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Contractual agreements form an important part of business partnership. A contract must be governed by law. Usually, negotiation of a contract may be very demanding and it is very necessary that the participating companies recognize the risks involved, and be able to know the opportunities there of. In addition, it is advisable for a company to set up a contract management system so as to achieve the maximum benefits and reduce the risks to the minimum. In addition, there is need to review contracts before sign-offs for formation of a good partnership since interpretation of contracts regularly faces misinterpretation by the courts. In this paper, I analyze a simulation for the contract between C-S Company and Span. In this case, Span will be referred to as the selling company while the C-S Company will be referred to as the buying company. The contract entails the hiring of Span by the C-S to prepare banking software to be able to launch a competitive deal in the United States. We begin with an analysis as reported and filling of the simulation has been used to allow the writer to think through options.
The contract between C-S and Span lacked clarity on the specifications of software to be built. Late deliverables and poor quality of deliverables are the issues bringing deadlocks. Span wants to terminate the contract and C-S transfer the unfinished codes. There are problems at both ends since C-S has been faced with a change in the project management which arguably has affected delivery of work products. There is also an increase in both the user requirements and the ordinary changes which are hard to fit in with the originally determined costs.
In case of a deadlock, restarting the negotiation between the selling and the buying company requires that the project manager and other people involved in setting up strong points of negotiations by consideration of the risks that they face and the clauses and principles that govern them. This is an attempt to draw up strong negotiating points. If for example there are current increase in customer requirements which did not form a part of original agreement, the second party may not agree that these are requirements demanding cost adjustment, and therefore a prove would be required to show that these are requirements rather than ordinary changes. These problems can be eliminated by having a careful analysis at the beginning of contract formation to determine all the requirements of the project. Additional requirement (functional changes) are required to that they be communicated by law immediately to the selling company and that additional fee may be necessary. A risk lies to the selling company since it may be hard to prove that the changes so said are functional changes requirements requiring extra penny and/or an explanation of late deliverables and poor quality. Besides, collection of the mistakes or bugs in a program may be taxing and requiring more expenditure than the costs to be added by the buying company. It would also mean an upgrade of the programmers, operators and system machinery which would cost more since there are defaults on the already built program. There would be a further risk facing the selling company if it delivered poor quality and argue that functional requirement addition caused this. Reason may prove that what would be necessary is the delivery of quality even if it means very late deliveries. A company may score low since poor quality delivery which is accompanied by late deliveries is a two-count loss on the case.
The selling company like Span may loose a contract if it delivers poor quality and not meet time limits. Usually, according to the law, it is possible that the buying company will not terminate the contract if 50% is already completed. However, quality may form the most important determinant of whether to terminate or not since failure to deliver proper quality may be a violation of the buying company’s rights. Termination of the contract by the buying company may however mean that it face a legal sanction or be taken to court.
The selling company stands at an opportunity to improve relations with the buying company so as to reduce risks of loosing the contract through rescission. This is because an opportunity lies in the fact that the buying company is tied by the laws to follow a progressive down-to-top management procedure to solve the c0ontract stalemate. The law favors the side of the selling company since it requires that the buying company initiate the progressive procedure if it “feels offended”. Primary level: Span project leader-C-S project leader (allotted time 5 days)
- 1st level: span project manager-C-S Project Manager (10 business days)
- 2nd level: Spans project dire-C-S IT director (15days)
- Third level: Span CEO-C-S CEO (20 business days)
Where a company may have patent rights, the law requires that they are the owners and no transfer of unfinished codes may be possible. This gives an upper hand to the selling company to organize itself to improve the situational deadlock other than lose the contract. However, the partially completed sections of the project may be exposed to another company which may expose security details and private information of the selling company. The company may face competition if the company that acquires the security and private information through illegal means is contracted by other companies or begins to venture into the particular business. Yet this is a legal opportunity for the selling company to defend its rights to continue holding the contract.
Contractual agreements, according to figured estimates form about 80% of business relationships (‘Why we need Contract Management’). It would take 20-30 days for a typical company to complete a contract from creating to finalizing it. Contract management helps companies to offer a better understanding of the obligations that are already in place, improve compliance, observe and know risks, and make companies identify opportunities for saving costs. Using a fragmented procedure of contract management may lead to a higher rise in risk, insufficient collaboration during contract creation, and having a no-full-view onto active contracts. This is important to automate and standardize processes across the lifecycle of a contract. Realizing greater collaboration, enforced adherence to the terms of the contracts and reduced risks would be the realization of standardizing contract procedures, while automating the processes may lead to a reduced cycle time in negotiation, lesser administration costs and improved compliance and analysis. There are software developed to allow automate and standardize contracts among other contract operations. It would be necessary for managers to determine whether the controls in place are effective. A survey carried out in December 2006 by Ernst and Young showed that about 22% of the 140 financial executives participating were not aware of how effective their controls were (Ernst & Young). The managers should analyze carefully and understand the occurrence of risks. Such risks could go up as a result of increased outsourcing for various activities, globalization-related complexities, increased business affiliations, speedy change among other reasons.
It is advisable here for managers to ensure that a contract risk review has been put in place. This begins with assessment of the risk of the contract, then making or allowing of improvements, then monitoring procedures includes such as industry and trend analysis, and proceeding to the other step which is communicating of the results (Ernst & Young). During renegotiation of a contract, it may be necessary for the manager who feels he may lose the contract if terminated, to stir up ways of restoring confidence as pertains correction of the mistakes that occurred and future trust. Such would require formation of quality control panel to evaluate and analyze defects and determine repair mechanisms, enhance is team which is preparing the project like building a program or software to deliver on time, and invite a quality officer from the buying company to inspect or oversee the production process or upload daily reports for analysis by the team of the buying company. A manager must come up with a proper analysis and proposals to meet the financial requirements for change to take place. He should ensure that the costs are minimal so as not to result in losses for the whole procedure.
- ‘Why we need Contract Management’. 2008.
- Ernst & Young. “Managing Contract Risks”.