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Attitudes to standard terms

June 14, 2012

I recently received a question from one of IACCM‘s public sector (Government) members regarding industry’s attitudes towards standard terms and conditions. He wanted to know the extent to which consistency and clarity in Government contracting is valued.

In my reply, I suggested that there is little question that industry generally welcomes standards and the associated predictability they offer. Today, for any substantial organization, it is unusual for them not to have standard contract terms and templates (IACCM has precise data on this point). Their prevalence clearly indicates a preference for standards, generally driven by two major considerations:

1) Standards reflect a position of business need (buy side) or capability (sell side) which is driven by a view of acceptable risk and affordability.
2) Standards also reflect today’s dominance of ERP systems, which themselves mandate certain embedded policies or process capabilities. When operating within standard terms, the contract also draws on standard tools and methods. A departure from those terms creates the need for exception handling, with consequent impact on resource, cost and risk.

Picking up from this, the existence of a standard also facilitates evaluation of non-standards – what demands they may place on the business and an assessment of their impact and viability.

Although industry is accustomed to the need to undertake such evaluations, it is of course helpful when there are somewhat predictable parameters (after all, this goes the heart of the lean principles that many Government purchasing groups are themeselves adopting). The more variation they encounter (especially within the narrow time-frames of a bid process), the more difficult it is to make a thorough and reliable assessment of capability, cost and risk – hence a higher possibility that they will either feel obliged to no-bid, or that they will get it wrong.

Therefore the requirement is for some degree of certainty and predictability, within which appropriate risk assessments can be made, therefore simplifying and speeding internal reviews and bid responses and cutting the need for push-back and negotiation on important, but perhaps low value, terms.

However, while standards and their universal adoption will be welcome, this is not of course a blank check! There is an assumption of reasonableness and appropriateness. By this I mean that the assumed risk allocations are within acceptable commercial boundaries and that the allocation of responsibilities is balanced and conducive to good performance. In addition, that contract structures and terms are adaptive to the nature of the agreement or acquisition under consideration. This implies a portfolio of templates, with standardised terms and term options.

Finally, the ideal for industry would be to feel that there was room for manoeuvre within the proposed contract terms – that within the context of a specific acquisition there was a possibility for meaningful negotiation and value offsets. In the commercial world, this is sometimes achieved by inviting bidders to highlight terms that they would prefer to alter and to specify what benefit they are ready to give in return (frequently price-based). Such an approach could offer much greater insight to the cost of specific terms and policies contained in current approaches to Government procurement.

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