Contract Essentials

Commercial & Contracting Training Solutions

The Basics of Contracts
- Commercial & Contracting Training Solutions

Expectations
 Respect other´s opinions
 Ask questions
 Engage in discussions
 Share experiences

Content
 Contract
 Scope of Work
 Compensation Method
 Contract Types
 Contract Templates
 Selection of Contract Type

Contract
A contract is a mutually binding legal relationship -
normally in writing - that sets up obligations between at
least two parties
The basic elements of a contract are offer and acceptance
by competent persons having legal capacity who exchange
consideration to create mutuality of obligation

Scope of Work
A Scope of Work (SOW) –also know as
Statement of Work- is a formal document that
captures and defines the work activities,
deliverables, and timeline a contractor must
execute in performance of specified work for
the Company

Compensation Method
Mechanism of outlining the payment due to a
contractor. Main categories:
 Fixed Price – Lump Sum
 Fixed Price – Unit Rates
 Cost Reimbursable - Time & Materials (T&M)
 Cost Reimbursable – Cost Plus Fee

Contract Types – Compensation Method
Fixed-Price Contract
The contractor must deliver the product or perform the service for a
pre-set firm fixed price established in the contract.
 Places upon the contractor maximum risk
 Contactor assumes full responsibility for all costs and resulting
profit or loss
 Provides maximum incentive for the contractor to control costs
and perform effectively
 Imposes a minimum administrative burden upon the parties

Contract Types – Compensation Method
Cost-Reimbursement Contract
The contractor agrees to expend its best efforts to achieve the
specified requirements within the estimated amount established in
the contract. If the scope of work is not fully performed at the time
the contractor expends the funds, it has no obligation for further
performance, unless the contract is modified to increase the funds.

Contract Templates
Facts
 There is no template that can automatically match a contract type to any
contracting circumstances and still consistently promote the best interests of
the Company
 Sound judgment by qualified personnel familiar with the influencing factors is
essential
 The importance and magnitude of the intended contract must be fully
understood
 Each of the types of contracts available must be understood, the benefits and
constraints of each in a given situation must be clear together with the various
types of risks involved

Contract Templates
Typical Contract Structure
 Cover page stating contract type and name of the parties involved
 Table of content
 Preamble declaring contract effective date and full identification of the
parties
 Definitions and terms used, contract objective & all applicable general
provisions
 Scope of work with technical requirements and all delivery-related
information
 Economic conditions outlining the procedures for reimbursement
 Signature page
 Appendices

Contract Templates
Applicable General Provisions
 Warranties
 Indemnities & Liabilities
 Insurances
 Termination provisions
 Management of change procedure
 Notification addresses
 Governing laws & settlement of disputes

Contract Templates
Most Common Contract Forms
 Master Services Agreement (MSA)
 Engineering, Procurement & Construction Contract (EPCC)
 Purchase Agreement (PA)
 Blanket Purchase Agreement (BPA)
 Purchase Order (PO)
 Memorandum of Understanding (MOU)
 Non-disclosure Agreement (NDA)
 Licensing Agreement
 Equipment Lease Agreement

Contract Templates
Master Services Agreement (MSA)
 A MSA is not a contract itself
 It is a written instrument of understanding which sets forth the negotiated contract terms and
clauses which will be applicable to future contracts entered into between the parties
 Used where future plans indicate that a substantial number of supplies or services are anticipated
to be acquired from the contractor
 Reduces or eliminates repetitive negotiating steps
 Should neither mention rates to be charged nor be used for the purpose of obligating funds
 Should not provide for any obligation on the part of the Company to place future contracts with
contractor
 Specific provisions pertaining to subjects not covered in an MSA -but applicable to the contract
being negotiated- should be included in it
 Company may request contractor to perform work by issuance of orders to contractor
 Each order shall be considered a separate contract which incorporates by reference the terms and
conditions set forth in the MSA
 Orders shall describe all services and supplies to be delivered along with duration and value

Contract Templates
Engineering, Procurement & Construction Contract (EPCC)
 Contractor is fully responsible for the design of the project, procurement and
installation of all materials and equipment together with all applicable civil,
electrical, mechanical and instrumentation construction works
 The project is delivered at an agreed price and by a fixed date with minimal
involvement from the Company
 If contractor is in charge of commissioning and start-up of the project, then the
EPC contract is also known as a turnkey contract
 The contractor turns the project over to the Company when it is ready to put
into business operation or production
 Complex, long-term negotiations

Contract Templates
Engineering, Procurement & Construction Contract (EPCC)
Key provisions:
 Warranty terms
 Liquidated damages
 Milestone dates and payment schedule
 Records and reporting procedure
 Monitoring and inspection
 Change order procedure
 Approved subcontractors
 Letter of Credit
 Performance Bond

Contract Templates
Purchase Agreement
It is a contract under which the ownership and possession of a good, or entitlement
to a service, is transferred from a Seller to a Buyer in exchange for a specified sum
of money
Key provisions:
 Applicable INCOTERMS
 Acceptance Tests
 Seller´s Liabilities for Defects
 Passing of Risk and Title
 Customs Clearance & Duties
 Management of Change (MOC)

Contract Templates
Blanket Purchase Agreement (BPA)
 A basic means of filling repetitive needs for nonessential supplies in small
quantities and dollar values
 Individual orders against a BPA shall not exceed the simplified acquisition
threshold
 Allows for the Company to get most preferred prices form vendors
 Individual BPAs and the orders issued against them are to be well
documented
 Individuals outside the contracting/purchasing activity (internal
customers) may be authorized to place orders

Contract Templates
Purchase Order (PO)
A Purchase Order is a legally binding agreement that
commits a Buyer or Purchaser to purchase an item or
quantity of items from a Seller at an agreed-upon price and
specifies the delivery date and payment terms

Contract Templates
Memorandum of Understanding (MOU)
 An immediate binding agreement that authorizes contractor to start
work on an ASAP basis pending negotiation of a final contract
 Contractor begins performance on urgent requirements prior to
completion of procedural requirements
 Maximum liability of the Company
 Amount estimated to cover performance until final agreement signed
 Type of final contract anticipated to be negotiated
 No incentive for cost control by the contractor
 Company is in a very weak negotiating position at the time the contract
is finalized

Contract Templates
Non-disclosure Agreement (NDA)
It protects confidential information and gives a party the
right to seek legal action if the other party discloses
information covered by the agreement

Contract Templates
Licensing Agreement
It protects intellectual property´s developers by allowing
third parties to use inventions or creations. This type of
agreement outlines terms such as how much users will pay,
restrictions of use, reproduction rights and exclusivity of
the product.

Contract Templates
Equipment Lease Agreement
These contracts spell out the terms and conditions of a
lease for a piece of equipment, including monthly
payment, deposits, terms, and maintenance agreements,
among other terms.

Selection of Contract Type
Main Risk Factors
 Type and complexity of the requirement
 Urgency of the requirement
 Period of performance
 Technical capabilities of the contractor
 Financial capabilities of the contractor
 Suitability of the contractor’s accounting system

Selection of Contract Type – Risk Factors
Type and complexity of the requirement
 Requirements that are complex and unique creates the possibility of changes in
technical direction and for performance uncertainties placing greater risk
assumptions on the Company. These cases would likely result in cost
reimbursement type contracts as this type of arrangement shifts cost risk from
the contractor to the Company.
 Recurrent requirements allow for a significant degree of certainty related to
achieving the objectives of the requirements, then cost risk should shift to the
contractor creating the potential for a fixed price type contract.

Urgency of the requirement
In the event of urgent requirements the Company may have to
assume a greater percentage of risk or offer incentives to ensure
timely contract performance
These situations would also likely result in cost reimbursement type
contracts as this type of arrangement shifts cost risk from the
contractor to the Company

Period of performance
When the contract period extends over a relatively long period of
time it is challenging to establish accurate contract value and cover
all contingencies in performance
In these cases consideration should be given to the use of economic
price adjustment terms or other re-pricing mechanism

Technical capabilities
Consideration should be given to two key aspects:
 Has this type of effort been done before?
 Is the technical requirement well defined?
The above will determine the level of contractor technical capabilities necessary to
successfully achieve contract requirements. A requirement for high degree of
technical capability may have a greater risk to achieve in an effective and efficient
manner and is a consideration when determining the contract type.

Financial capabilities
 Generally, smaller contractors with limited expertise may not have
the financial strength to accomplish the requirements in a timely
and efficient manner
 In contrast, larger vendors are normally better positioned to
successfully achieve complex requirements

Suitability of the contractor’s accounting & reporting system
The contractor’s accounting system should allow timely tracking and
reporting of all necessary cost data in the form required by the
proposed contract type
The above is critical for both fixed price type contracts with price re-
determination as well as cost-reimbursement type contracts

Contract Essentials

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Contract Essentials

Similar to Contract Essentials (20)

Recently uploaded

Recently uploaded (20)

Contract Essentials