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Do we need contracts? Industry speaks

September 17, 2017

We all know that people have different views about the purpose and value of contracts. But what about industries? Do they also have distinct perspectives?

Based on IACCM’s recent survey on ‘the purpose of a contract’, the answer appears to be yes. And for any negotiator – especially when working across industry borders – those variations are important to understand. There is only one area in which there is unanimity of purpose – and that is in defining rights, responsibilities and obligations.

Those in Engineering and Construction and Outsourcing and Consulting place the highest overall value on contracts; those in Retail and Aerospace and Defense place the least. Why might that be?

  • The Engineering and Construction industry has a long history of fractious relationships. The contract is of major importance in communicating roles and responsibilities (including definition of scope). And given the traditional adversarialism of relationships, it also scores very high for its role in apportioning risks.
  • In the world of outsourcing and consulting, there is no tangible product, so the contract takes on a far more significant role in defining the business relationship, governance and performance management. People in this industry are also more likely to see the contract having a role in promoting their brand and its values, providing an instrument that generates trust.
  • Those in Aerospace and Defense do not see the contract as unimportant, but they are more selective in the areas where they see a strong purpose. In particular, they rate its role in supporting communication, risk management and operational guidance significnatly lower than others.
  • Retail is perhaps no surprise; in general, retailers are working with less powerful suppliers and in many cases place limited value on the relationship. Contracts are primarily focused on risk alloacation and the rights of the customer.

The table below shows the industries that considered each ‘contract purpose’ least and most important. It is just one of many discoveries that will be contained in the IACCM research report on the purpose of a contract, to be issued to IACCM members later this month.

Lowest score (Scale 1-5)
Highest score (Scale 1-5)
Providing protection and remedies in the event of a dispute 4.1 – Outsourcing / Consulting 4.8 – Eng’g & Construction
A framework for a mutually successful business outcome 4.3 – Technology 4.8 – Aerospace & Defense
A tool for risk apportionment 3.9 – Outsourcing / Consulting 4.6 – Technology
Support for a business relationship 4.1 – Eng’g & Construction 4.5 – Outsourcing / Consulting
Governance and performance management 4.0 – Technology 4.5 – Outsourcing / Consulting
A tool for risk management 3.5 – Aerospace & Defense 4.4 – Technology
An effective communication tool for those with a need to know 3.7 – Aerospace & Defense 4.5 – Eng’g & Construction
Providing operational guidance 3.4 – Aerospace & Defense 4.2 – Eng’g & Construction
An instrument for generating financial benefit 3.5 – Public Sector 3.9 – Technology
Demonstrating brand and corporate values 2.5 – Aerospace & Defense 3.5 – Outsourcing / Consulting

To view the IACCM survey, visit https://www.research.net/r/Thepurposeofcontract.

One Comment
  1. Dear All….
    RE: My view / opinion on the question posed…

    In the absence of signed contract, the courts may then impose its rule of law on the parties as it sees fit regarding the deal.

    I have yet to work for an organization that would want to go down this road; especially when dealing with another company in another part of the world. The only exception to this may be within the aerospace industry.

    I have worked for two very large aerospace companies and a plethora of large consulting engineering companies as a consultant.

    In my experience, I have yet to see any of these companies / industries not focus on having some sort of signed contract in place prior to starting work. Whether it’s a full blown signed agreement with all the required provisions inserted or at the very least, A Letter of Intent in place that outlines the broad scope/intention of the parties involved so a portion of the work ( the low risk portion ) may start while the parties continue to negotiate on the final provisions and eventual sign off of the main governing agreement.

    However, as I said above, on occasion, I did witnessed the practice of proceeding on work without a signed agreement in place within the aerospace industry from time to time. The reason for this high risk practice within the aerospace industry is simple …many of the senior people within the aerospace industry are retired ex military folks with very strong connections / friends within the government / DND. They rely heavily on their relationship with the folks within the government / DND to do business. They have this very strong relationship / trust with they former working buddies within the government / DND that you will not see in most other industry sectors. Also, both parties need each other and can not risk jeopardizing the strong relationship that they have between them. I personally view the aerospace industry as a sort of government run / controlled entity in some ways.

    My experience in working with a plethora of consulting engineering companies on a wide range of both EPCM and EPC contracts is that most have a very strong inhouse legal team that usually has no appetite for risk and will insist on making sure that a contract is firmly in place before any work on the project starts.

    In doing business within the US, the contract is the deal for many US companies and must be firmly in place before works starts. I personally view doing business within the US as high risk; more so than any other country in the world. Why … because their business culture / practices is to sue first and ask questions later. Also, doing business with US companies is usually done on the basis of an open account while doing business with companies in other parts of the world is usually done on having a firm irrevocable letter of credit in place usually confirmed by a local financial institution.

    Roy Tarnowski
    Brix Consulting Inc.
    Toronto Ontario Canada

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