understanding, subcontract or
purchase order.
 Seller can be called a contractor, vendor, service provider, or supplier.
 Buyer can be called a client, customer, prime contractor, acquiring organisation,
governmental agency, service requestor, or purchaser.
 During the contract life cycle seller is first called bidder, then the selected source, and
then the contracted supplier or vendor.

55
 Purchasing generally refers to the actual buying of materials and those activities
associated with the buying process.
 Procurement is broader in scope and includes purchasing, traffic, warehousing, and
receiving in bound materials.

56
PURCHASING
 The purchasing function comprises the essential activities associated with the
acquisition of the material:
1. Coordination with user departments to identify purchase needs
2. Discussion with sales representatives
3. Identification of potential suppliers
4. The conduct of market studies for important materials
5. Negotiation with potential suppliers
6. Analysis of proposals
7. Selection of suppliers
8. Issuance of purchase orders
9. Administrative of contracts and resolution of related problem
10. Maintenance of a variety of purchasing records

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THE SCOPE OF PURCHASING

• To supply the organization with a flow of materials and services to meet its needs.
• To ensure continuity of supply by maintaining effective relationships with existing
sources and by developing other sources of supply either as alternatives or to
meet emerging or planned needs.
• To buy efficiently and wisely, obtaining by ethical means the best value for every
pound spent.
• To maintain sound co-operative relationships with other departments, providing
information and advice as necessary to ensure the effective operation of the
organization as a whole.
• To develop staff, policies, procedures and organization to ensure the
achievement of these objectives.
MORE SPECIFIC OBJECTIVES

• To select the best suppliers in the market.

• To help generate the effective development of new products.
• To protect the company’s cost structure.
• To maintain the correct quality/value balance.
• To monitor supply market trends.
• To negotiate effectively in order to work with suppliers who will seek mutual
benefit through economically superior performance.
• To adopt environmentally responsible supply management.
PROCUREMENT

 The procurement concept encompasses a wider range of supply activities :

1. Participation in the development of material and service requirements and their

specifications
2. Management of value analysis activities
3. Conduct of more extensive material market studies
4. Conduct of all purchasing function activities
5. Management of supplier quality
6. Management of investment recovery activities (salvage of surplus and scrap)

60
SUPPLY MANAGEMENT

 Supply management is a process responsible for the development and management of a firm’s total supply system-
both the internal and the external components.

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MATERIALS MANAGEMENT

 The material management concept is quite different from the purchasing,

procurement and supply management concept:
1. Purchasing and supply management activities
2. Inventory management
3. Receiving activities
4. Store and warehousing
5. In-plant material handling
6. Product planning, scheduling, and control
7. Traffic and transportation

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The increasing importance of purchasing and supply in the
manufacturing sector
Changing purchasing roles: reactive and proactive buying
The ‘transactional’ relationship
The ‘mutual’ relationship
The price/cost iceberg
A four-stage purchasing development model
A four-stage purchasing development model (Continued)
OUTSOURCING

The Outsourcing Institute has defined outsourcing as:

‘The strategic use of outside resources to perform activities traditionally

handled by internal staff and resources.’ .

As such it concerns the following:

• Do we have candidate functions for outsourcing?
• How do we select?
• How do we assess ourselves?
• Who are the potential providers?
• How do we assess them?
• What sort of relationship will we form?
• How will we manage it?
• How do we ensure efficiency?
BEST PRACTICE – DRIVERS

The main driver of outsourcing is the need for focused

competitiveness:
• Outsource where others can do it better.
• Outsource to focus on core business.
• Outsource to reduce cost base.
WHY OUTSOURCE?
There are many considerations that might influence an
organization, such as:
• External supplier has better capability.
• External supplier has greater or more appropriate capacity.
• Freeing resources for other purposes.
• Reduction in operating costs.
• Infusion of cash by selling asset to provider.
• Reducing or spreading risk.
• Lack of internal resource.
• Desire to focus more tightly on core business.
• Economies of scale.
Some commonly used measures of operational procurement performance
TYPES OF PROCUREMENT

Constructional
Goods Services
works

are actions include projects

individuals or such as the
are tangible or
organisations construction,
material items,
perform which alteration, repair,
which can be
confer a benefit, maintenance or
consumed, such
but do not result demolition of
as clothing, food,
in the ‘ownership’ buildings or
electronic
of anything, i.e structures; the
goods,etc..
educational installation of
services, etc.. fittings; and so on

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PROCUREMENT CLASSIFICATION

Direct Indirect
Procurement Procurement
Refers to a range of
situations when the items Refers to purchase of any
procured are either for other, ancillary items
resale (eg the goods (including MRO supplies,
purchased by retailer), or services, and other
for incorporation in goods operating expenses), eg
for sale (eg raw material & travel, stationary,
components purchased by telecommunications, etc..
a manufacturer)

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WHAT DIFFERENCE DOES THE DISTINCTION MAKE?
Direct Procurement Indirect Procurement
Has a direct impact of the quality of goods Does not generally impact the production process
produced
Need to be held in stock Usually made as when required

Likely to be made for longer term, more Frequently one off, transactional relationship in
collaborative supplier relationship order to take advantage of price competition

More likely carried out by the procurement and More likely to be carried out by end users
supply chain function

77
 PART II
 Six-procurement phases

PROCUREMENT  E-procurement
MANAGEMENT  Tendering
PROCESS

78
SIX-PROCUREMENT PHASES

79
 PROCUREMENT MANAGEMENT PROCESSES

 Project procurement management includes the following processes for acquiring goods
and services from outside organization:
1. Procurement planning: determining what to procure and when.
2. Solicitation planning: documenting product requirements and
identifying potential sources.
3. Solicitation: obtaining quotations, bids, offers, or proposals as
appropriate.
4. Source selection: choosing from among potential vendors.
5. Contract administration: managing the relationship with the vendor.
6. Contract close-out: completion and settlement of the contract.

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81
1- PROCUREMENT PLANNING

 Procurement planning involves identifying which project needs can be best

met by using products or services outside the organization. It includes
deciding:
 Whether to procure.
 How to procure.
 What to procure.
 How much to procure.
 When to procure.

82
STATEMENT OF WORK (SOW)

 Many contracts include a statement of work (SOW). A statement of

work is a description of the work required for the procurement.
 The SOW describes the work in sufficient detail to allow prospective
sellers to determine if they are capable of providing the goods and
services required.
 The SOW should specify the product of the project, use industry
terms, and refer to industry standards.

83
 STATEMENT OF WORK (SOW)

 Describes the procurement items in sufficient detail for prospective sellers

to determine if they are capable of providing the item.
All bidding documents must include a SOW
A good SOW gives bidders a better understanding of the buyer’s
expectations
Professional buyers invite two or three carefully prequalified potential
contractors to aid in the development of SOW.

84
 SOW impacts the administration of the contract as it defines the scope and
objectives.
 Many formats and styles of Statement of Work document templates have
been specialized for the hardware or software solutions described in
the Request for Proposal.
 Many companies create their own customized version of SOWs that are
specialized or generalized to accommodate typical request and proposals
they receive.

85
 SOW should include:
 Purpose: Why are we doing this project?
 Scope of Work: This describes the work that must be done in detail and the exact nature of the work to be done.
 Location of Work: This describes where the work must be performed.
 Period of Performance: This specifies the allowable time for projects
 Deliverables Schedule: This part lists the specific deliverables, describing what is due and when.
 Applicable Standards: This describes any industry specific standards that need to be adhered to in fulfilling the
contract.
 Acceptance Criteria: This specifies how the buyer of goods will determine if the product or service is acceptable
 Special Requirements: This specifies any special hardware or software, specialized workforce requirements, such
as degrees or certifications for personnel, travel requirements, and anything else not covered in the contract
specifics.
 Type of Contract/Payment Schedule
 Miscellaneous: There are many items that do not form part of the main negotiations but are nonetheless very
important to the project. They seem minor but being overlooked or forgotten could pose problems for the project.
86
 Writing the SOW is not an easy task.
 It must balance between protecting the buyer’s interests and encouraging the
supplier’s (contractor) creativity.
 When a SOW becomes contractual it shall be used as a standard for measuring
contractor performance.

87
TYPES OF SOW

 There are three different types of Statements of Work:

1- Design/detailed specification;
2- Level of effort; and
3- Performance based.

88
 The design/detail Statement of Work tells the contractor how to do the work.
 In this case, the buyer requires the contractor to follow the buyer’s way of performing
the task or making the product.
 This type of Statement of Work is primarily used for manufacturing or construction.

89
 The deliverable in the Level of Effort
 Statement of Work is based on the hour of work.
 Level of Effort SOWs are usually very broad and describe the general
nature of the service or products to be procured over a given period of
time.
 This type of Statement of Work is primarily used for task order and
delivery order contracts.

90
 The Performance Based Statement of Work
 It focuses on the purpose of the work, but does not dictate how the work is to
be done.
 It should provide answers to five basic questions: what, when, where, how
many, and how well.
 The goals of this type of Statement of Work are:
1. To save money by reducing contract costs from elimination of unnecessary
effort, through innovation by the contractor.
2. To shift the emphasis from processes to outputs.
3. To hold contractors accountable for end results.

91
2- SOLICITATION PLANNING

 Solicitation planning involves preparing of the documents needed for

requesting bids (solicitation), and determining the evaluation criteria
for the award of a contract.
 Common documents used in this process are:
 Request for Proposals: used to solicit proposals from prospective
sellers.
 Invitations for bid or negotiation and initial contractor responses
are also part of solicitation planning.

92
3- SOLICITATION

 Solicitation involves obtaining proposals, tenders or bids from

prospective sellers.
 Sellers do most the work in this process, usually at no cost to the buyer
or the project.
 The buying organization is responsible for advertising the “request to
tender” (the solicitation).
 A bidders’ conference or similar meeting between the buyer and the
prospective sellers can help clarify the buyer’s expectations.

93
4- SOURCE SELECTION

 Once buyers receive proposals, they must select a vendor or

decide to cancel the procurement. Source selection involves:
 Evaluating bidders’ proposals.
 Choosing the best one.
 Negotiating the contract.
 Awarding the contract.
 It is highly recommended that buyers use formal evaluation
procedures for selecting vendors.
 Buyers often create a “short list”.
94
SAMPLE PROPOSAL EVALUATION SHEET
The following template could be used by a project team to help
create a short list of the best three proposals.

95
Supplier evaluation
Supplier evaluation (Continued)
Supplier evaluation (Continued)
 SOURCE SELECTION

 After developing a short list of possible sellers, organizations

will often undertake more detailed evaluation.
 All of the evaluation criteria are given a certain number of
possible points (based on ranked importance),
 And the project team members and other stakeholders then
evaluate each proposal by assigning points to each criteria.

99
SUPPLIER EVALUATION AND SELECTION PROCESS
 Critical steps involved in the supplier evaluation and
selection process:
1. Recognize the Need for Supplier Selection
2. Identify Key Sourcing Requirements
3. Determine Sourcing Strategy
4. Identify Potential Supply Sources
5. Limit Suppliers in Selection Pool
6. Determine the Method of Supplier Evaluation and Selection
7. Select Supplier and Reach Agreement
100
 SELECTING SUPPLIERS

 There are three types of sourcing:

1- sole souring
Only one supplier is available
2- multiple sourcing
The use of more than one supplier
3- single sourcing
One supplier for an item (long term relation)

101
 Single sources may be justified when:
- Better pricing results (economies of scale)
- Quality considerations
- Buyer obtains more influence
- Lower freight costs result
- Special tooling is required
- Risk sharing result
- Time to market is critical
- By order

102
 Factors in selecting suppliers
1- Technical ability
2- Manufacturing ability
3- Reliability
4- After-sale service
5- Supplier location
6- Price
7- Other considerations

103
 Final selection of suppliers
- Ranking method is some method that combining these two major factors: quantitative
and qualitative.
- Ranking method:
1- select needed factors.
2- assign a weight to each factor.
3- rate the supplier for each factor.
4- rank the suppliers

104
 Factor Weight Rating of suppliers Ranking of suppliers
Suppliers A B C D A B C
D
Function 10 8 10 6 6 80 100 60 60
Cost 8 3 5 9 10 24 40 72 80
Service 8 9 4 5 7 72 32 40 56
Technical assistance 5 7 9 4 2 35 45 20 10
Terms 5 4 3 6 8 8 6 12 16
Total 219 223 204 222

105
 Problem:

If suppliers were to be rated on the following basis, what would be the ranking of the two suppliers listed?

Factor Weight Supplier A Supplier B

Function 8 8 9
Cost 5 9 5
Technical Assistance 7 5 7
Terms 2 8 4

106
 5- CONTRACT ADMINISTRATION

Contract administration ensures that the seller’s

performance meets contractual requirements.
Contracts are legal relationships, and are subject to the
contract law in the country where the project is conducted,
and in the case of international projects, the country of
supply.

107
However, due to their complexity, many project
managers ignore contractual issues. This can result
in serious problems.

Ideally, the project manager and the project team

should be actively involved with contract law experts
in the preparation and administration of contracts.

108
Project members must be aware of the legal problems
they might cause by not understanding a contract.
In particular, most projects involve changes, and these
changes must be handled properly for items under
contract.

109
6- CONTRACT CLOSE-OUT

 Contract close-out is the final project procurement management

process. It includes:
 Product verification to determine if all work was completed
correctly and satisfactorily.
 Administrative activities to update records to reflect final
results.
 Archiving information for future use.
 Procurement audits are often undertaken during contract close-out
to identify lessons learned in the procurement process.

110
 It is essential that organizations obtain good contracts that
minimize risk while ensuring optimum results through effective
contract administration.
 It is very important to prepare contracts with great care and
expert assistance.
 It is equally important to initiate and follow effective contract
administration procedures.

111
The following guidelines can assist in preparing proposals, contracts and
administrative procedures:
 Use checklists and templates where appropriate.
 Evaluate risks by reference to suggested contract provisions where
appropriate.
 All major proposals and contracts, and contracts with questionable
provisions, should be reviewed by a contract law expert.
 Appropriate pricing and/or insuring of risk under the contract.
 Periodic review, improvement and updating of contract
preparation and administration procedures.

112
PURCHASING DEPARTMENT RECORDS
 A record of open order
 A record of closed order
 Supplier record
 Contract record
 Commodity record
 Special tool record

113
 ETHICAL AND PROFESSIONAL STANDARDS

 Demonstrate loyalty to the employer and use only authority granted.

 Conflict of interest
 Gratuities
 Business meals
 Handle confidential information to employers or suppliers with due care
 Treatment of suppliers

114
E-PROCUREMENT

115
TRADITIONAL PROCUREMENT TOOLS:
TELEPHONE, FAX, PAPER CATALOGUES

116
 A TYPICAL MANUAL PROCUREMENT PROCESS

2.Check price,
1. Specify 3. Create 4. Requisition
availability,
requirements requisition approval
other factors

8. Complete
6. Evaluate offers 5. Obtain offers
purchase order 7. Select supplier
from suppliers from suppliers
(P.O.)

10. Send P.O. to 11. Check order 12. Receive

9. Approve P.O.
vendor status shipment

17. Process 16. Send 15. Approve 14. Process 13. Review
returns payment payment exceptions invoice
117
LIMITATIONS OF TRADITIONAL PROCUREMENT PROCESSES

1. Process Inefficiencies
2. Potential for Errors
3. Non-Compliance with
Purchasing Policy
4. Lack of Leverage
5. Sub-Optimal Sourcing

118
PROCESS INEFFICIENCIES

 Employee cost

 Paperwork and redundancy

 Cycle time

119
POTENTIAL FOR ERRORS

 Manual processing of information and

involvement of many people
 Data entry errors

120
 LACK OF LEVERAGE

 In manual procurement, poor consolidation of information on purchase volumes, timing and discounts can lead to
a loss of leverage opportunities

Buyers
Buyersfail
failtotorealise
realisethe
thepotential
potential
for
forconsolidating
consolidatingtheir
theirpurchases
purchasesand
and
obtaining
obtainingbetter
betterprices
pricesand
andconditions
conditions

121
HOW E-PROCUREMENT DIFFERS FROM MANUAL
PROCUREMENT
Obtaining
Obtaining
offers
offersfrom
from
suppliers
suppliers
Checking Creating
Checking Creatingaa
availability
availability requisition
requisition
and
andprice
price

Obtaining
Obtaining
Finding
Finding approval
approval
suppliers
suppliersand
and
products
products
Generating
Generating
and
andmanaging
managing
Systems the
theorder
order
Systems
integration
integration Billing
Billingand
and
payment
payment
122
TWO KEY ELEMENTS OF E-PROCUREMENT
Technology People

+
= E-Procurement Success!
123
 ADVANTAGES OF E-PROCUREMENT
12
9 3

 Improved process efficiencies 6

 Reduction in errors a ct
o ntr
C

 Better compliance

 Enhanced leverage

 Improved sourcing

124
E-PROCUREMENT MODELS

1. Buyer Centric Model

The buying organization implements software to support its procurement processes,
obtains catalogue data from its contracted suppliers, and aggregates the catalogue
data into a single internal catalogue for the use of its purchasing officers.
2- Seller Centric Model
Buyers use the supplier's system, accessible over the Internet, to browse the supplier's
catalogue and place orders.

125
3- E-marketplace or third party-managed model
The third model is the e-marketplace model, in which the 'system', provided by a third
party with buying and selling organizations trading with each other through the
common marketplace.
4- Organization based model
 Centralized Model: purchasing procedures are centralized.
 Decentralized Model: purchasing procedures depend on each administration unit.

126
SIX STAGES IN PREPARING
AN E-PROCUREMENT STRATEGY

6. Finalising the strategy

5. Assessing the extended enterprise

4. Reviewing current procurement processes

3. Establishing the business case for e-procurement

2. Setting objectives for e-procurement strategy

1. Assessing external infrastructure and conditions

127
STEP 1: ASSESSING EXTERNAL
INFRASTRUCTURE AND INDUSTRY CONDITIONS

6. Finalising the strategy

5. Assessing the extended enterprise

4. Reviewing current procurement processes

3. Establishing the business case for e-procurement

2. Setting objectives for e-procurement strategy

1. Assessing external infrastructure and conditions

128
LOCAL INFRASTRUCTURE REQUIREMENTS

INTERNET Information Technology and

Telecommunications

WW
• Internet backbone
N
W
B
ET • Related professional expertise

B2 E-Commerce

Education
• General computer literacy
• Managerial understanding of IT

129
INDUSTRY REQUIREMENTS

To be fully effective, e-
procurement cannot
be introduced into a single
company in isolation.

*
*
*
A critical mass of companies in an industry is
needed to make e-procurement work in that
industry.

130
 STEP 2: SETTING E-PROCUREMENT OBJECTIVES
ALIGNING WITH PURCHASING STRATEGY AND CORPORATE
STRATEGY

6. Finalising the strategy

5. Assessing the extended enterprise

4. Reviewing current procurement processes

3. Establishing the business case for e-procurement

2. Setting objectives for e-procurement strategy

1. Assessing external infrastructure and conditions

131
 Corporate strategy:
the key dimensions

1. Which products/ 3. What conditions

services? to offer?

ra ct
nt
Co

2. Which markets?

4. How to enter &

develop the
markets?

5. How to operate
cost-effectively?
132
STEP 3: ESTABLISHING THE BUSINESS CASE FOR E-PROCUREMENT
IN YOUR COMPANY

6. Finalising the strategy

5. Assessing the extended enterprise

4. Reviewing current procurement processes

3. Establishing the business case for e-procurement

2. Setting objectives for e-procurement strategy

1. Assessing external infrastructure and conditions

133
ITC M15:U4:4.4-1
ROLE OF THE BUSINESS CASE
Measure of
costs and
savings

!
Tool for
understanding
e-procurement
benefits

134
STEP 4: REVIEWING AND REENGINEERING CURRENT
PROCUREMENT PROCESSES

6. Finalising the strategy

5. Assessing the extended enterprise

4. Reviewing current procurement processes

3. Establishing the business case for e-procurement

2. Setting objectives for e-procurement strategy

1. Assessing external infrastructure and conditions

135
BREAK DOWN WHAT ACTUALLY HAPPENS AT
EACH STEP

Check price,
availability,
other factors

Check catalogue prices

Occasionally compare to other suppliers

Call supplier to check availability

136
STEP 5: ASSESSING THE EXTENDED ENTERPRISE – SUPPLIERS AND
CUSTOMERS

6. Finalising the strategy

5. Assessing the extended enterprise

4. Reviewing current procurement processes

3. Establishing the business case for e-procurement

2. Setting objectives for e-procurement strategy

1. Assessing external infrastructure and conditions

137
 THE CHALLENGE OF SUPPLIER E-ENABLEMENT

Buyer’s Perspective Supplier’s Perspective

 Too many suppliers to enable  Complexity of embracing new
 Fear of imposing too great a technologies
cost on suppliers  Lack of money and technical
 Lack of knowledge about resources
suppliers  No visibility of returns
 Lack of communication inside
the company
 Lack of time, money or
expertise for a supplier
e-enablement programme i

138
STEP 6: FINALISING THE
E-PROCUREMENT STRATEGY

6. Finalising the strategy

5. Assessing the extended enterprise

4. Reviewing current procurement processes

3. Establishing the business case for e-procurement

2. Setting objectives for e-procurement strategy

1. Assessing external infrastructure and conditions

139
 THREE ELEMENTS OF E-PROCUREMENT IMPLEMENTATION
PLANNING

Communication and
Change Management

Performance Measurement

Impact on the Purchasing

Department

140
ITC M15:U6:6.1-2
 COMMUNICATION AND CHANGE MANAGEMENT
Obtain High Level Support

Having a ‘champion’…

…Helps in getting the

cross-functional support
you will need

…Ensures greater consistency …Makes it easier to obtain the

between e-procurement and overall necessary resources
corporate strategy

141
ITC M15:U6:6.2-1
 COMMUNICATION AND CHANGE MANAGEMENT
Communicate and Manage Change!

Communicate with all

Timescale, objectives
parts of the
and benefits
organisation

Overcome fear of
Plan for staff change among those
redeployment or affected
redundancy

Manage people’s
Arrange training – and
expectations about what
communicate about it
will be achieved

142
ITC M15:U6:6.2-4
 PERFORMANCE MEASUREMENT

E-Procurement E-Procurement
Implementation KPIs Performance KPIs

143
ITC M15:U6:6.3-1
TENDERING

144
TENDER DEFINITION

 Tender is a document comprising a series of questions

to the supplier or requests for specific information
relating to the buyer’s requirements and the supplier’s
capabilities and ideas, or a quotation for supply of a
defined service or product.

145
 TENDERING STEPS
 Definition of requirements:
To provide proposals or pricing, the supplier needs to know what you
want.
 Solicitation (documents preparation) of responses:
The suppliers provide their responses to the questions or requests for
specific information relating to the stated requirements.
 Analyze responses:
The suppliers’ responses are reviewed and analyzed.
 Use of the findings:
The results of the analysis of responses then need to be used as part
of implementation. This might mean selecting those suppliers who
emerged favorably. 146
TYPES OF TENDERING/ DIFFERENT TYPES OF TENDERING

1. Open procedure / general/ public/ comprehensive.

2. Restricted/ selected/ privet/ special procedure
3. Negotiated procedure/ dialogue. ‫ممارسه‬
4. Competitive dialogue.

147
1. OPEN TENDER

 Open tender refers to bidding without restriction.

 Any bidder who can meet the qualification requirements is entitled to submit a tender for the
work.
 It ensures fair accountability and avoids favoritism.
 Strengths and weaknesses:
- It’s fair that anyone can submit proposals +
- Time-consuming to review technical and commercial –
- There is a risk of delaying receiving our needs -

148
1. A higher cost associated with duplicating tender documents.
2. A higher cost of administration of tenders.
3. Problems of selecting a best bid from a wider range of bids.
 Open tender can be either open-local or open-international tender.

149
2. RESTRICTED/SELECTED TENDER

 Contractor must first be selected as a candidate for tendering

through pre-qualification.
 Buyer then invites tenders from the pre-qualified candidates.
 Buyer may ask bidders for further information to help evaluate
tenders.
 Bidders may request clarification on points of fact or procedure.

150
 Negotiating about prices is usually not permitted.
 Discussions may take place between bidders and buyers only for the purpose of
clarifying or supplementing the content of tenders.
 It may be approached in two ways:
1. As a single-stage tendering.
2. As a two-stage tendering.

151
 A single-stage select tendering:
- Buyer will select a specific number of bidders who will then be invited to submit their
tenders.
 In a two-stage select tendering:
- Buyer will first call bidders for registration of interest from suitably qualified and
experienced contractors. Then, buyer will invite only a small number of contractors to
submit their tenders.

152
3. NEGOTIATED PROCEDURE

 Buyer may go directly to one or more seller and negotiate with them the
terms of a contract.
 This type of procedure is used only in relatively exceptional cases:
- Technical reasons
- Emergency
- Exclusive rights
- Monopolistic

153
4. COMPETITIVE TENDER
 Conducting post-tender discussions both with tenderers who have submitted
final bids and with the preferred bidder (the one who has provided the most
advantageous tender).
 Competitive dialogue procedure is relatively new.
 It does not really mark any big change in approaches to complex procurement,
but largely reinforces best practice.
 Competitive dialogue is time-consuming.
 By its nature, the process is slower than a straight- forward restricted or
negotiated procedure.

154
TENDERING APPROACHES AND TERMINOLOGIES

 RFI (request for information)

 The RFI is a solicitation tool that is sent to multiple suppliers and potential suppliers
to gather general information such as capability, products, geographical coverage,
company set-up and so on. The RFI is not part of this tender activity.

155
 RFP (request for proposal)
 A solicitation tool issued by a buyer to a supplier, the RFP is designed
to ask a number of suppliers to make specific proposals regarding how
they would meet some stipulated requirements.
 A good RFP should always include a voluntary section which gives the
supplier the opportunity to make an alternative proposal.

156
 RFQ (request for quotation)
 The RFQ is a solicitation tool issued by the buyer to a number of suppliers
and designed to ask for specific commercial or pricing proposals.
 Using the RFP responses, RFQs invite a number of suppliers to respond,
perhaps following the use of the RFP responses as a prequalification stage.

157
 Receive
Clearly Define
Issue RFI Information Evaluate Suppliers Create Short-list
Business Needs
Reports

Can be Part of RFP (Following Steps will occur after RFP)

Prepare RFP/ Host Bidders

Prepare SOW Issue RFP/RFQ
RFQ/IFB Conference

Receive
Prepare Contract Proposals/
Quotations

Select Supplier
Negotiations Sign Contract Initial Payment
and Offer

Delivery Testing Close-out Final Payment

158
 EXAMPLES

QATAR PETROLEUM CASE STUDY

159
HOW TO TENDER- QP

 Tenderers shall comply with the requirements (list of needs) specified in the
respective public Tender advertisement or Invitation To Tender.
 The tenderer shall thoroughly familiarize itself with all the laws, including but not
limited to Qatar Labor laws, and the Qatar Ministry of Economy and Finance
requirements regarding commercial registration of companies.

160
 Public (open) Tenders, are published regularly in local news papers and Qatar
Petroleum website. 2 means of communication at least.
 Non-refundable Tender fees are applicable as specified in the Tender Document.
 Tender Documents will be normally issued as soft copy in DVD/CD
 It is strongly recommended that the Tenderer attend any scheduled site visit and mid-
tender meeting

161
 Any queries relating to the Tender Documents or submitting a Tender must not be
raised by telephone or personal contact, but must be submitted in writing, preferably
by fax.
 Tender Bulletins are sent to all Tenderers during the Tendering period.
 The Tenderer must submit a provisional Bank Guarantee (Tender Bond).

162
 The Tender Documents, including any drawings, specifications, etc. (needs SOW),
forwarded to the Tenderer shall continue to be the sole and exclusive property of QP.
 QP will not be responsible for any costs or expenses incurred by the Tenderer in
connection with its Tender, any site visit, attending meetings, obtaining additional
insurance.
 Details of Awarded Contracts against Public Tenders are published on the QP
Website.

163
 QP shall notify the successful Tenderer in writing of QP’s acceptance of its Tender,
subject to the following conditions:
 a) Submittal and acceptance by QP of Performance Bond in the form of a Final Bank
Guarantee,
 b) Submittal and acceptance of necessary Insurances.
 c) Signing of the Contract Documents.

164
PROCUREMENT CYCLE

165
 PROCUREMENT CYCLE / SIMILAR TO LEAD TIME
Identifying and defining needs

Identifying needs
Requisition
• Clarifications
Challenging needs
• Challenge over specified
• Suggest alternatives
• Specifications
Defining
needs • SLA
• Contract terms

Specifications

166
CUSTOMER‫عميل‬: ANY INDIVIDUAL OR COMPANY PURCHASING GOODS.
CONSUMER‫مستهلك‬: USES THE PRODUCT FOR CONSUMING/ USING THE PRODUCT.
CLIENT‫زبون‬: REGULAR OR FREQUENT PURCHASER.
END USER: DEPARTMENT WITHIN THE ORGANIZATIONS

ANY CONSUMER IS A CUSTOMER. HOWEVER, NOT EVERY CUSTOMER IS A

CONSUMER.

167
168
 The procurement cycle has steps to be achieved step No.1

PROCUREMENT CYCLE
1- Specification= Satisfaction (difference between expectations and perception)
Can be defined as a statement of the requirements to be Satisfied in the supply of a
product or service.

Purpose & value add of an effectives Specs:

 Define the requirement,
 Communicate the requirement,
 Minimise risk and cost,
 Provide a means of evaluating the quality or
conformance,
 Support standardisation and consistency.

169
Specification
PROCUREMENT CYCLE
Types of specifications

Performance
Conformance 4 dimensions:

- Productivity: About quantity/capacity.

Conformity with the needs/ meeting customer needs
- Quality: Standards.
- utilization: Resources and assets.
- Financial: Cost.

170
What is Contract?
PROCUREMENT CYCLE

Agreement
Consideration
(Offer and Acceptance)

Elements of
Legally Biding
Contract

Intention to create legal Contractual capacity

relations

171
PROCUREMENT CYCLE
Supplier Appraisal

Definition

Is the definition and assessment

Pre-qualification
of criteria for supplier “suitability”
, so that only pre-screened
suppliers with certain minimum Development of objective
standards of capability, capacity, evaluation criteria
compatibility are invited or
considered for participation in a
given sourcing process.
The screening of potential
suppliers against the defined
criteria

172
 PROCUREMENT CYCLE
Supplier Appraisal
Competency Cost

Capacity Consistency

Avoid loss, damage, dely Commitment to quality Culture

Control of processes Communication

Cash Compliance

173
PROCUREMENT CYCLE
Supplier Selection

• Preferred supplier
• Competitive bidding
• Negotiations

174
PROCUREMENT CYCLE
Supplier Selection

o Quality and process control. 8dimensions

(product life cycle).
o Continuous improvement
o Facility environment
o Customer relationship
o Delivery
o Inventory and warehousing
o Ordering
o Financial conditions
o Certifications
o Price 175
PROCUREMENT CYCLE
Supplier Performance Evaluation

 Help identify the highest-quality and best-performing

suppliers
 Suggest how relationships with suppliers can (or need to
be) enhanced to improve their performance
 Help ensure that suppliers live up to what was promised in
their contracts
 Provide suppliers with an incentive to maintain and/or
continuously improve performance levels
 Significantly improve supplier performance

176
  Contract Management
 Contract Administration
 Types of Contracts
PART III
 Methods of Payments
CONTRACT  Types of Bonds
 Disputes Resolutions
 Types of Delays

177
CONTRACT MANAGEMENT

178
 What is a Contract?
To be valid a contract must fulfill the following
requirements:

An offer/ proposal

An acceptance of the offer.

The contractual capacity (authority) of the parties.

A consideration (benefits) of something of value.

A legally binding (documented) relationship.

179
LETTER OF INTENT

 This is NOT a contract, but simply a letter stating future

intentions of the buyer to hire the seller

 There is no legal bind on Letters of Intent

 CONTRACT DEFINITION

 Contract management or contract administration is a

contract made with customers, vendors, partners, or employees.

 The difference between contract management and contract

administration is a difference of timing and whether a final
contract has been signed by all parties.

181
 CONTRACT MANAGEMENT

 Contract Management focuses on what happens before a contract is

signed. A contract manager's duties taking control of the way the
contract is prepared, analyzed and negotiated.

182
 CONTRACT ADMINISTRATION

• Contract administration focuses on what happens after a contract

is formed.
• A contract administrator decides how the organisation will ensure
that it does what it agreed to do in an agreement with another party
and that the other party also fulfils its obligations.

183
 A CONTRACT FEATURES

The law of contract

It regulates the legal relations between parties

What is a contract?
It is an agreement made between two or more persons for the purpose of obtaining a
certain consideration

What is a difference between an agreement and a contract?

When a contract is made?

When parties have reached agreement and the law recognising rights and obligations
arising from the agreement
184
 A CONTRACT MANNER

 The manner in which an agreement may be made:

- In writing
- By word of mouth (verbal)
- By electronic means (E-commerce/ E-business)
- By any combination of the above

185
 ESSENTIAL ELEMENTS OF CONTRACT

1- Agreement
The parties must have reached or be deemed to have reached an
agreement (Meeting of the minds)
2- Intention
The parties must have intended to create legal relations (a lawful
purpose)
3- Consideration
It is any advantage/benefit moving from one party to another, which it
must be possible and legal (mutuality of obligation)

186
The existence of intention:

1- Capacity
The parties must be of sound mind and of age.
2- Legality
A contract must be for a legal purpose.
3- Privity of contract
It states that a person who is not a party to the contract cannot enforce it
even where a contract is expressly for his benefit (e.g. hired ship and the
charterer)
4- Declaration of intention

187
 CLASSIFICATION OF TERMS OF CONTRACT

 The terms are instructions upon both parties

 Each party has its respective instructions

1. Terms may be either express: or implied or both:

2. Terms may be either conditions or warranties or both:

3. Terms may be either rights or obligations or both:

188
1- Express terms (quantity, location of delivery, price, product, method of delivery, etc)
and implied terms

 Express terms are stated by the parties and expressly agreed between them.

 Express terms might be oral or written

 Implied terms are said to be included in the contract or at law

189
2- Conditions and Warranties

 Conditions are important terms. Breach of such a term entitles the

innocent party to terminate the contract and claim damage.

 Warranties are less important terms. Breach of a warranty, sometimes,

does not lead to terminate the contract.
 Warranty vs. Guarantee

190
WARRANTIES AND GUARANTEES –EXAMPLE

 Seller warrants goods for the period of 18 months from the date of delivery or 12
months from the date installation, whichever occurs first.
 Seller is responsible to replace or repair defective goods after receiving written
notice.

191
3- Rights and Obligations (duties)

 Where parties made a binding and correlative rights and obligations

between themselves.

 A purchaser has the right to reject material that does not conform with
the terms of the contract.

 A purchaser needs to notify the supplier, describing specifically the

nature of the defect or default.

192
 EXAMPLES

CLASSIFY THE FOLLOWING TERMS:

193
 A full compensation for supplying the goods and performing all supplier’s obligations
under the purchase order, purchaser shall pay seller’s the price.
 The purchaser shall have the right to inspection and approval.
 Seller shall warrant that the goods shall conform with the specifications.

194
 All specifications and drawings supplied by the purchaser shall remain the property of
the purchaser.
 Purchaser shall give notice to terminate a contract.
 The seller shall indemnify and protect harmless the purchaser, its agents and
employees from all damages.

195
 The seller shall conform strictly with all requirements of Qatar Law No. 6 of 1987.
implied mentioned.
 Contract shall be read as a whole. Obligation.
 The seller shall maintain adequate insurance coverage. Warranty and obligation on
seller.
 Seller shall ensure that all Seller Personnel undergo any medical
examinations required by the State of Qatar or Purchaser and shall supply Purchaser
with relevant details of medical and/or health records for Seller Personnel if required to
do so by Purchaser.

196
 Seller shall be responsible for Seller Personnel‘s sound and safe operation and
use of any materials, equipment and facilities provided by the Purchaser and shall
ensure that Seller personnel comply with the manufacturers instructions and any
particular operation requirements advised by the Purchaser.

197
 Seller’s obligations
Deliver the goods

Deliver the related documents

Transfer the title of ownership

Assure conformity

Act in good faith & fairly

Offer “civil liability”

198
 Buyer’s obligations
Accept the goods or services

Pay the agreed price

Act in good faith & fairly

Accept civil liability

199
Major issues in preparing the contract
relate to:
What do you want to obtain? Needs

What do you want to avoid? Delay, damage, losses, less quantity, etc.

The options do you have to protect yourself if things go wrong?

complain, review, ordinary courts, etc.

What do you want to include or exclude in the contract? The 6

categories of Terms.

Which clauses to use? Rights, obligations, conditions, warranties,

guarantees.

200
What you want to obtain
type of purchase (recurring needs or
not, number of suppliers…)

What you want to avoid

inventory levels, stockouts, changes of suppliers…

The options you have to protect

yourself if things go wrong
short contracts, performance and completion bonds, dispute
resolution clauses...

201
What to include or exclude in the
contract
 Trends towards outsourcing and new types of relationships
will influence the type of contract

 In a global environment not all terms have the same meaning...

 Increased use of the Internet

Which clauses to use

 Develop your own Clause Book §§§
202
 What makes a good contract?
Know what you want, what you want to avoid & your options if
things go wrong
Know your supplier
§ §
Aim at “win-win”
Don’t accept unrealistic promises
§
Avoid ambiguous drafting
Keep technology in mind
Keep intellectual & industrial property in mind
Have a clear dispute resolution clause
Have a clear termination clause
Keep culture in mind
203
 CONTRACT‘S ROLE

 Ensures that the seller’s performance meets contractual

requirements
 Contracts are legal relationships, so it is important that legal
and contracting professionals be involved in writing and
administering contracts
 Many managers ignore contractual issues, which can result
in serious problems

204
PREPARING THE CONTRACTS

205
1. § Identifying the parties §

Objective: To determine the parties

to the contract.

Why:
* Who is your company is really dealing with?
* Does it have to capacity you need?
* Needed for contractual claims...

Contents: Exact name, type, location,

registration...
206
2. § Description of the §
goods/services/capital investment

Objective: To describe the goods/services/

capital investment to be supplied.

Why: To determine if the goods

conform to what you require & and how
to verify this.

Contents: Quality levels, weight, size,

colour, tolerances, defects...
207
3. § Contract price §

Objective: Determine the amount the

buyer is to pay, or the way in which
this amount is to be determined

Why: Price represents the buyer’s

main responsibility
Contents: Price per unit or for total
number of units. Lump-sum or cost plus
or person/day. Currency, taxes, price
adjustments...
208
4. § Delivery §

Objective: To specify where and when the goods are

to be sent by the seller, received and accepted by the
buyer, and determine whether the seller has complied
with its duties.

Why: Many different costs are involved. Who

covers these as well as the related risks needs to
be made clear

Contents: Incoterm, place, time, way of

delivery...
209
5. § Inspection by the buyer §

Objective: For the buyer to be able to

examine whether the goods, the result of the
services, or the capital investment meet the
requirements of the contract. For the seller to
know how it is to execute its duty to provide the
goods for inspections to the buyer.

Why: To ensure that goods conform to

specs.

Contents: When, where, how to inspect and who

is to do it.
210
6. § Retention of title §

Objective: Determine who retains the

title of ownership to the goods, works
or capital investment, and until when.

Why: To determine when what is

purchased really belongs to the buyer

Contents: A description of the parties’

intention
211
7. § Payment conditions §

Objective: To explain how the buyer is to pay for

the goods, works or capital investment purchased
under the contract.

Why: To specify this additional

key obligation of the buyer

Contents: When, how, where to pay.

Payment discounts, interest/penalty for
late delivery...
212
8. § Documents §

Objective: To specify which

documents the seller is to provide in
order to complete obligations.

Why: The seller need to know which

documents you require.
Contents: List of transportation documents,
invoice, pocking list, insurance documents,
certificates of origin and of inspection...
213
9. Liability for late delivery, non-
§ delivery, and remedies §
Objective: Determine how
problems with delivery are to be
addressed.

Why: To ensure compensation for delays

and clarify how to deal with problems

Contents: State how problems will be

addressed, notice of delays, when the buyer will
have the right to terminate the contract...
214
10. Limitation of liability for non-
§ conforming goods §
Objective: As part of the balance of the
contract, the parties may wish to foresee, to
the extent permitted by law, the consequences
of the goods not conforming to the
specifications.
Why: To avoid having to
negotiate or litigate the dispute

Contents: Specifies duties to inspect & to give

notice; whether to refuse, replace, repair or
reimburse non-conforming goods and the time
frame for the seller’s liability... 215
11. Claims in product liability
§ §

Objective: To create a contractual

obligation of assistance between the
parties, in the case of a customer
claim about the goods provided. ?

Why: To ensure a duty to

cooperate

Contents: Each party’s duty to inform

the other about claims and to assist
each other... 216
12. § Force majeure §

Objective: This is a mechanism to

address a situation where here an
barrier occurs that is beyond the
control of the parties and prevents
performance.
Why: To relieve a party from the
duty to perform in case of
impediments beyond its control
Contents: Specify what is to be considered
force majeure and how to notify it 217
13. § Applicable law §

Objective: To help the parties know

how to interpret their obligations
under the contract. To help the judge
or arbitrator know how to determine LAW
liability under the contract.

Why: To minimize misinterpretation

and problems in case of a dispute

Contents: Specify the law to apply

218
14. § Resolution of disputes §

Objective: To determine the

procedure for resolving disputes.

Why: It is always recommended to specify

accepted ways of solving a dispute

Contents: Refer to use of meditation,

expertise, arbitration vs. ordinary
courts, etc.
219
15. § Language of the contract §

Objective: To specify the language in

which the parties are conducting their
business.

Why: To simplify communications

Contents: Specify the language or the

controlling language (in case of more
than one)
220
16. § Definitions §

Objective : To identify certain terms that have a

specific meaning for the parties in the context of the
agreement.

Why: To avoid misunderstandings ?

Contents: Spell out the meaning of
specific terms

221
17. § Notices and communications §

Objective : To specify how the parties will

communicate with each other in a valid way.

Why: To protect the parties from

arguments that a communication was
not received ?
Contents: Specify to whom
communications are to be made, in
what way, any copies required…. 222
18. § Exclusion of headings §

Objective : To avoid a misinterpretation of the

contract by reference to the headings of each of the
clauses.

Why: Some headings may sometimes seem

misleading §
§
§ §

Contents: State that headings are

used for convenience only
223
19. § Modification of the contract §

Objective : To spell out the way in which a contract

is modified.

Why: It may otherwise be difficult to

determine when and whether a
communication amounts to a modification in
the contract or not. r a ct
n t
Co
Contents: Procedures for modifying
§ §
the contract. 224
20. § Changes in the parties §
Objective : To ensure the buyers rights in the event
of substantial changes in the ownership, management,
etc., of the seller which might endanger performance
of the contract.

Why: Important changes may mean that the

buyer would want to terminate the contract.
Contents: Specify that in the event of a
fundamental change, the buyer has the right to
terminate the contract or to compensation. 225
21. § Assignment §

Objective : To protect the buyers interest in the event

of the seller wishing to assign the contract to a third
party.
Why: Assignments to third parties may not be
acceptable as they may involve additional risks

Contents: Specify whether or not assignment is

possible and if so what procedures to follow
226
22. § Termination for cause §

Objective : Specification of circumstances in which

the buyer is entitled to terminate the contract.

x
ract
ont
Why: It is important to know under C
what conditions this can be done

Contents: Specify the types of events that

may lead to termination and the procedure
for communication
227
23. § Insurance §

Objective : The determination of who is to bear the

costs of the insurance and the way it is to be procured
is necessary.

Why: To make it clear who is

responsible

Contents: Specify obligations to insure

and the type of proof required
228
24. § Warranty claims §

Objective : To allocate responsibility if warranty

claims arise.

Why: To make it clear who bears the

costs of repair and refunds and how
this is to be done

Contents: Specify procedures &

responsibilities
229
25. Voidability of the contract or part or it
§ §

Objective : To help the contract survives even if part

of it is not valid under local law.

Why: Sometime a clause may be included

which is not valid under the applicable law
a ct
Contents: State that the contract will Co n tr
be preformed as if the voided clause §
did not exist X
§
230
26. Intellectual or industrial property
§ §
Objective : To make clear the impact of the sale on
any intellectual or industrial property of the seller.

Why: The seller (or the buyer) may

not want the other party to acquire
any rights in this regard
Contents: State which rights are to be
acquired, if any
231
27. § Taxes §

Objective : To make clear the manner in which taxes

will be covered by the parties

Why: To avoid tax surprises

Contents: Statement that each party

bears the responsibility for its own
taxes
232
28. Performance bonds, advance payment,
and/or completion bonds

Objective : To protect any advances made and ensure

performance.

Why: To avoid financial losses for the

buyer
Contents: The type of bond, the amount and
the wording required

233
29. § Confidentiality §

Objective: To avoid disclosure of

confidential information.
GOAL
Why: For contractual security,
certain information has to be kept
confidential by the parties.

Contents: Description of duty not to

disclose by the parties.
234
CONTRACT ADMINISTRATION

235
 Forming contract management teams

 For large contracts you may have

“core teams” & “extended teams”

 Different contracts require

different managers:

“Arms-length” relationships require people who

are good at applying contract law

Co-operative relationships require good people

managers
236
 Contract Managers: Roles
 Defines team roles
 Keeps the team motivated
 Ensures team members maintain communication
 Responsible for the contract management plan
 Establishes contract management reporting systems
 Ensures proper contract administration
 Identifies & manages risk
 Identifies priorities
 Manages the buyer-supplier relationship
 Manages disputes
 Approves or rejects requests for contract changes
237
 Contract Managers: Skills, Competencies
& Experience

 An excellent communicator
 Relationship builder / good interpersonal skills
 Able to focus on issues & not personalities
 Has a working knowledge of the technical issues
 Respected, influential & politically aware
 Knowledge of risk management techniques
 Knowledge of contract law
 Ability to see the “big picture”
 Skilled in project management techniques
 Skilled negotiator

238
 Types of information to include in a contract
management plan
Definitions
Background information & supply strategy
Contract management team
Supplier details
Partnering information (if relevant)
Contract management scope
Key provisions of the contract
§§§ 239
 The contract schedule
Draft the network flowchart
Confirm:
 level of detail displayed
 activity sequencing
 physical placement
 interdependencies with milestones

Allocate responsibilities for activities & milestones

Make time estimates

240
 Calculate the preliminary schedule and prepare
a network chart

1 Sequence 1
Lag Dependency Activity A2
0 1 week 5 weeks 10
M1 M2 6

Start M5
4 6 10

Lag
4 weeks M3 M4
Activity A3
Activity A1 4 weeks
2 weeks

241
ITC M9:U3:3.4-5
 Make a Gantt (bar) chart
I Task Name
Ju Aug Sep Oc Nov
D
l t 06 13
23 30 07 14 21 28 04 11 18 25 01 08 15 22 29 2 2 0 10 1
0 7 3
0 Sample Gantt Chart
1 START
2 Lag time
3 M1 Final assembly and test completed
4 M2 Ready to start packing equipment
5 A2 Pack and ship equipment to customer
6 Lag time
7 M3 Arrangements for crane hire at destination started
8 A1 Arrange crane hire at destination & confirm with site personnel
9 M4 Crane hired and site personnel notified
10 A3 Deliver crane to site and assemble
11 M5 Ready to off-load equipment from transport vehicle

242
ITC M9:U3:3.4-6
 Critical path networks
The network (non-scalar) below represents a
certain contract. It shows the milestones and the
duration of each activity linking the milestones.
Work in teams to answer the questions that follow.

243
 Communicating priorities
You need to be aware of the relative priority of
TIME, COST and QUALITY

12
9 3
6
2 3 1

244
TYPES OF CONTRACTS

245
 You can use contract type to control the share of risk assumed by the contractor and
the buyer.
 Contract should reflect:
- The type of work involved
- The balance of risk and reward between the parties
- The overall commercial deal

246
 There is a great temptation to take a contract form off the shelf and then make the
deal fit the document.
 THIS IS THE WRONG WAY ROUND
 Always do the deal first, taking account the type of work/service to be provided, and
also taking care to assess the risks, then select the relevant contract form.

247
 CONTRACT TYPES
• Firm fixed price
Fixe • Fixed price with economic price
d • Fixed price determination
Pric
e

• Fixed price incentive

Ince • Cost plus incentive fee
ntiv
e

• CPAF
• CPFF
Cost • Time and materials
type
248
 1. FIXED PRICE CONTRACTS

 The supplier is obligated to deliver the product called by the contract for a fixed price.

 It is normally used where specifications are well defined and cost risk is low.

 There is no minimum or maximum profit limitations.

249
 Firm Fixed Price (FFP)
- The most preferred type of contract.
- An agreement to pay a specified price.
- FFP is appropriate in competitive bidding.
 Fixed Price with Economic Price (FPEPA)
- Used to recognise economic contingencies.
- FPEPA contract is an FFP contract that includes. economic price adjustment clauses.
 Fixed Price Redetermination (FPR)
- A firm fixed price is set for initial contract.
- A fair price can be for initial period, but not for subsequent period.

250
 2. INCENTIVE CONTRACTS

 The cost responsibility is shared by the buyer and the seller.

 The desire to motivate the supplier to control the cost
 Two types of incentive contracts:
- Fixed price incentive (FPI)
The ceiling/maximum price is agreed upon during the negotiation
- Cost plus incentive fee (CPIF)
- The supplier is reimbursed for all allowable costs incurred up to any prescribed ceiling

251
 3. COST TYPE CONTRACTS

 The buyer is obligated to reimburse the supplier for all allowable, reasonable costs incurred and to pay a fixed fee.
 The supplier is obligated to provide its best efforts.
 It has many types of contracts, including:
- Cost contracts
- Cost sharing contracts
- CPFF
- CPAF

252
 Cost Contracts
- Contractor receives no fee, and it is used for research and development work
particularly with non-profits and educational institutions, or other non-profit
organisations.
 Cost Sharing Contracts
- It is a cost-reimbursement contract in which the contractor receives no fee and
is reimbursed only for an agreed-upon portion of its allowable costs. Cost-
sharing contracts can be used for basic and applied research efforts performed
by non-profit and educational institutions

253
 Cost Plus Fixed Fee (CPFF) Contract
- The buyer pays the seller for allowable performance costs plus a fixed fee
payment usually based on a percentage of estimated costs for
doing the work.
- CPFF is relevant where technical and schedule risks are high.
 Cost Plus Award Fee (CPAF) Contract
- The buyer reward the supplier on a periodic basis for the application of
efforts in meeting the buyers stated needs.
 Time and Materials Contract
- In case of repairs to machinery, the precise work to be done cannot be
predicted in advance. The parties agreed on a fixed rate per labor hour.

254
 Time and materials contract is designed for situations where the amount or duration
of work cannot be predicted and, as a result, where the costs cannot be estimated
realistically.
 Under this type of contract, the parties agree on a fixed rate per labor hour that
includes overhead and profit, with materials supplied at cost.

255
CONSIDERATIONS WHEN SELECTING CONTRACT TYPES
 Unstable labor conditions
Risk
 Unstable market conditions
 Improvement in production is required Improvement in production using technology

 Complexity of product or service High complexity, high risk, vise versa

 Product or service requires development Service level (extra charge for customized services)

 Design is not completed or may change Design of product not completed/ high risk

Education and experience/ awareness/ knowledge

 Learning must take place
 Short time to prepare for a bid or negotiation Tendering/ high risk for short time

 Short delivery period High risk

256
RISKS ASSOCIATED WITH CONTRACT TYPE
Buyer/seller risk in major contracts
 MATCHING CONTRACTS TO TENDER
DOCUMENTS

Tender Document Contract Type

Open tender
FPC
Request For Proposal Cost Plus

Competitor and Invitation For Bid Fixed Price

negotiated tender

Private tender Request for Quotation Time and Material

 EXAMPLES

ANSWER THE FOLLOWING QUESTIONS

260
Q.
 Which type of contract has the highest risk for the buyer?
A. Fixed price
B. Reimbursed time
C. Time and materials
D. Cost plus

261
Q. Which type of contract has the highest risk for the seller?

A. Fixed price
B. Reimbursed time
C. Time and materials
D. Cost plus

262
TODAY’S CHALLENGES REGARDING FORCE
MAJEURE

263
 § Force majeure §

Objective: This is a mechanism to

address a situation where here an
impediment occurs that is beyond the
control of the parties and prevents
performance.
Why: To relieve a party from the
duty to perform in case of
impediments beyond its control
Contents: Specify what is to be considered
ITC
force majeure and how to notify it M8:U3:3.2-13
264
FORCE MAJEURE - EXAMPLES

 A delay in total or partial failure of performance shall not constitute a termination if it is caused by force majeure
that can not be foreseen before the effective date.
 It may be due to:
- Act of good
- Embargo, expropriation and confiscation by governmental authority
- War or terrorism
- Lawful or unlawful strikes
- Maritime disasters

265
INSPECTION, ACCEPTANCE, REJECTION

266
 • Conduct by the buyer.
• Inspection can lead to either acceptance or rejection.
INSPECTION - EXAMPLES • If you accept there are 2 conditions: 1- you don’t have the right to
reject any accepter materials. 2- you have to make payment to the
supplier.
• If you rejected there are 2 conditions: 1- go for penalty. 2-
terminate the contract. You can do both.

 Purchaser has the right to inspect, test and examine the goods.
 3Pl can be used for inspection purposes.

267
ACCEPTANCE -EXAMPLES

 Inspection by purchaser at the seller’s premises shall not constitute final acceptance.
 If defects are discovered at purchaser’s place, costs shall be for seller’s account.

268
LIABILITY - EXAMPLES

 Contractor shall protect, save and indemnify the purchaser, its agents and employees
fro any damage arising out of the supply.

269
 PENALTY/LIQUIDATED DAMAGES CLAUSE ‫شرط جزائي‬

• Penalty is commonly used in the market.

• It’s a certain amount of money or a percentage of a contract.
• What is liquidated damage? It aims to quantify or calculate the exact number of losses to indemnify.
• Unliquidated damage? Identify the exact losses. You can’t quantify all loss (human)/ it refers to losses that can’t be quantified,

270
PENALTY/LIQUIDATED DAMAGES CLAUSE

 Liquidated damages clause: are damages whose amount the parties designate during
the formation of a contract for the injured party to collect as compensation upon a
specific breach (e.g., late performance)
 Unliquidated damages clause: Damages that are sufficiently uncertain and are not
mathematically calculable or are subject to a contingency which makes the amount of
damages uncertain.
 Penalty clause: its purpose is to punish the party in breach rather than to compensate
the injured party.

271
 The damages are "liquidated" in the sense that the contract sets forth a specific sum
that will be paid as damages, whatever the actual amount of damages may be.
 However, the amount of "liquidated damages" should roughly parallel what actual
damages might realistically be.

272
ARE LIQUIDATED DAMAGES CLAUSES ENFORCEABLE?

 If the clause is a genuine pre-estimate of the loss which is likely to be suffered by the
innocent party as a result of a breach of contract, then it is enforceable. The parties
are limited to that calculation even if the innocent party's loss is more than the amount
claimed.
 If the amount claimed is not a genuine pre-estimate of loss then it is likely to be
unenforceable.

273
 The intent of liquidated damages is simply to measure damages that are hard to
prove once incurred.
 If the liquidated damages are disproportionate, they can, however, be declared
a penalty. The clause is then void, and recovery will be limited to the actual damage
that results from the breach.
 The courts consider two elements to determine whether
a liquidated damage clause is enforceable.
1- The first is the uncertainty element;
2- The second element is whether the amount of the liquidated damages is reasonable
in proportion to the actual or anticipated harm.
 If it is not, then it is a penalty, which is against public policy, and therefore
the clause is unenforceable.

274
LIQUIDATED DAMAGE - EXAMPLES

 When seller fails to deliver agreed goods, he shall be liable for the purchaser for
liquidated damage.
 All liquidated damages are agreed between parties.
 Liquidated damages rate is 2% of the price for each week and should not exceeding
10% of the price.

275
• 1-
• 2- it is a termination case (due
to a rejection case).
• 3- when the ended (enforced HOW CONTRACTS MAY END
end- law- government-.)
• 4- ending the contract
because of a change in
ownership.
• 5- end the contract by natural
enforcement (pandemic).
• 6- contract breach:1- if there
is a breach of any condition
you have the right to
terminate the contract.
2- unlawful act
3- when there is a breach/ if any
hackers discovered end the
contract.

276
 The offer must be definite, clear, complete and final
 Accepting an offer leads to a contract
 Invitation to treat is different from a contract:
It is an indication of a willingness to receive offers
 The offer may be terminated in case of:
- Revocation by the offeror (withdraw before acceptance)
- Lapse of the offer
- Rejection (express or implied)
- Passage of time (nor period prescribed or not made within the period)
- Death of a party
- A conditional acceptance
277
WHAT CONSTITUTES A BREACH?

278
 Where any vitiating factor is present in a contract, a contract may be
void, illegal or unenforceable:

- If a contract is to perform an unlawful act

- If one party is not recognised as being capable of entering a contract
- If the consent given by a party is vitiated
- When a party was induced to enter a contract by force (Duress)
- If the signing has been fraudulently induced
- If a supplier fails to deliver by agreed date

279
 INTERPRETING CONTRACT PROVISIONS

 Interpreting and construing contracts and contract language differ in very important
ways.
 Failure to fully understand interpret versus construe frequently results in a few
common errors made by contract reviewers or individuals administering or enforcing
a contract.
 Interpreting a contract or portion of a contract deals with the language before the
interpreter.

280
 Anyone can read and interpret contract clauses, including all incorporated
documents, appendix, amendments and attached terms and conditions.
 Construing a contract requires significantly more training and requires an
understanding of various contract law rules for interpreting, construing
and enforcing contract rights and obligations.
 Literal interpretation of a contract may result in the use of unenforceable,
inconsistent or conflicting clauses.

281
 COMMON ERRORS MADE IN CONTRACT
INTERPRETATION

 Intent of the parties - The best contracts first require an agreement in

concept and in substance on the subject matter, followed by terms,
conditions and contract provisions that document the shared
agreement.
 This process often takes time. Cutting short this part of the
contracting process is a common error.

282
 The Contract as a Whole - A very common error is to read the literal content of
a single provision, without interpreting the provision as a part of the entire
contract.

 Explaining Contractual Rights and Obligations. Another common error is the

assumption that all contract provisions are enforceable in accordance with literal
interpretation. Numerous public policy, statutory and common law
considerations may affect and control actual contract rights and obligations.

283
 Frequent problems
¨ Applicable law
¨ Bidding strategy
¨ Change of ownership/management
¨ Changed circumstances
¨ Currency fluctuations & foreign exchange
¨ Delays
¨ Delivery
¨ Different business cultures
¨ Dominance
¨ Lack of specificity
¨ Languages

284
ITC M8:U2:2.3-1
INTERPRETATION - EXAMPLES

 Purchase order shall be read as a whole.

 Interpretation and enforcement of all terms and conditions shall be made in
accordance with the laws of the State of Qatar.
 No modifications and changes shall be valid without written approval by both parties.

285
• It is mandatory to be mentioned in all contracts.
• Methods: 1- cash- in advance/ upon delivery
2- bank transfer: in advance/ upon delivery
3- open acc: in the name of the seller
4-

METHODS OF PAYMENT

286
 § Payment conditions §

Objective: To explain how the buyer is to pay for

the goods, works or capital investment purchased
under the contract.

Why: To specify this additional

key obligation of the buyer

Contents: When, how, where to pay.

Payment discounts, interest/penalty for
late delivery...
287
ITC M8:U3:3.2-7
 Principal payment methods
The cost, level of complexity and the level of security
offered will vary depending on which method you
choose

1. Cash in advance:
Generally used only for small purchases and when the
goods are built to order.

2. Open account
The easiest but requires the highest level of trust.

288
ITC M8:U7:7.2-1
 Principal payment methods (Cont.)
3. Documentary letters of credit (3 types)

¨ irrevocable, confirmed L/C

¨ irrevocable, unconfirmed L/C
¨ revocable L/C

“Irrevocable” means that any amendment or cancellation requires

the seller’s consent

“Confirmed” means that the seller can obtain confirmation from its
bank that payment will be made upon presentation of the required
documents (e.g., bill of lading) =

The irrevocable, confirmed L/C offers the highest level of security

289
ITC M8:U7:7.2-2
 IRREVOCABLE LETTER OF CREDIT
- the process

1. Instruction to 2. Instruction to
open L/C corresponding bank
9. B/L given 5. B/L
to buyer 7. B/L transferred presented
Buyer Seller
Buyer Seller
8. Payment 10. Payment 6. Payment
’s ’s
Bank Bank
13. Goods 12. B/L used to
arrive after claim goods 4. Master
unloading issues clean
B/L
3. Goods
loaded

11. Shipment arrives

290
ITC M8:U7:7.2-3
 Managing exchange risk -some options
Agree with the supplier to pay in your own currency
Agree to pay in a currency which is reasonably stable
Agree to pay on the basis of a “basket of currencies”
Purchase the currency you need immediately on the spot market and
hold it in a bank account until the time you need it
Make a “forward” transaction to purchase the currency you need at
the time when needed

Get advice from your bank on options,

possibilities and costs involved
291
ITC M8:U7:7.4-1
PAYMENTS - EXAMPLES

 Invoices are to be submitted within 30 days of materials delivery.

 Claims for payments of materials delivered but invoiced will not be accepted after 12
months from delivery date.

292
MINI-CASE STUDIES

Pakistan Vietnam
 Transfer of fund between London and Dhaka  Dollar transfer from Hanoi to London.
 When the money left London, Dhaka was in the  At the time, USA had an embargo on trade with
East Pakistan. The next day, the Province declared Vietnam.
independence as Bangladesh.  All dollar payment pass through NY, where the
 The money was seized in Karachi by Pakistani American government seized the money and held
government. it until the embargo was lifted.

293
• It refers to a precaution to ensure the performance of the supplier.
•

TYPES OF BONDS

294
 A performance bond is a form of security provided by a contractor to a developer and
consists of an undertaking by a bank or insurance company to make a payment to the
employer in circumstances where the contractor has defaulted under the contract.
 There are two types of performance bond - "on demand" and "conditional".

295
On Demand Bonds
 On demand bonds are a standard requirement in many international contracts, as well
as in the petroleum and power industries .
 On demand bonds are usually provided by banks, and as the title suggests, the bank is
required to make a payment under the bond whenever this is demanded.

296
Conditional Bonds
 A conditional bond is common within construction industry.
 Such a bond is usually issued by an insurance company, and payment
is usually conditional upon the employer who makes the call proving
the amount of loss which he has suffered.
 In practice, a conditional bond may require litigation before any
payment can be obtained.

297
 The value of a performance bond is usually expressed as a percentage of the contract
price, usually between five and twenty per cent of the contract price.

298
BID BOND OR TENDER BOND

 A bid bond is issued to support a customer's tender for a particular contract and to
protect the importer for any loss that might occur if the exporter fails to sign the
contract.
 Once the tender is accepted it will normally be necessary to replace the bid or tender
bond with a performance bond.
 Bid bonds are usually issued for 2% to 5% of the tender amount and are usually
outstanding until the end of the tender process.

No need to know it
299
PERFORMANCE BOND

 A performance bond safeguards the importer should the exporter fail to meet its
contractual obligations.
 Performance bonds are usually issued for 10% to 20% of the contract amount but may
be fixed by the local law of the importer's country.

300
ADVANCE PAYMENT BOND

 An advance payment bond ensures repayment to the importer of any advance

payments they have made (usually an agreed percentage of the contract amount
(typically 10%-30%) if the exporter does not fulfill its contractual obligations.)

301
DISPUTES RESOLUTION

302
 Settling Disputes: Methods
The are two groups of methods:

1. Adjudicative methods

 Litigation (court case) act

ntr
 Arbitration Co
§
2. Non-adjudicative methods: §§
 Expertise
 Mediation /conciliation
Negotiation
303
 Adjudicative resolution methods
Litigation: One party sues the other
before a state court
§
Arbitration: A private tribunal selected by the § §
parties makes an award.

Arbitration is normally selected through an arbitration

clause in the contract

Arbitration can be supervised (by an institution with a

secretariat such as the International Court of Arbitration
or the ICC) or
ad hoc where the parties set the procedures, sometimes
using the UNCITRAL Model Rules of Arbitration 304
 Non-adjudicative resolution methods (I)
Expertise: A neutral expert examines the problem
and makes recommendations.

 Reference can be made to a centre of expertise, or the parties may

select the expert themselves
 The recommendation may or may not be binding

Mediation & conciliation: A person facilitates the

resolution of the dispute.

 Allows to alter options

 The parties retain total control
 Can be used in combination with other methods 305
 Non-adjudicative resolution methods (II)
Negotiation: The parties exchange views aimed at reaching
an agreement amongst themselves

The negotiation can be facilitated or unfacilitated

INTERNET

The Internet can sometimes be used WWN

W
B
ET
(e.g., www.clicknsettle.com) B2 E-Commerce

306
 STAGE 1 – REACH AGREEMENT
FOR MEDIATION

 Agreement with the other party to refer the matter to mediation.

 This could be carried out in a preliminary meeting during which it
would be explained to both parties precisely how the mediation
would work.
 Selection of a well trained and competent mediator is essential.

307
 STAGE 2 – PREPARE FOR THE
MEDIATION

 Apart from the logistical items of time and location, the formalities
of the mediation agreement should be taken care of, together with
an exchange of case summaries.

308
 STAGE 3 – THE MEDIATION

 There is no rigid procedure, but typically a mediation will take

place over one or two days.
 The Mediator will explain the procedure to be adopted at the
first meeting which the parties present a brief summary of
their case.
 After an initial session of questioning and discussion the
mediator meets each party privately to explore the case with
them and to assist them in their search for common ground.

309
 CONCILIATION

 Conciliation involves round table discussions with both parties present

in front of the conciliator who will endeavor to assist the parties in
coming to an agreed settlement.
 The conciliator takes a more active role investigating the strengths and
weaknesses of the parties' case, making suggestions, giving advice, and
creating new ideas which might induce them to settle their dispute.

310
 There is some disagreement in the industry as to the meaning of
conciliation and mediation. The two terms are used interchangeably.
 Any conclusion reached is non-binding, however, it becomes binding if
it is concluded in a signed agreement.
 Neither the conciliator nor the mediator is eligible to sit as arbitrator in
subsequent proceedings.

311
 LITIGATION

 Where there is no arbitration clause in the contract, or where,

in spite of an arbitration clause, the parties have commenced
litigation which has not been challenged, the matters in dispute
will be settled in the courts.
 Usually subject to one or more levels of appeal
 Usually takes a lot of time to reach a resolution
 Cost and duration can vary enormously from country to
country

312
 ARBITRATION

 Arbitration is a process whereby parties in dispute agree to

submit the matter in dispute to the decision of the
arbitrator(s) and undertake to abide by such decision.
 The parties conclude to withdraw a certain dispute from
the jurisdiction of national courts, and to authorize the
arbitrator(s) to settle it by final binding award.

313
 The number of arbitrators is usually 1 or 3.
 If 1, both parties agree on an arbitrator.
 If 3, each party appoints an arbitrator and the two arbitrators appoint the
third.
 In case of failure to agree on an arbitrator, the appointing authority shall
appoint one.
 The parties should agree on the rules under which the arbitration shall be
settled, e.g. ICC, UNCITRAL (United Nations Commission on
International Trade Law)

314
 Advantages and disadvantages of the
various methods (I)
Litigation & arbitration lead to a final judgment or
award

Litigation is final in the country where the

judgment is rendered as well as in any country
which has signed a treaty for reciprocal
enforcement of foreign judgments

315
 Advantages and disadvantages of the
various methods (II)
Litigation and arbitration are the most expensive methods.
Between litigation & arbitration there is a general preference for arbitration because:

¨ Wider possibility of enforcement

¨ It is not required to select a court of one of the two parties
¨ Arbitral proceedings are faster
¨ Greater confidentiality
¨ Lower cost
¨ The parties can select the language they wish

316
Advantages and disadvantages of the
various methods (III)
The more informal methods (mediation,
conciliation, expertise & negotiation):
Avoid the hardening of positions
Can be used rapidly and are cost-effective

Different methods can be combined in many ways

Future trends point towards more rapid & efficient access to private & public justice

317
 When to state the dispute a ct
n tr
resolution methods in the Co
contract?
For litigation, the place needs to be indicated

Arbitration should be stated through an arbitration

clause

Mediation/ conciliation, expertise & negotiation can

be incorporated in the contract but are frequently
sought only when a dispute has arisen

318
Drafting the Arbitration Clause: sljs d l jk
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Choice 1: Institutional or ad hoc?

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Institutional/supervised arbitration:

- Provides a set of rules and staff but there

is a cost for this service

Ad hoc (non-institutional) arbitration:

- May not be possible in all countries

- Can be difficult & risky

- UNCITRAL Model Rules may be used 319
 Drafting the Arbitration Clause:
Choice 2: What type of institutional arbitration?
Use an institution which is credible
& which has the right experience

Each institution would normally

have a recommended arbitration clause

320
TYPES OF DELAYS

321
TYPES OF DELAYS

 Critical (it affects the project, operations (suspension)).

 vs. Non-critical (it doesn’t affect the continuous flow of
activities or actions).
 Excusable (it occurs when we face force majeure
scenarios).
 vs. Non-Excusable (if the delay was caused by the seller’s
awareness in advance)
 Compensable (valid for excused delay)
 vs. Non-Compensable (valid for non excused)

322
CRITICAL VS. NON-CRITICAL DELAYS

 Critical delays are delays that affect the project completion, or a milestone date.
 Non-critical delays are delays that do not affect the project completion, or a milestone
date.
 Regardless of the type of schedule used, all projects have a critical path - the path of
activities that if delayed will delay the completion date.
 Extension of time considerations will apply only to those on the critical path or a path
made critical as a result of delays.

323
EXCUSABLE VS. NON-EXCUSABLE
 An excusable delay is a delay that is not attributable to the Contractor or for which
the Contractor is not held responsible.
 The Contractor shall be entitled to extension of time.
 Examples of excusable delays:
 Errors in drawings;
 Delayed drawings or instructions;
 Force Majeure;
 Delay in giving access to or possession of the site;
 Unforeseeable physical conditions;
 Suspension of work by the Employer;
 Variations. 324
 A non-excusable delay is a delay that is attributable to the Contractor or for which the
Contractor is held responsible.
 The Contractor shall not be entitled to extension of time.
 Examples of non-excusable delays:
 Delay by subcontractors;
 Expected weather conditions;
 Defects in workmanship.

325
 COMPENSABLE VS. NON-COMPENSABLE

 Excusable delays could be compensable or non-compensable.

 Compensable delay: a delay where the contractor is entitled to extension of time and
to additional costs.
 Non-compensable delay: a delay where the contractor is entitled only to extension of
time, but no additional costs.
 Whether or not a delay is compensable depends on the terms of the contract.

326
 PART IV  Contract Negotiation Process
 Negotiation Tactics
NEGOTIATION

327
CONTRACT NEGOTIATION PROCESS

328
Contract Negotiation: A Complex Activity for Both Buyers and
Sellers

Successful negotiators must –

 Have the ability to perceive and comprehend factors
shaping and characterizing the negotiation
 Exhibit behavioral and analytical skills to diagnose
problems and adapt winning strategies
 Understand their own personalities and personal ethics
and values
 Know their needs, desired terms and
conditions, and pricing strategy

329
 We All Negotiate Every Day

 Personal: Family and friends

 Professional:
 Internal Organization
 External: Buyers and subcontractors

Question: How well do you negotiate?

330
 Negotiation Approaches

 Natural approach
 Non-structured
 Informal – not written
 Inconsistent results
 Process approach
 Structured, planned
 Documented
More consistent results

331
What Is Different About Global and Domestic Negotiations?

 Political and legal issues

 International monetary factors
 Foreign governments and their bureaucracies
 Potential instability and sudden change
 Cultural diversity
 Export/Import regulations

332
The basic phases of negotiation
 The Contract Negotiation Process

Three Phase 1: Prenegotiation Phase 2: Conducting Phase 3: Postnegotiation Contract

Phases Planning Negotiations Actions Award
Key 1. Prepare yourself and your team 1. Determine who has authority 1. Prepare negotiation minutes

Steps or 2. Know the other party 2. Prepare the facilities 2. Send mintues ot the other party

actions 3. Know the big picture 3. Use an agenda 3. Offer to write up the contract

4. Identify objectives 4. Introduce the team 4. Prepare the contract

5. Prioritze objectives 5. Set the right tone 5. Prepare negotiation results

6. Create options 6. Exchange information summary

7. Select fair standards 7. Focus on objectives 6. Obtain required reviews and

8. Examine alternatives 8. Use strategy, tactics, and approvals using CMS

9. Select your strategy, tactics, countertactics 7. Send contract to the other party

and countertactics 9. Make counteroffers for signature

10. Develop a solid and approved 10. Document agreement or know 8. Provide copies of the contract

team negotiation plan when to walk away to affected organizations

9. Document lessons learned

10. Prepare contract administration

plan
334
 Phase 1: Pre-negotiation Planning (10-Step Process)

Step 4
Step 1 Prepare Step 2 Step 3 Step 5
Identify
yourself and your Know the Know the big Prioritize
objectives
team other party picture objectives
(interests)

Step 10
Step 9 Develop a
Step 6 Step 7 Step 8
Select your solid and
Create Select fair Examine
strategy, approved team
options standards alternatives
and tactics negotiation
plan

335
 The Importance of Price

Schedule
Technology
Obligations (R&D)

Type of Services
contract Price

Miscellaneous Ts and Cs

Products

336
Suppliers and buyers working together to drive out unnecessary costs
 The Importance of Terms and Conditions

Payments
Inspection and
And so on
acceptance
Delivery
terms
Financing

Ts and Cs:
Obligations
Cost, Risk Warranties

Spares
Taxes

Exchange rate Guarantees

Indemnity
and liability

338
The phases of negotiation – multi-meeting
The phases of negotiation – single meeting
Ranges of possibility
Manipulative techniques and ploys
Two views of the negotiation process
The interpretation of postures
 Phase 2: Conducting Negotiations

Step 1 Step 2 Step 4 Step 5

Step 3
Determine who Prepare the Introduce the Set the right
Use agenda
has authority facilities team tone

Step 7 Step 10
Step 6 Step 8 Step 9
Focus on Document
Exchange Use strategy, Make
objectives agreement or
information tactics counteroffers
(interests) walk away

345
 Phase 3: Postnegotiation Actions

Step 2
Send Step 3 Step 6
Step 1 Step 5
minutes Offer to write Step 4 Obtain
Prepare Prepare
to the Prepare the required
negotiation negotiation
other up the contract reviews and
minutes results summary
contract approvals
party

Step 7
Step 8
Send contract Step 10 Contract
Provide Step 9
to Prepare Administration Contract
copies of Document
the other contract closeout or
contract to lessons
administration Contract termination
affected learned
party for plan Implementation
organizations
signature

346
 TIPS: TIMING FACTORS

• Minimize unprepared negotiations

• Watch for “bad” times to avoid (or finish by)
• Seek an adequate time slot
• Take the time to establish ice-break
• Establish common goals and understandings
• Know when to be silent
• Know when to close
• Know the effect of a delayed

347
 TIPS: LOCATION FACTORS

•Free from interruptions/distractions/noise

•Comfortable (seating, temperature, lighting, etc)
•Appropriately equipped (flip chart? Table space?)
•Culturally appropriate
•Calming (soft tones)
•Light refreshments

348
 ABC OF GOOD COMMUNICATION

A – Accuracy, Appropriateness, Attentiveness to

your audience, and avoidance of ambiguity.

B – Brevity or conciseness, brightness and

buoyancy.

C – Correctness (of usage of words and

grammar), clarity, consistency and coherent.
349
 VOCABULARY
‘Happy’
 Exuberant
 Elated
 Delighted
 Cheerful
 Blithe
 Buoyant
 Rapturous
 Ecstatic
 Jaunty
 Sprightly
 Cock-a-hoop / exultant
350
 SIMPLICITY

“ I am not so inebriated as to be incapable of

unassisted perambulation”
“I am not so drunk that I cannot walk without
your help”
“He is a sophisticated rhetorician, inebriated
with the exuberance of his own verbosity”
“He is a verbose speaker”

351
 PUNCTUATION

The teacher said, the parent is a

fool.

The teacher, said the parent is a

fool.

352
 AMBIGUITY

“we offer iced lemonade and tea to drink and chocolate éclairs
and biscuits to eat.”
- Are the biscuits all chocolate biscuits ?
- Is the tea also iced ?

“ We offer tea and iced lemonade to drink, and biscuits and

chocolate éclairs.”

Keep it very simple, clear, and precise vocab.

353
NEGOTIATION TACTICS

354
 NEGOTIATING TECHNIQUES (TACTICS)

Universally applicable techniques

Traditional techniques
Collaborative relationships

355
 Universally applicable techniques
1- Murder Boards and Mock Negotiations ‫مراوغة‬
2- Use Diversions
3- Use Questions Effectively
4- Use Positive Statements
5- Be A Good Listener
6- Be caring of Sellers

356
 Traditional techniques
1- Keep the Initiative
A good offense is the best defence
2- Never Give Anything Away (in the case of a monopolistic/
very powerful company).

 Collaborative relationships. Don’t blame someone from the

other party’s team.
1- Separate the People from the problem
2- Focus on Interests
3- Innovate Options for Mutual gains
4- Insist on your Objectives 357
 A SUCCESSFUL NEGOTIATOR

-1 Communication skills and body language skills.

2- if you’re not ready don’t join.
 Skilful individuals 3- should fit with your personality.
4- it’s an art, gain through accumulative experience.
 Broad business experience
5-
 Knowledgeable about negotiating techniques
 Able to lead negotiation conferences
 Superior tactical and strategic plans

358
Always use WE
because we are SOME BASIC FACTS…
partners.

 Your Supplier is your Partner, not your enemy or opponent

 “Us and Them” attitude only leads to failure!

359
 TYPES OF NEGOTIATION SITUATIONS

Types of Situations:
Lose – Lose
Win – Lose
Win – Win The preferred situation.

360
 NEGOTIATION TACTICS
Do we have other tactics?
Don’t use the 2nd tactic.
 Attacks The 3rd tactic is not preferred hhhhhhh.
 Personal Insults Dr. Khalid likes the deadline.

 Good Guy/Bad Guy

 Deadline
 Lying
 Limited Authority (scaping to have more time to think about a point, you can just say you’re
not authorized for this point)
 Missing Man (another lying)
 Fair and Reasonable (don’t show that you are winning)
 Delay

361
 DEALING WITH REJECTION

 They are saying “no” for right now, not forever

 They are not rejecting you personally – they are rejecting your offer/product
 After they believe you have accepted their “no” it is a good idea to “probe” - to make
really sure you understand their real reason for not accepting your offer

362
 NON-VERBAL AGREEMENT SIGNALS

 Sitting up -- leaning toward you (how to sit?)

 solid eye contact (giving attention)
 Smile - obviously enjoying what they are hearing
 Arms open, palms up, accepting
 Rubs hands together
 Making calculations or notes
 tone of voice

363
1. I am a person of high truth.

1 2 3 4 5

2. I always act as a true business professional, especially in contract negotiations.

1 2 3 4 5

3. I ensure all of my business partners and team members act honestly, ethically, and
legally, especially when involved in contract negotiations and contract formation.

1 2 3 4 5

4. I verbally communicate clearly and concisely.

1 2 3 4 5

5. I am an effective and winning contract negotiator.

1 2 3 4 5

364
6. My written communications are professional, timely, and appropriate.

1 2 3 4 5

7. I am an excellent team leader.

1 2 3 4 5

8. I consistently build high performance teams, which meet or exceed contract

requirements.

1 2 3 4 5

9. I am willing to negotiate when necessary to solve problems.

1 2 3 4 5

10. I confront the issues, not the person, in a problem-solving environment.

1 2 3 4 5

365
11. I recognize the power of strategies, tactics, and countertactics and use them
frequently in contract negotiations.

1 2 3 4 5

12. I am able to achieve my desired financial results in contract negotiations.

1 2 3 4 5

13. I understand various cost estimating techniques, numerous pricing models, and how
to apply each when negotiating financial arrangements.

1 2 3 4 5

14. I understand generally accepted accounting practices and how to apply them when
negotiating deals.

1 2 3 4 5

15. I am highly computer knowledgeable, especially with electronic sales tools, and/or
electronic procurement tools.

1 2 3 4 5

366
16. I am knowledgeable of e-marketplaces, vertical and horizontal trade exchanges,
e-tendering, and how to use them to buy or sell products/services.

1 2 3 4 5

17. I understand the contract management process and have extensive education,
experience, and professional training in contract management.

1 2 3 4 5

18. I have extensive education, experience, and training in contract law.

1 2 3 4 5

19. I have extensive education, experience, and training in my organization's products

and services.

1 2 3 4 5

20. I am considered a technical expert in one or more areas.

1 2 3 4 5

367
 Skills to Win - Self-Assessment Survey Worksheet
Questions # Self-Assessment Score (1-5)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Grand Total Score: _______________________________

368
 Skills to Win
Self-Assessment Survey
Scoring

90+: You have the knowledge and skills of a master contract negotiator.

80 - 90: You have the potential to become a master contract negotiator, after reviewing
the specialized skill areas and determining in which areas you need to improve
your skills. You are an intermediate contract negotiator.

65 - 79: You have basic understanding of successful contract negotiation skills. You
need to improve numerous skills to reach a higher level of mastery of contract
negotiations. You are an apprentice contract negotiator.

0 - 64: You have taken the first step to becoming a master contract negotiator. You
have a lot of specialized skills areas you need to improve. With time,
dedication, and support (education, experience, and training) you can become
a master contract negotiator.

369
THANK YOU

KHALED ABDALLAH