Project Contracts From POME by Gautam Koppala VT

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Kanaka maha lakshmi Thalli
Be bold when you loose and be calm when you

win.
"Changing the Face" can change nothing.

POME’
POME’07
But "Facing the Change" can change everything.
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KANAKA MAHA LAKSHMI THALLI
THIS BOOK IS DEDICATED TO THE ALMIGHTY, WHO
ALWAYS SHOWERS HER BLESSINGS ON HER
CHILDREN.
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2007, POME, Gautam_Koppala, All Rights Reserved
PROJECTS AND OPERATIONS
MANAGEMENT EXPOSED
(POME)
Part “ PROJECT CONTRACT’S”
A COLLECTION AMELIORATED BY
GAUTAM KOPPALA V.T.
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You are the only person who can revolutionise your life.
You are the only person who can influence your happiness,
your realisation and your success.
You are the only person who can help yourself.
Your life does not change, when your boss changes,
when your friends change, when your parents change,
when your partner changes, when your company changes.
Your life changes when YOU change,
when you go beyond your limiting beliefs,
when you realize that you are the only one responsible for your life.

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What People are saying about Gautam Koppala’s POME:
“Worth a lifetime of knowledge for Project Personnel.” –Binoy Koshy, Regional
Manager, Siemens Ltd, 2006
“My Productive and effectiveness have been increasing in my daily professional
life.”- Krishna Prasad, Area Manager, Honeywell Ltd., Bangalore, 2007
“Am more relaxed as my productivity evidently increased, as many of the doubts
are been cleared, after going through POME.”- Venu Gopal, Operations Manager,
Majees Tech Services, Muscat 2008
“Exceptionally well tailored and it’s the best book on Operations that ever made.” –
Krishna Rao, Branch Manager, HSBC, Dubai, 2008
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Copyright © 2007 POME
All rights reserved. No part of this product may be reproduced or utilized in any form or by any means,
electronic or mechanical, including photocopy, recording, broadcasting, or by any information storage or
retrieval system, without permission in writing from the author Gautam Koppala.
All knowledge in POME book is service marks and/or trademarks of the author Gautam Koppala.
Except as otherwise specified, names, marks, logos and the like used in the educational/teaching content of
these materials are intended to be, and to the best of Licensor’s [Gautam Koppala’s] knowledge and belief
are, fictitious. None of the names, marks, or logos used herein is intended to depict any past or present
individual or entity, or any trademark, service mark, or other protectable mark of any individual or entity.
Any likeness, similarity or sameness between any name, mark, or logo used herein by Licensor and the
name, mark, or logo of any individual or entity, past or present, is merely coincidental and unintentional.
Any such names, marks, and logos used in the educational/teaching content of these materials are used
only to provide examples for purposes of teaching the educational content of the materials, and are in no
way intended to be used in any trademark sense or manner.
The names of actual past or present individuals, entities, trademarks, service marks, logos and the like
(other than those of Licensor used in the educational/teaching content of these materials are used only to
provide examples (including in some instances actual case studies based upon factual events or
circumstances involving the individuals, entities, marks, or logos) for purposes of teaching the educational
content of the materials. Any such names, marks, and logos used in the educational/teaching content of
these materials are intended and used solely for the purpose of providing examples and case studies, and
are in no way intended to be used in any trademark sense or manner.
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VITA: FROM THE AUTHOR:
Academically, I am a cum laude graduate with a Bachelor of Technology degree in Electrical and Electronics
Engineering (B-Tech E.E.E.) and a post graduate in Masters in Human Resources Management (M.H.R.M.)
and Masters of Foreign Trade (M.F.T.), all from India.
My engineering completed in a remote village in India, Srikakulam, and it’s been a long journey from there,
and journey still continues….I feel this book demonstrates my ability to maintain dedication, motivation and
enthusiasm for a project management over a long period of time. I believe that in combination with my
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extensive broad-based operations work experience along with my drive, resourcefulness and determination
would make this book, an excellent opportunity for any juvenile/experienced one in Projects industry.
I started my career as a small time engineer and gradually still developing in the Operations Domain.
With over nine years of Professional Experience, am a well-rounded functional Manager with excellent,
documented record of accomplishment and success in the electronic Security and Building Systems
Technology Field.
The reason behind writing this book, is that when am new to this field, I don’t have any one to say, what is
all about the projects, what to do, and when to do? Hence, the detailed information that I gained through
the ages, thought to put in an orderly fashion, so that it would be vitally milked by future successful
managers, avoiding the time lags.
Highlights of my background include Supply chain, Commercial with a magnificent experience in Project and
Operations management, technically oriented towards Automation and Security Systems in Industrial and
Building sectors.
My success in the past has stemmed from my strong commitment and sense of professionalism. I keep high
standards for my work and am known for my persistent nature and ability to follow through.
If this book facilitates you in getting adjusted and grow in this domain. I would feel really successful.
GAUTAM KOPPALA VT
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POME Contents
Tendering Concepts: ................................................................................................................... 16
An arrangement between two or more people, countries etc; contract ....................................... 20
Additional or supplementary material at end of contract, book etc ............................................. 20
Settlement of a dispute by a person chosen by both parties - to arbitrate v. .............................. 20
Procurement/ Contracting Phases: ............................................................................................. 26
Contract Types: ........................................................................................................................... 34
Contracts Management: .............................................................................................................. 41
Contract Loop holes Management: .............................................................................................. 58
Additional contracting considerations for large projects: ............................................................ 76
Terms and Conditions: ................................................................................................................ 84
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PROPOSAL-
CONTRACTUAL
INTERACTION
116
Proposal –Contractual Interaction ............................................................................................ 117
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Change Order & Claim Management .......................................................................................... 123
Managing Change Requests ...................................................................................................... 157
Accepting and Handling Legal Process Documents: .................................................................. 164
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TENDERING
CONCEPTS
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Tendering Concepts:
“We should never would have Projects, if we expect to find them with out faults.”
Tenders and Contracts:
What is a Tender?
“Tender” means the Letter of Tender and all other documents which the Contractor submitted with the
Letter of Tender, as included in the Contract.
A “tender” is an invitation to suppliers to bid on a clearly specified statement of requirements, and includes:
• a request for tender;
• an expression of interest;
• a request for proposal; and
• a request for information.
Tender is a general offer made by a company or a public sector agency for the purchase of specific goods
and services. The potential suppliers respond to the tender notice or invitation by submitting their
proposals, which specify the technical, commercial and financial aspects of how they would carry out work.
“Common use contracts” will be reported by Treasury.
What is a Contract?
A “contract” is a legally binding arrangement between a State-owned Company and a supplier for the
supply of goods and/or services (including building and construction projects and consultancies) for a
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specific period. “Contract” means the Contract Agreement, the Letter of Acceptance, the Letter of
Tender, these Conditions, the Specification, the Drawings, the Schedules, and the further documents
(if any) which are listed in the Contract Agreement or in the Letter of Acceptance.
“Contract Agreement” means the contract agreement referred [ Contract Agreement ].
“Letter of Acceptance” means the letter of formal acceptance, signed by the Employer, of the
Letter of Tender, including any annexed memoranda comprising agreements between and signed by
both Parties. If there is no such letter of acceptance, the expression “Letter of Acceptance” means the
Contract Agreement and the date of issuing or receiving the Letter of Acceptance means the date
of signing the Contract Agreement.
“Letter of Tender” means the document entitled letter of tender or letter of bid, which was
completed by the Contractor and includes the signed offer to the Employer for the Works.
“Specification” means the document entitled specification, as included in the Contract, and any
additions and modifications to the specification in accordance with the Contract. Such document
specifies the Works.
“Drawings” means the drawings of the Works, as included in the Contract, and any additional and
modified drawings issued by (or on behalf of) the Employer in accordance with the Contract.
“Schedules” means the document(s) entitled schedules, completed by the Contractor and
submitted with the Letter of Tender, as included in the Contract. Such document may include the
Bill of Quantities, data, lists, and schedules of rates and/or prices.
“Contract Data” means the pages completed by the Employer entitled contract data which
constitute Part A of the Particular Conditions.
“Party” means the Employer or the Contractor, as the context requires.
“Employer” means the person named as employer in the Contract Data and the legal successors
in title to this person.
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“Contractor” means the person(s) named as contractor in the Letter of Tender accepted by the
Employer and the legal successors in title to this person(s).
“Engineer” means the person appointed by the Employer to act as the Engineer for the purposes
of the Contract and named in the Contract Data, or other person appointed from time to time by the
Employer and notified to the Contractor
“Contractor’s Representative” means the person named by the Contractor in the
Contract or appointed from time to time by the Contractor, who acts on behalf of the Contractor.
“Employer’s Personnel” means the Engineer, the assistants and all other staff, labour and other
employees of the Engineer and of the Employer; and any other personnel notified to the
Contractor, by the Employer or the Engineer, as Employer’s Personnel.
“Contractor’s Personnel” means the Contractor’s Representative and all personnel whom the
Contractor utilises on Site, who may include the staff, labour and other employees of the Contractor and
of each Subcontractor; and any other personnel assisting the Contractor in the execution of the Works.
“Subcontractor” means any person named in the Contract as a subcontractor, or any
person appointed as a subcontractor, for a part of the Works; and the legal successors in title to each
of these persons.
“DB” means the person or three persons Appointment of the Dispute Board
“Bank” means the financing institution (if any) named in the Contract Data.
“Borrower” means the person (if any) named as the borrower in the Contract Data.
“Base Date” means the date 28 days prior to the latest date for submission and completion of the
Tender.
“Commencement Date” means the date notified for the Commencement of Works .
“Time for Completion” means the time for completing the Works or a Section (as the case may be) [
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Time for Completion ], as stated in the Contract Data (with any extension [ Extension of Time for
Completion ]), calculated from the Commencement Date.
“Defects Notification Period” means the period for notifying defects in the Works or a Section
(as the case may be) [ Completion of Outstanding Work and Remedying Defects ], which extends
over twelve months except if otherwise stated in the Contract Data, calculated from the date on
which the Works or Section is completed as certified [ Taking Over of the Works and Sections ].
“Tests after Completion” means the tests (if any) which are specified in the Contract and which are
carried out in accordance with the Specification after the Works or a Section (as the case may be) are
taken over by the Employer.
“Taking-Over Certificate” means a certificate issued by the employer Taking Over,after the
completionofthe contract.
“Tests on Completion” means the tests which are specified in the Contract or agreed by both Parties
or instructed as a Variation, and which are carried out [ Tests on Completion ] before the Works or a
Section (as the case may be) are taken over by the Employer.
Contractor’s Equipment” means all apparatus, machinery, vehicles and other things required for
the execution and completion of the Works and the remedying of any defects. However,
Contractor’s Equipment excludes Temporary Works, Employer’s Equipment (if any), Plant, Materials
and any other things intended to form or forming part of the Permanent Works.
“Goods” means Contractor’s Equipment, Materials, Plant and Temporary Works, or any of them as
appropriate.
“Materials” means things of all kinds (other than Plant) intended to form or forming part of the
Permanent Works, including the supply-only materials (if any) to be supplied by the Contractor under
the Contract.
“Permanent Works” means the permanent works to be executed by the Contractor under the
Contract.
“Plant” means the apparatus, machinery and vehicles intended to form or forming part of the
Permanent Works, including vehicles purchased for the Employer and relating to the construction or
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operation of the Works.
“Section” means a part of the Works specified in the Contract Data as a Section (if any).
Agreement
An arrangement between two or more people, countries etc; contract
Appendix
Additional or supplementary material at end of contract, book etc
Arbitration
Settlement of a dispute by a person chosen by both parties - to arbitrate v.
clause
a particular statement or stipulation in a contract etc; article
condition
Anything necessary before the performance of something else
force majeure
Superior, power; unforeseeable event excusing one party from fulfilling contract
Fulfil
to satisfy a condition; to complete the required task; to fulfillUS
herein
in here; in this (document etc)
hereinafter
in the following part (of this document etc)
hereto
to this (document etc) [eg: attached hereto]
Heretofore
up until now; until the present; before this
in behalf of
in the interests of (person etc); for (person etc); on behalf ofUK
null and void
invalid; without legal force; not binding
on the one hand
on one side - on the other hand on the other side
party
the person or persons forming one side of an agreement
stipulate
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to specify as an essential condition - stipulation n.
terms
conditions or stipulations
warrant
to give formal assurance; to guarantee
Whereas
conj: it being the case that; in view of the fact that [in introduction to contracts]
Tender to contract period:
The period of time ranging between the submission of a tender and the actual signature of the contract.
Information that to be collected from the bidder, during the tendering process:
1. Full Name under which Bidder is trading.
2. Address of Bidder
3. Phone No. & Fax No.
4. Constitution of Bidder (Proprietorship/ Partnership/ Pvt. Ltd./ Ltd.)
5. Name of the Proprietor or partners or Directors (as the case may be)
6. Partnership is registered? Furnish particulars of registration.
7. How long Bidder is in this business?
8. Name & address of regular customers/ clients
9. Banker Name and address
10. Income tax permanent account number (PAN)
11. Sales Tax registration No. (TIN)
12. Service Tax Registration No.
13. Declaration by the Bidder:
General terms and conditions in the tendering process
Note: The below wont be applicable in all the cases, but is the conventional model
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1. Tender: Duly wax sealed envelope; super scribed with tender should be dropped in the Tender box
which shall be opened on the same day at certain time, in the presence of such Bidder or their
representative who may wish to be present at the time of opening of tenders. However applicable taxes
like Sales Tax or VAT and services, other taxes and duties may be quoted separately, depending upon
the tenderer. No condition(s) shall be mentioned in tender. No rate revision will be allowed for any
reasons during the period of contract/extended period. It shall be open to accept/reject any tender with/
with out assigning any reason. The tenderer reserves the right to forfeit the Earnest Money and the
security deposit if the Bidder after acceptance the contractor fails to comply with any of the terms &
condition set herein or any contract/agreement which may be drawn up as consequences of acceptance
of tender. In such cases the right to cancel the tender/contract is reserved with the tendered. For the
settlement of any dispute arising out of this tender/contract, only the courts shall have jurisdiction.
2. Eligible bidder: - The bidder should furnish EMD (Earnest Money deposit) of certain amount in cash or
bank demand draft in favor of the tender’s bank. Authenticated copy of Partnership Deed in case of
partnership firm with a clear indication about the person authorized for signing the tender documents
otherwise all the partners should sign the tender document or the person signing the tender document
should have a "Power of Attorney" for signing the tender document. Tender document shall be signed on
each page by the bidder with his seal. Copy of Original Power of Attorney In case if a person other than
the Bidder has signed the tender documents. Above documents, along with duly filled original tender
form, are to be kept in the submitted envelope.
3. Security: - In addition to already deposited EMD of certain amount (thus making total Security deposit),
extra certain amount prescribed by the tenderer will be deposited by the Contractor as performance
security deposit in the Form of cash or bank demand draft or Bank Guarantee in favor of tenderer for a
period
4. In case the successful bidder fails to deposit performance security or fails to submit the required
documents at the time of agreement or does not turn up for agreement the EMD of the bidder shall be
forfeited and the tender approval is liable to be cancelled.
Tender data items and descriptions:of the data:
The following data should be collected by the bidder for the constant follow up, or to to track the progress of
his bid, and the others.
Tender / Contract No.
A unique alpha, numeric or alpha/numerical identifier.
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All tenders and the resulting contracts must be provided with the same unique identifier.
In cases where multiple contracts are awarded from a single tender process, each contract should have the
same tender/contract no.
Tender / Contract Title
The title or a very brief description of the tender / contract.
Date tender called
The date that the tender was advertised or the market was approached.
Date tender closes
The advertised date that the tender closed, or that bids were to be submitted by.
Estimated value of tender
An estimate of the cost of the contract(s) that result from the tender process, for the entire period of the
contract(s).
Date contract awarded
the date the contract was awarded.
The date that the contract is awarded, is the date that an agreement is signed by the State-owned
Company and the supplier.
Period of the contract
The duration of the contract in months.
Value of the contract
The value of the contract for the entire period of the contract.
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Tendering Process Types:
There are a number of different tender processes, but as per POME:
OPEN Process - All potential contractors / suppliers can bid for a contract.
RESTRICTED Process - A two or three stage process allows only those potential contractors / suppliers
who satisfy a number of criteria to be short listed and allowed to bid.
NEGOTIATED Process - Used for complex purchases. Careful consideration is given to the use of this
process. When tenders are invited, bids must be submitted by the time and date in sealed, unmarked
envelopes (usually supplied with the Invitation to Tender documentation) to the address specified in the
Invitation to Tender.
POME Prescribe
L
Love yourself first
and most.
POME Prescribe
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PROCUREMENT/
CONTRACTING
PHASES
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Procurement/ Contracting Phases:
Procurement can be defined as the acquisition of goods or services. Procurement (and contracting) is a
process that involves two parties with different objectives who interact in a given market segment. Good
procurement practices can increase corporate profitability by taking advantage of quantity discounts,
minimizing cash flow problems, and seeking out quality suppliers. Because procurement contributes to
profitability, procurement is often centralized, which results in standardized practices and lower paperwork
costs.
All procurement strategies are frameworks by which an organization attains its objectives. There are two
basic procurement strategies:
Corporate procurement strategy: The relationship of specific procurement actions to the corporate
strategy
Project procurement strategy: The relationship of specific procurement actions to the operating
environment of the project
Project procurement strategies can differ from corporate procurement strategies because of constraints,
availability of critical resources, and specific customer requirements. Corporate strategies might promote
purchasing small quantities from several qualified vendors, whereas project strategies may dictate sole
source procurement.
Procurement planning usually involves the selection of one of the following as the primary objective:
Procure all goods/services from a single source.
Procure all goods/services from multiple sources.
Procure only a small portion of the goods/services.
Procure none of the goods/services.
Another critical factor is the environment in which procurement must take place. There are two
environments: macro and micro. The macro environment includes the general external variables that can
influence how and when we do procurement. These include recessions, inflation, cost of borrowing money,
and unemployment. As an example, a foreign corporation had undertaken a large project that involved the
hiring of several contractors. Because of the country's high unemployment rate, the decision was made to
use only domestic suppliers/contractors and to give first preference to contractors in cities where
unemployment was the greatest, even though there were other more qualified suppliers/contractors.
The micro environment is the internal environment of the firm, especially the policies and procedures
imposed by either the firm, project, or client in the way that procurement will take place. This includes the
procurement/contracting system, which contains five cycles:
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Requirement cycle: Definition of the boundaries of the project
Requisition cycle: Analysis of sources
Solicitation cycle: The bidding process
Award cycle: Contractor selection and contract award
Contract administration cycle: Managing the subcontractor until completion of the contract
There are several activities that are part of the procurement process and that overlap several of the cycles.
These cycles can be conducted in parallel, especially requisition and solicitation.
REQUIREMENT CYCLE
The first step in the procurement process is the definition of project, specifically the requirement. This is
referred to as the requirement cycle and includes the following:
Defining the need for the project
Development of the statement of work, specifications, and work breakdown structure
Performing a make or buy analysis
Laying out the major milestones and the timing/schedule
Cost estimating, including life-cycle costing
Obtaining authorization and approval to proceed
Previously, we discussed the statement of work. The SOW is a narrative description of the work to be
accomplished and/or the resources to be supplied. The identification of resources to be supplied has taken
on paramount importance during the last ten years or so. During the 1970s and 1980s, small companies
were bidding on mega jobs only to subcontract out more than 99% of all of the work. Lawsuits were
abundant and the solution was to put clauses in the SOW requiring that the contractor identify the names
and resumes of the talented internal resources that would be committed to the project, including the
percentage of their time on the project.
Specifications are written, pictorial, or graphic information that describe, define, or specify the services or
items to be procured. There are three types of specifications:
Design specifications: These detail what is to be done in terms of physical characteristics. The risk of
performance is on the buyer.
Performance specifications: These specify measurable capabilities the end product must achieve in
terms of operational characteristics. The risk of performance is on the contractor.
Functional specifications: This is when the seller describes the end use of the item to stimulate
competition among commercial items, at a lower overall cost. This is a subset of the performance
specification, and the risk of performance is on the contractor.
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There are always options in the way the end item can be obtained. Feasible procurement alternatives
include make or buy, lease or buy, buy or rent, and lease or rent. Buying domestic or international is also of
critical importance, especially to the United Auto Workers Union. Factors involving the make or buy analysis
are shown below:
The make decision
o Less costly (but not always!!)
o Easy integration of operations
o Utilize existing capacity that is idle
o Maintain direct control
o Maintain design/production secrecy
o Avoid unreliable supplier base
o Stabilize existing workforce
The buy decision
o Less costly (but not always!!)
o Utilize skills of suppliers
o Small volume requirement (not cost effective to produce)
o Having limited capacity or capability
o Augment existing labor force
o Maintain multiple sources (qualified vendor list)
o Indirect control
The lease or rent decision is usually a financial endeavor. Leases are usually longer term than renting.
Consider the following example. A company is willing to rent you a piece of equipment at a cost of $100 per
day. You can lease the equipment for $60 per day plus a one-time cost of $5000. What is the breakeven
point, in days, where leasing and renting are the same?
Therefore, if the firm wishes to use this equipment for more than 125 days, it would be more cost effective
to sign a lease agreement rather than a rental agreement.
REQUISITION CYCLE
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Once the requirements are identified, a requisition form is sent to procurement to begin the requisition
process. The requisition cycle includes:
Evaluating/confirming specifications (are they current?)
Confirming sources
Reviewing past performance of sources
Producing solicitation package
The solicitation package is prepared during the requisition cycle but utilized during the solicitation cycle. In
most situations, the same solicitation package must be sent to each possible supplier so that the playing
field is level. A typical solicitation package would include:
Bid documents (usually standardized)
Listing of qualified vendors (expected to bid)
Proposal evaluation criteria
Bidder conferences
How change requests will be managed
Supplier payment plan
Standardized bid documents usually include standard forms for compliance with EEO, affirmative action,
OSHA/EPA, minority hiring, and so on. A listing of qualified vendors appears in order to drive down the cost.
Quite often, one vendor will not bid on the job because it knows that it cannot submit a lower bid than one
of the other vendors. The cost of bidding on a job is an expensive process.
Bidder conferences are used so that no single bidder has more knowledge than others. If a potential bidder
has a question concerning the solicitation package, then it must wait for the bidders' conference to ask the
question so that all bidders will be privileged to the same information. This is particularly important in
government contracting. There may be several bidders' conferences between solicitation and award. Project
management may or may not be involved in the bidders' conferences, either from the customer's side or the
contractor's side.
SOLICITATION CYCLE
Selection of the acquisition method is the critical element in the solicitation cycle. There are three common
methods for acquisition:
Advertising
Negotiation
Small purchases (i.e., office supplies)
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Advertising is when a company goes out for sealed bids. There are no negotiations. Competitive market
forces determine the price and the award goes to the lowest bidder.
Negotiation is when the price is determined through a bargaining process. In such a situation, the customer
may go out for a:
Request for information (RFI)
Request for quotation (RFQ)
Request for proposal (RFP)
The RFP is the most costly endeavor for the vendor. Large proposals contain separate volumes for cost,
technical performance, management history, quality, facilities, subcontractor management, and others. The
negotiation process can be competitive or noncompetitive. Noncompetitive processes are called sole-source
procurement.
On large contracts, the negotiation process goes well beyond negotiation of the bottom line. Separate
negotiations can be made on price, quantity, quality, and timing. Vendor relations are critical during
contract negotiations. The integrity of the relationship and previous history can shorten the negotiation
process. The three major factors of negotiations are:
Compromise ability
Adaptability
Good faith
Negotiations should be planned for. A typical list of activities would include:
Develop objectives (i.e., min-max positions)
Evaluate your opponent
Define your strategy and tactics
Gather the facts
Perform a complete price/cost analysis
Arrange "hygiene" factors
If you are the buyer, what is the maximum you will be willing to pay? If you are the seller, what is the
minimum you are willing to accept? You must determine what motivates your opponent. Is your opponent
interested in profitability, keeping people employed, developing a new technology, or using your name as a
reference? This knowledge could certainly affect your strategy and tactics.
Hygiene factors include where the negotiations will take place. In a restaurant? Hotel? Office? Square table
or round table? Morning or afternoon? Who faces the windows and who faces the walls?
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There should be a postnegotiation critique in order to review what was learned. The first type of
postnegotiation critique is internal to your firm. The second type of postnegotiation critique is with all of the
losing bidders to explain why they did not win the contract. Losing bidders may submit a "bid protest"
where the customer may have to prepare a detailed report as to why this bidder did not win the contract.
Bid protests are most common on government contracts.
AWARD CYCLE
The award cycle results in a signed contract. Unfortunately, there are several types of contracts. The
negotiation process also includes the selection of the type of contract.
Important Conclusion: The objective of the award cycle is to negotiate a contract type and
price that will result in reasonable contractor risk and provide the contractor with the
greatest incentive for efficient and economic performance.
There are certain basic elements of most contracts:
Mutual agreement: There must be an offer and acceptance.
Consideration: There must be a down payment.
Contract capability: The contract is binding only if the contractor has the capability to perform the
work.
Legal purpose: The contract must be for a legal purpose.
Form provided by law: The contract must reflect the contractor's legal obligation, or lack of
obligation, to deliver end products.
The two most common contract forms are completion contracts and term contracts.
Completion contract: The contractor is required to deliver a definitive end product. Upon delivery and
formal acceptance by the customer, the contract is considered complete, and final payment can be
made.
Term contract: The contract is required to deliver a specific "level of effort," not an end product. The
effort is expressed in woman/man-days (months or years) over a specific period of time using specified
personnel skill levels and facilities. When the contracted effort is performed, the contractor is under no
further obligation. Final payment is made, irrespective of what is actually accomplished technically.
The final contract is usually referred to as a definitive contract, which follows normal contracting procedures
such as the negotiation of all contractual terms, conditions, cost, and schedule prior to initiation of
performance. Unfortunately, negotiating the contract and preparing it for signatures may require months of
preparation. If the customer needs the work to begin immediately or if long-lead procurement is necessary,
then the customer may provide the contractor with a letter contract or letter of intent. The letter contract is
a preliminary written instrument authorizing the contractor to begin immediately the manufacture of
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supplies or the performance of services. The final contract price may be negotiated after performance
begins, but the contractor may not exceed the "not to exceed" face value of the contract. The definitive
contract must still be negotiated.
The type of contract selected is based upon the following:
Overall degree of cost and schedule risk
Type and complexity of requirement (technical risk)
Extent of price competition
Cost/price analysis
Urgency of the requirements
Performance period
Contractor's responsibility (and risk)
Contractor's accounting system (is it capable of earned value reporting?)
Concurrent contracts (will my contract take a back seat to existing work?)
Extent of subcontracting (how much work will the contractor outsource?)
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CONTRACT
TYPES
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Contract Types:
Divisible Contract: Supply, Installation and Commissioning
Purchase orders are separated, i.e, the storage is in the scope of
the client.
Indivisible Contract: Supply, Installation and Commissioning
Purchase orders are wholly one, i.e, the storage is in the scope of
the company.
Take and Pay Contract/ Tolling Contract: A contract
that the buyer would be taking and paying for goods or
services only if delivered.
Take or Pay Contract : A contractual term whereby the buyer is unconditionally obligated to take
any product or service that he is offered (and pay the corresponding purchase price), or to pay a
specified amount if he refuses to take the product or service.
CPPC Contract: Cost Plus Percentage of Costs, Buyer assumes risk, provides for reimbursement to
the contractor for allowable costs due to contract performance. Additionally, the contractor receives
an agreed-upon percentage of the estimated costs as a profit. Although prohibited for in federal
government, used in private, particularly construction industry
CPFF Contract: Cost Plus Fixed Fee, Buyer high risk; Seller moderate risk, Provides that the seller
be reimbursed for allowable costs for performing the contract, and in addition the seller receives a
profit a fixed fee payment usually based on a % of estimated costs, for difficult and long research
projects.
CPIF Contract: Cost Plus Incentive Fee, Seller is paid for allowable performance costs along with a
predetermined fee and an incentive bonus, Long performance period with hardware & development
test requirements; compute incentive based on savings.
In this contract, the contractor is reimbursed 100% of the costs. However, there is a maximum fee
(i.e., profit) of $1,350 and a minimum fee of $300. The final allowable profit will vary between the
minimum and maximum fee. Because there appears more financial risk for the customer in a CPIF
34
contract, the target fee is usually less than in an FPIF contract, and the contractor's portion of the
sharing ratio is smaller.
FPIF Contract: Fixed Price Incentive Fee, The most complex type of contract, which is composed of
a target cost, target profit, target price, ceiling price, and share ratio, usually used when contracts
are for substantial sum and involve a long production time. This enables the seller to develop
production efficiency during the performance of the contract. target cost 100,000, target price
110,000, target profit 10,000, ceiling price 12,000, share ratio 70/30; if cost above 120,000 no
profit.
To alleviate some of the previously mentioned problem areas, clients, especially the government,
have been placing incentive objectives into their contracts. The fixed-price-incentive-fee (FPIF)
contract is an example of this. The essence of the incentive contract is that it offers a contractor
more profit if costs are reduced or performance is improved and less profit if costs are raised or if
performance goals are not met. Cost incentives take the form of a sharing formula generally
expressed as a ratio. For example, if a 90/10 formula were negotiated, the government would pay
for 90 cents and the contractor 10 cents for every dollar above the target cost. Thus it benefits both
the contractor and the government to reduce costs, because the contractor must consider that 10
percent of every dollar must be spent by the company. Expected profits can thus be increased by
making maximum use of the contractor's managerial skills.
In the FPIF contract, the contractor agrees to perform a service at a given fixed cost. If the total cost
is less than the target cost, than the contractor has made a profit according to the incentive-fee
formula. If the total cost exceeds the target cost, then the contractor loses money.
When the contract is completed, the contractor submits a statement of costs incurred in the
performance of the contract. The costs are audited to determine allowability and questionable
charges are removed. This determines the negotiated cost. The negotiated cost is then subtracted
from the target cost. This number is then multiplied by the sharing ratio. If the number is positive, it
is added to the target profit. If it is negative, it is subtracted. The new number, the final profit, is
then added to the negotiated cost to determine the final price. The final price never exceeds the
price ceiling.
FFP Contract: Firm Fixed Price, It is an agreement where the contractor agrees to furnish supplies
or services at a specified price that is not subject to adjustment because of performance costs. It is
best suited when reasonably definite production specifications are available and costs are relatively
certain. Lump sum - used most often; Seller has most risk
35
T&M Contract: Time and Materials, Hybrid type of contractual arrangement that contains aspects of
both cost-reimbursable and fixed-price-type arrangement. Based upon performing a prescribed
amount of work, previously agreed upon by both the seller and buyer, where the seller is paid for
amount of time it takes to accomplish the work. The seller also provides, but is reimbursed, for the
materials to complete the work.
Turn-Key Contract: A term used in a construction contract, whereby the contractor has a
contractual responsibility to build and hand over to a client a completed and tested plant, operating
to specification. The contractor is thus totally responsible for all activities from design through to final
completion of the project.
EPSC Contract: Contract is of Engineering, Procurement, Supply and Construction
EPSCC Contract: Contract is of Engineering, Procurement, Supply and Construction and
Commissioining.
Frame Work Contract: A frame work contract is a contract concluded between a Contracting
Authority and an economic operator for the purpose of laying down the essential terms governing a
series of specific contracts to be awarded during a given period, in particular as regards the duration,
subject, prices, conditions of performance and the quantities envisaged. The Contracting Authority
may also conclude multiple framework contracts, which are separate contracts with identical terms
awarded to a number of suppliers or service providers.
Works Contract: Works contracts cover either the execution, or both the design and execution, of
works or the realisation.
36
Supply Contract: Supply contracts cover the purchase, leasing, rental or hire purchase.
Mixed Contract: A contract between the Contracting Authority and a service provider, supplier or
construction firm covering two or more of the following: works, supplies and services.
EPC/ Design-Build Contract: A contractual agreement between the client (i.e. the owning
company which has issued the contract) and the contractor, which outlines the terms of the
contractor's responsibility for the Engineering, Procurement and Construction (EPC) activities linked
to the project.
37
POME Prescribe
38
M
Make it happen.
POME Prescribe
39
CONTRACTS
MANAGEMENT
40
Contracts Management:
Note: This chapter is some what difficult, when compared to the other chapters and I request the readers
to concentrate more on this, though the chapter is more in to thesis, but more towards a pragmatic in real
life operations.
In general, companies provide services or products based on the requirements of invitations for competitive
bids issued by the client or the results of direct contract negotiations with the client. One of the most
important factors in preparing a proposal and estimating the cost and profit of a project is the type of
contract expected. The confidence by which a bid is prepared is usually dependent on how much of a risk
the contractor will incur through the contract. Certain types of contracts provide relief for the contractor,
since onerous risks exist. The cost must therefore consider how well the contract type covers certain high-
and low-risk areas.
Prospective clients are always concerned when, during a competitive bidding process, one bid is much lower
than the others. The client may question the validity of the bid and whether the contract can be achieved
for the low bid. In cases such as this, the client usually imposes incentive and penalty clauses in the
contract for self-protection.
41
Because of the risk factor, competitors must negotiate not only for the target cost figures, but also for the
type of contract involved, since risk protection is the predominant influential factor. The size and experience
of the client's own staff, urgency of completion, availability of qualified contractors, and other factors must
be carefully evaluated. The advantages and disadvantages of all basic contractual arrangements must be
recognized to select the optimum arrangement for a particular project.
Onerous risks are unfair risks that the contractor may have to bear. Quite often, the contract
negotiations may not reach agreement on what is or is not an onerous risk.
Contracts management is an important part of the business model for companies that engage in
transaction based processes. Superior management of your contracts can improve
operational efficiency,
improve profitability,
And make contracts more visible in the organization.
In the day to day operations of company business, manpower shortages, price competition, and
limited capital resources all compete for attention. Implementing a contracts management framework
into an organization to help manage and streamline the processes involved in procuring contracted
supplies and labor can amplify operational efficiency. Contract management can be an important
means for achieving organizational goals which ultimately results in an improvement in your bottom
line.
The contract administrator is responsible for compliance by the contractor to the contract's terms and
conditions, and for making sure that the final product is fit for use. The functions of the contract
administrator include:
Change management
Specification interpretation
Adherence to quality
Warranties
Subcontractor management
Production surveillance
Waivers
Contract breach
Resolution of disputes
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Project termination
Payment schedules
Project closeout
The larger the contract, the greater the need for the contract administrator to resolve ambiguity in the
contract. Sometimes, large contracts that are prepared by teams of attorneys contain an order of
precedence clause. The order of precedence specifies that any inconsistency in the solicitation of the
contract shall be resolved in a given order of procedure such as:
A. Specifications (first priority)
B. Other instructions (second priority)
C. Other documents, such as exhibits, attachments, appendices, SOW, contract data requirements list
(CDRL), etc. (third priority)
D. Contract clauses (fourth priority)
E. The schedule (fifth priority)
Generally speaking, an ambiguous contract will be interpreted against the party who drafted the document.
However, there is an offsetting rule called Patent Ambiguity. This includes the following:
The offeror in a "bid" situation is expected to be knowledgeable about ordinary and normal industrial
or construction practices pertinent to its work.
The presumption is made that the offeror has made reasonable and complete review of the
contractual documents before preparing and submitting them.
Failure to notify of patent ambiguity works against the offeror if the claim is later submitted based on
ambiguity.
Perhaps the majority of the contract administrator's time is spent handling changes. The following
definitions describe the types of changes:
Administrative change: A unilateral contractual change, in writing, that does not affect the
substantive rights of the parties (i.e., a change in the paying office or the appropriation funding).
Change order: A written order, signed by the contracting officer, directing the contractor to make a
change.
Contract modification: Any written change in the terms of the contract.
Undefinitized contractual action: Any contractual action that authorizes the commencement of work
prior to the establishment of a final definitive price.
Supplemental agreement: A contract modification that is accompanied by the mutual action of both
parties.
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Constructive change: Any effective change to the contract caused by the actions or inaction of
personnel in authority, or by circumstances that cause a contractor to perform work differently than
required by written contract. The contractor may file a claim for equitable adjustment in the contract.
Typical causes of constructive changes include:
Defective specification with impossibility of performance
Erroneous interpretation of contract
Overinspection of work
Failure to disclose superior knowledge
Acceleration of performance
Late or unsuitable owner or customer furnished property
Failure to cooperate
Improperly exercised options
Misusing proprietary data
Based on the type of contract, terms, and conditions, the customer may have the right to terminate a
contract for convenience at any time. However, the customer must compensate the contractor for his
preparations and for any completed and accepted work relating to the terminated part of the contract.
The following are reasons for termination for convenience of the customer:
Elimination of the requirement
Technological advances in the state-of-the-art
Budgetary changes
Related requirements and/or procurements
Anticipating profits not allowed
The following are reasons for termination for default due to contractor's actions:
Contractor fails to make delivery on scheduled date.
Contractor fails to make progress so as to endanger performance of the contract and its terms.
Contractor fails to perform any other provisions of the contract.
If a contract is terminated due to default, then the contractor may not be entitled to compensation of work
in progress but not yet accepted by the customer. The customer may even be entitled to repayment from
the contractor of any advances or progress payments applicable to such work. Also, the contractor may be
liable for any excess reprocurement costs. However, contractors can seek relief through negotiations, a
Board of Contracts Appeals, or Claims Court.
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The contract administrator is responsible for performance control. This includes inspection, acceptance, and
breach of contract/default. If the goods/services do not comply with the contract, then the contract
administrator has the right to:
Reject the entire shipment
Accept the entire shipment (barring latent defects)
Accept part of the shipment
In government contracts, the government has the right to have the goods repaired with the costs charged
back to the supplier or fix the goods themselves and charge the cost of repairs to the supplier. If the goods
are then acceptable to the government, then the government may reduce the contract amount by an
appropriate amount to reflect the reduced value of the contract.
Project managers often do financial closeout once the goods are shipped to the customer. This poses a
problem if the goods must be repaired. Billing the cost of repairs against a financially closed out project is
called backcharging. Most companies do not perform financial closeout until at least 90 days after delivery
of goods.
Fig: Sales Opportunities and Contracts Sub-System
Contracts management, contracts development and sourcing management goals include
45
supplier identification,
contract negotiation,
service ordering,
tracking vendor equipment,
monitoring
and analysis of vendor performance,
forecasting need,
aligning procurements with business objectives,
and securing advantageous rates for products and services.
Trying to account for these using manual systems over geographic distance can dampen operation
efficiency if systems and software are not designed, aligned and implemented correctly.
Contract
Project Administration
Management
Management
Contract Approval Process( CAP) System
Leadership
Metrics, Metrics,
Sales
Engineering Estimating Booking & more Metrics
Fig : contract approval process stake holders
46
As Is Rep fills out the forms Rep gives to the Approver; Rep makes copies & distributes
Rep ready to issue Contacts them
Proposal/Bid
1 2 3 4
Actions Assigned, Forms Admin. Receives & Sorts Admin calls Rep in case
Filled Out & Signed, through Paperwork of any missing forms
5 Approvals Gathered
Reviews held via 6 7 8 8
Teleconference
Admin files all
Customer gets confirmation Admin books job 11
Sales Documents
10
9
fiu: contract approval process single line diagram( conventional type)
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Email 0otices are AUTOMATICALLY dispatched to all
Rep completes CAP Summary & required Reviewers & Signatories
Rep ready to issue other Required Documents on-line &
Proposal/Bid indicates Ready for Review
1 2 3
CAP
Review participants may download
all pertinent files (Estimates,
Proposals, etc.) from PMIS
4 5
4 Reviews held via
Teleconference w/
0etMeeting
CAP
-Actions Assigned
CAP
Admin books the job
Approvals done on-line
6 7
8 Admin files hard copies of
4
CSR, Proposal/Contract,
and Estimate
Admin books job
Fig: contract approval process single line diagram( evolved type)
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Fig: Alternative Process
PMIS for Contracts is becoming increasingly important to companies who manage operations over
large geographic areas and for contracts administration. Centralized Contract Management software
provides a centralized repository for service agreements, a system of alerts for pending contract
expirations, the ability to track documentation and the flexibility to run reports for revenue
accounting and managerial benchmarking. PMIS Contract software module helps business-to-
business trading partners define, administer, and track sales and purchases. With electronic contract
management software a company can provide better and more equal service to its offices at different
locations and in different countries.
A comprehensive suite of contracts management tools provides the highest level of control to
negotiate contracts agreements, manage and track all of your contracts and business agreements.
Globalization is increasing the types and complexity of contracts as well as the risks inherent in
trading relationships. Proactive contract management involves risk managing the key strategic areas
that have the largest impact on your business. Systematic reporting on contracts in an organized and
efficient manner provides the company with the flexibility to anticipate and renegotiate key contracts
that are about to expire and make plans for performance improvement.
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Whether you a small, medium or large organization, developing contracts management processes
and working towards performance improvement should be a key objective of every companies
operational mandate. In the age of increasing cost and competition it can mean the difference
between having a sustainable business or succumbing to business who take the time to define and
administer superior contracts management practices.
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Essential Information on Government Contracts
Before starting any job, work, transaction or business, every individual or organization is subject to
some form of contract. This is because a contract reflects the mutual agreement between two or
more individuals for consideration or a specific performance. Government contracts are also part and
parcel of this process.
Contracts can be of different types. There are government contracts, commercial contracts, legal
contracts, business contracts, employment contracts, etc. It is important to define what a contract is
before moving forward.
A contract is the legal agreement or promise between two or more persons for a consideration or
erformance of a task. It may be in writing to reflect the mutual consent or agreement between the
parties. Usually, the parties, individuals or organizations sign the contract after accepting the terms
and conditions of the offer. Once a contract is signed, it serves as a legal proof of the mutually
agreed obligation. Every contract lays down certain principles which are inviolable. Therefore, one
has to the follow all rules and regulations upon entering into a contract. Some contracts, however,
are verbal and not in a written form.
A government also signs contracts. The government can sign a contract with another government,
business firm, or individual, depending upon its objective. Those who sign the government contract
are usually involved in performing or supplying goods and services for the government department.
Profit generation is not always the primary motivating factor in government contracts although
governments operate within the same commercial framework as other individuals and organizations.
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Many contracts that are available with government departments are subject to a tender based
process. This process applies to state government contracts and federal/central government
contracts. Commercial parties that are interested in performing the work or supplying the service are
required to submit a proposal known as a tender document. This document is judged according to
price and the relevant qualifying criteria. The winning bid does not always go to the lowest bidder.
The overall proposal is examined and judged according to the stated government criteria before the
government contract is awarded.
A contact can be signed as an expressed or implied contract. Expressed contracts are those contracts
where the terms and conditions are stated openly at the time of making the contract such as the
price of real estate when the settlement takes place. With the implied contract, certain terms and
conditions are not expressed in words but are deemed to be inherent to the nature of the contract.
An example of this is a checkup with your local doctor. You are not charged prior to the consultation
and the act of making the booking and submitting to examination constitutes an implied condition to
pay the bill at the cessation of the appointment.
CONSORTIUM AGREEMENTS POLICY
INTRODUCTION – PROBLEM STATEMENT
If a company may want to team up with other companies in view of tendering for and, if successful,
entering into and performing a customer contract.
Such teaming agreement may have various forms and denomination such as “Consortium Agreement”,
“Joint Bidding Agreement”, “Temporary Association of Enterprises”, “Joint Venture Agreement”, etc. For the
purpose of this Policy, such teaming agreements are called “Consortium Agreements”.
Some Consortium Agreements may stipulate that all or several partners are jointly and severally liable for
all or part of the Consortiums obligations.
The purpose of this Policy is to define the conditions under which the company may enter into a Consortium
Agreement.
TEMPLATE CONSORTIUM AGREEMENT
All Consortium Agreements need to be on the Standard Templates of the respective organisations. Any
deviations or amendment to the Standard Template must be approved by Contracts Management.
52
APPROVAL PROCESS
1. Before initiating any contact with a potential Consortium partner, the Sales person in charge of
the project to be tendered must contact the Regional Contracts Manager for elevation to General
Counsel. The General Counsel will initiate the approval process applicable to all Consortium partners as
per business Corporate Policies.
Following information will be required from the Sales person in order to start the Policy process:
• details (full name, address) of the potential Consortium partners;
• owners/shareholders up to a level of a private individual (not necessary if it is a listed company and
the majority of shares are traded on a stock exchange);
• names, details of directors;
• names, details of potential consortium partner’s personnel responsible for the business relationship
with the company.
2. After the potential Consortium partner(s) has been cleared under company Policy, the Sales person can
contact the potential Consortium partner(s) and start negotiating the specifics of the transaction. The
Regional Contracts Manager must be involved and approve any deviation to the Consortium
Agreement. If any change proposed to such template involves a possible infringement to Policy, the
Regional Contracts Manager must immediately elevate the issue to the General Counsel.
3. If the Consortium Agreement relates to a project with a value > $5M, the Regional Contracts Manager
must organize a Bid/No Bid review with the following individuals: General Counsel, Contracts Leader,
Regional General Manager, Regional Operations Leader and Regional Sales Leader (the “Bid/No Bid
Team”). No commitment to the Consortium partners may be made before the Bid/No Bid Team
decided to pursue the opportunity concerned.
4. After the negotiations with the Consortium partners are finalized but before entering into the
Consortium Agreement, the final draft of such agreement must be submitted to the General Counsel’s
approval.
DISTRIBUTION AGREEMENTS POLICY
INTRODUCTION – PROBLEM STATEMENT
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Company regularly faces the choice of selling its products and services through its own employees or,
alternatively, by engaging distributors or resellers (“Distributor(s)”).
Usually, Distributors independently determine the price, terms and conditions of the sale and contract
directly with the customer. They take legal title to products purchased from Company and then resell them
and their compensation for such sales consists of the difference between the price paid to Company and the
resale price.
The purpose of this Policy is to establish procedures for the selection and retention of persons who will
“represent” Company but who are not employed by Company and not directly subject to its policies and
controls.
This policy applies to new distribution agreements and to the renewal of existing distribution agreements.
TEMPLATE DISTRIBUTION AGREEMENT
All Distribution Agreements need to be on the Company Standard Template. Any deviations or amendment
to the Company Standard Template must be approved by Contracts Management.
APPROVAL PROCESS
5. Before initiating any contact with a potential Distributor, the Sales person concerned must contact the
Regional Contracts Manager for elevation to the Regional General Manager and General Counsel. After
the Regional General Manager’s approval, the General Counsel will initiate the approval process
applicable to all sales agents and Distributors as per Company Corporate Policy
Following information will be required from the Sales person in order to start the Policy process:
a. details (full name, address) of the potential distributor/sales agent;
b. owners/shareholders up to a level of a private individual (not necessary if it is a listed company
and the majority of shares are traded on a stock exchange);
c. names, details of directors;
d. names, details of potential distributor’s/sales agent’s personnel responsible for the business
relationship with Company;
e. discount the Sales person would like to negotiate with the potential Distributor/ Sales agent.
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6. After the potential Distributor has been cleared under Policy, the Sales person can contact the potential
Distributor and start negotiating the specifics of the transaction. The Regional Contracts Manager must
be involved and approve any deviation to the Company Template Distribution Agreement. If any change
proposed to such template involves a possible infringement to Policy, the Regional Contracts Manager
must immediately elevate the issue to the General Counsel.
7. After the negotiations with the Distributor are finalized but before entering into the Distribution
Agreement, the final draft of such agreement must be submitted to the General Counsel’s approval.
POME Prescribe
P
Practice makes
perfect.
POME Prescribe
POME LIGHTER VEI0:
High Flying Project Manager
A man is flying in a hot air balloon and realizes he is lost. He reduces height and spots a man
down below. He lowers the balloon further and shouts:
"Excuse me, can you help me? I promised my friend. I would meet him half an hour ago, but I
don't know where I am."
The man below says, "Yes, you are in a hot air balloon, hovering approximately 30 feet above
this field. You are between 40 and 42 degrees North latitude, and between 58 and 60 degrees
55
West longitude."
"You must be a programmer," says the balloonist.
"I am," replies the man. "How did you know?"
"Well," says the balloonist, "everything you have told me is technically correct, but I have no
idea what to make of your information, and the fact is I am still lost."
The man below says, "You must be a project manager"
"I am," replies the balloonist, "but how did you know?"
"Well," says the man, "you don't know where you are or where you are going. You have made
a promise which you have no idea how to keep, and you expect me to solve your problem. The
fact is you are in the exact same position you were in before we met."
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CONTRACTS
LOOP HOLES
MANAGEMENT
57
Contract Loop holes Management:
The POME suggested few Policies which sets forth the basic conditional contract loop holes of customer
contracts, as well as the guidelines for approval of contacts with non-standard terms. This POME material
provides additional insight and explanation regarding the basic terms and conditions that must contain in
the Contracting Policies. It also offers potential solutions and negotiating tips for use in conjunction with
customer negotiations.
Fig:Contracts Sub-System
For any deviations, the respective organizations could free to follow making changes to the POME assigned
policies, and as per the business strategic requirements.
Unless specific exemption is granted, any contract that is not a pre-approved form must be reviewed by
Legal Counsel or the appropriate Contract Manager. Any Project contract valued at higher amount or more
must be reviewed by the General Counsel and the Director of Contracts.
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Fig: FIDIC Guidelines
59
1. BASIC CONTRACTING POLICIES RECOMMENDED BY POME:
a. Limitation of Liability.
POME Comments:
1. "Consequential Damage" means any damage, loss or injury of whatsoever nature which does
not flow directly from the act or omission in question but from a consequence or result of such act or
60
omission including, but not limited to, any loss or anticipated loss of profit, loss or anticipated loss of
revenue, Projects interruption, loss of use of any equipment, loss of any contract or other business
opportunity and any other indirect loss of a similar nature.
2. Unless a contract expressly excludes liability for indirect and consequential damages, the
possibility of incurring such liability exists. The Projects head, together with Projects general counsel, must
approve contracts that do not expressly exclude liability for indirect and consequential damages.
3. Where the customer will not agree to exclude liability for indirect and consequential damages,
attempt to obtain an overall liability cap equal to the contract value or up to three times the contract value
with Top management approval. Where the contract contains a liability cap in lieu of a disclaimer of indirect
and consequential losses, the Contract Approval Process (CAP) should apply to all types of damages (both
direct and indirect). An overall liability cap mitigates the lack of a consequential damages disclaimer and is
a consideration evaluated when deciding whether to accept the contract without the disclaimer.
4. Another alternative is to request that the customer articulate its specific concerns. If the
customer will not accept a complete disclaimer of indirect and consequential damages, attempt to draft the
provision such that the customer’s specific concerns are covered while at the same time affording Project
Taking Organization some level of protection. If the party negotiating on behalf of the customer cannot
articulate the customer’s concerns, request that a party who can do so be brought into the discussion.
5. Where Project Taking Organization is performing as a subcontractor, determine whether the
customer’s refusal to accept a consequential damages disclaimer is due to flow-down requirements from the
prime or an upper level contract. This is another consideration when deciding whether to accept the
contract without the disclaimer.
6. Inquire about the customer’s insurance coverage for the types of consequential losses about
which it is concerned. The party negotiating on behalf of the customer may not realize that certain losses
are covered by insurance. Where coverage can be determined, advocate that it is unnecessary for Project
Taking Organization to provide an added level of protection in addition to the customer’s insurance and that
to do so will result in additional cost.
7. In the case of service maintenance contracts, the annual amount of revenue Project Taking
Organization receives from the contract is greatly disproportionate to any potential liability that might be
imposed for consequential losses. It may also be difficult to establish a causal connection between the
service provided and the loss sustained, particularly in the case of a limited scope of work. In those cases it
is an unfavorable Projects proposition for Project Taking Organization to expose itself to potentially
unbounded losses. Last, argue that in accepting the service contract, Project Taking Organization is not
taking on the role of insurer of the customer’s property.
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b. Indemnity.
Project Taking Organization’s obligation to indemnify, if any, is limited to damages caused by Project Taking
Organization. Project Taking Organization should not assume responsibility for the negligence or other fault
of others including third parties.
POME Comments:
1. Although not specifically prohibited by the Contracting Policy, it is preferable to restrict the indemnity
obligation to the extent of Project Taking Organization’s negligence, rather than just excluding the obligation
in the case of customer negligence. The former attempts to exclude possible liability for third party claims,
while the latter does not. It is acceptable to include liability for Project Taking Organization’s sub-
contractors, agents and each of their employees, since Project Taking Organization is generally obligated to
account for the actions of its selected subcontractors. Project Taking Organization should not agree to
accept responsibility in the case of customer directed subcontractors.
Customer language, which requires indemnification for all injury or any nature or kind, directly or
indirectly connected to performance, is very broad and should not be accepted.
2. Look for and eliminate indemnity obligations that appear in other parts of the contract (patent
indemnity provision excepted). Such clauses may appear under the headings “Indemnity,” “Liability,”
“Product Liability,” “Obligations,” or other such headings. Confusion and interpretation disputes may arise
where multiple indemnity obligations appear in different parts of the contract.
3. Eliminate any additional clauses where the customer seeks reimbursement for costs it incurs as a
result of Project Taking Organization’s performance, particularly in cases where liquidated damages apply.
As discussed below liquidated damages should be the sole and exclusive remedy for delay. Such cost
reimbursement or damages for delay provisions operate as indemnity provisions in disguise.
4. Other types of indemnities: There are two other types of indemnities that are not good to hold, with
the contracting policy.
a) Intermediate Indemnity: this indemnity states that Project Taking Organization will indemnify the
customer from all claims or damage except to the extent caused by the sole negligence of the customer.
This form is unacceptable because Project Taking Organization will be liable for the claim if it is determined
that the customer is not 100% negligent. It is very difficult to prove sole negligence and in reality, this
makes Project Taking Organization liable for the negligence of others. Where a contract includes indemnity
for sole negligence refer to the applicable State guidelines for permissible indemnity obligations in
construction contracts.
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b) Broad Form Indemnity: this indemnity states that Project Taking Organization will indemnify the
customer from any and all claims, even if caused by the active or passive negligence of the customer or
third parties. This indemnity is contrary to the contracting policy and must not be accepted.
c) Examples: Let’s take the example of a personal injury claim. The injured party sues Project Taking
Organization and our Customer.
A court determines that: Customer is 50% at fault and Project Taking Organization is 50% at fault
WHO PAYS and HOW MUCH? - look at each of the indemnity clause.
Limited Form - Project Taking Organization pays 50%; Customer pays 50%.
Intermediate Form - Project Taking Organization pays 100% since the customer was not solely at fault.
*Note that if the Customer was 99% at fault and we had an Intermediate Indemnity clause, Project Taking
Organization would still pay 100%.
Broad Form - Project Taking Organization pays 100% regardless of fault.
*Note that if the Customer was 100% at fault, Project Taking Organization would still pay 100%.
c. Warranties.
All warranties are limited to one year (unless the contract price includes extended warranty coverage) and
remedies for product warranties are limited to repair or replacement.
POME Comments:
1. Although not specifically prohibited by the Contracting Policy, warranties of merchantability and
fitness for particular purpose are risky for Project Taking Organization. Customers often have difficulty
accepting a disclaimer of the warranty of merchantability. However, by accepting a warranty of
merchantability, Project Taking Organization could be subject to a different warranty obligation in each
jurisdiction in which it conducts business. The cost of such a broad warranty would be extremely difficult to
factor into the price of goods and services. In comparison, Project Taking Organization’s standard warranty
clearly states the parties’ intention for warranty obligations, rather than leaving interpretation of the
obligation to a third party. The warranty of fitness for a particular purpose (FFPP) imposes an even higher
obligation. Under it Project Taking Organization warrants that it understands the customer’s intent
regarding the performance of the system/equipment, and that the solution will exactly meet that intent.
Because we do not and can not have comprehensive understanding of the customer’s intent, it is clearer
63
and more reasonable to use the scope of work as the mutual expression of the parties’ intent regarding the
system to be installed and its performance.
2. For the reasons discussed above it is commercially reasonable for manufacturers of commercial
goods (non-custom ordered material available to the general public) to disclaim the merchantability/FFPP
warranties. Hence, where Project Taking Organization’s scope of work incorporate materials manufactured
by entities other than Project Taking Organization, we should discuss the commercial reasonableness of
Project Taking Organization disclaiming the warranties of merchantability and fitness for a particular
purpose because, otherwise, we assume the responsibility of warranting the merchantability/FFPP of goods
we did not manufacturer and for which the manufacturer does not extend to Project Taking Organization a
similar protection. In other words, there is a gap in warranty coverage for which Project Taking
Organization would be responsible.
3. Encourage the customer to specify its warranty needs, then agree on the cost of coverage. This
approach provides greater protection to both parties. In many cases the customer wishes to include either
the warranty of merchantability or fitness for particular purpose as a catch-all. In the event the customer
cannot specify its warranty needs, encourage the party negotiating on behalf of the customer to consult its
technical team to gain greater understanding of warranty needs.
4. Beware of warranties that restart the warranty duration for a repaired or replaced item. If the
customer insists on a restart of the warranty period, insist on a cap on the overall duration of the warranty.
5. The components of a good warranty include: 1) duration – one year preferable unless priced
otherwise, 2) exclusion of warranties for merchantability and fitness for a particular purpose, 3) specified
remedies (i.e. repair or replace), 4) exclusion for customer misuse, abuse or damage, 5) commencement of
warranty – upon completion or beneficial use, 6)specific equipment warranted.
d. Hazardous Materials/Mold.
The customer indemnifies Project Taking Organization for damages arising from undisclosed hazardous
materials and mold, and Project Taking Organization is entitled to stop work if any hazardous materials or
unsafe working conditions caused by others are encountered.
POME Comments:
1. The representations that the customer has not observed or been notified of hazardous substances or
conditions that would promote the spread of hazardous substances are important as they provide a “stake
in the ground” at the starting point of the contract that hazardous substances or conditions do or do not
64
exist. This knowledge in advance allows Project Taking Organization to more fully protect itself in the event
hazardous substances or conditions are discovered in the future.
2. Project Taking Organization should never assume responsibility to discover, identify, remediate or
remove any type of hazardous substance or mold.
3. Some states’ laws obligate a party to stop work when hazardous materials are encountered, at least
in some situations, i.e. California. In such situations, the hazardous materials provision need not be
incorporated into the contract.
4. The indemnity obligation protects Project Taking Organization in the event it suffers damages as a
result of encountering hazardous materials on the customer’s premises. It does not apply in the case of
damages caused by hazardous materials brought onto the premises by Project Taking Organization. This is
a common customer misconception. Educating the customer on the intent of the provision sometimes
alleviates confusion. Further, since the customer has an obligation to warn of hazardous materials of which
it is aware, as well as an obligation to update the notification as necessary, the indemnity obligation is not
as one-sided as it may seem upon a cursory reading.
5. It is recommended that a service agreement be negotiated on Project Taking Organization’s standard
terms at the same time as the install contract, or if that is not possible, obtain written confirmation from the
customer that they will either sign a service agreement on Project Taking Organization’s standard terms or
roll the new scope into an existing service agreement on Project Taking Organization terms. For the latter,
some form of written acknowledgement from the customer is required.
POME LIGHTER VEI0:
Golf:
A clergyman, a doctor and a project manager were playing golf together one day and were waiting for a particularly slow
group ahead. The project manager exclaimed, "What's with these people? We've been waiting over half and hour! It's a
complete disgrace." The doctor agreed, "They're hopeless, I've never seen such a rabble on a golf course." The
clergyman spotted the approaching green keeper and asked him what was going on, "What's happening with that group
ahead of us? They're surely too slow and useless to be playing, aren't they?" The green keeper replied, "Oh, yes, that's a
group of blind fire-fighters. They lost their sight saving our clubhouse from a fire last year, so we always let them play for
free anytime." The three golfers fell silent for a moment. The clergyman said, "Oh dear, that's so sad. I shall say some
special prayers for them tonight." The doctor added, rather meekly, "That's a good thought. I'll get in touch with an
ophthalmic surgeon friend of mine to see if there's anything that can be done for them." After pondering the situation for
a few seconds, the project manager turned to the green keeper and asked, "Why can't they play at night?"
65
e. Lien Rights.
Project Taking Organization should not affirmatively waive any lien rights prior to payment.
POME Comments:
1. The intent of the provision is to protect Project Taking Organization in the event of non-payment.
If Project Taking Organization is forced to waive its lien rights, look for other methods to protect Project
Taking Organization’s interest, i.e. conditional or partial waiver or a bond.
2. In the case of non-public jobs, performance or payment bonds issued by a higher tier contractor
in favor of Project Taking Organization may be posted. Obtaining copies of these bonds from the higher tier
contractor at the beginning of the project will make the filing of claims against the bonds easier in the event
of non-payment during subsequent performance.
f. Pay-If-Paid.
Any contracts containing a pay-if-paid clause must be approved by the corporate CFO.
POME Comments:
1. These clauses attempt to assign the risk of owner or upstream contractor insolvency to Project
Taking Organization. Courts do not favor such clauses and strictly construe them. However, if the terms of
a proposed contract unambiguously assign the risk of owner or upstream contractor nonpayment to Project
Taking Organization, in other words the contract makes payment by the owner a condition precedent to the
prime contractor’s duty to pay Project Taking Organization, the “pay-if-paid” clause is likely to be enforced.
It should be noted that a pay-if-paid clause cannot be used to preclude a contractor from asserting a
mechanic’s lien or payment bond claim. These clauses must be approved as indicated above.
2. When requesting approval of pay-if-paid terms, it is advisable to provide as much information as
possible regarding related contract terms, such as waiver of lien rights, an established time frame for
Project Taking Organization’s receipt of payment after customer receipt of payment from Owner, a joint
check arrangement, and/or a payment guarantee from the Owner in the event of contractor non-payment to
the subcontractor is not due to subcontractor’s non-performance, this latter condition may also be set forth
in the contract language in a “Notwithstanding the foregoing” type clause.
g. Unforeseen Conditions.
66
Except for performance contracts, Project Taking Organization is not required to take responsibility for
unknown and unforeseen conditions.
POME Comments:
1. Look to the age and condition of the site to determine the level of risk. If the construction is new
and no subsurface work is contemplated, the risk associated with accepting liability for unforeseen
conditions may be lower.
2. Where the contract requires that Project Taking Organization conduct a site walk and imposes
liability for any reasonably foreseeable conditions discoverable during such an inspection, Project Taking
Organization should complete the site walk prior to submitting its bid and document in writing with a copy
to customer any questionable conditions that may impact scope work.
3. Attempt to avoid responsibility for unforeseen conditions in exchange for eliminating contingency
costs to cover such risk from the bid. Since in most cases the customer will not want to accept added cost,
it may be more flexible in waiving the requirement.
h. Liquidated Damages.
Liquidated damages will not exceed 1-2 % of the contract amount per day or an overall cap of 10-15% of
the contract amount, and the liquidated damages are the sole remedy for delay.
POME Comments:
Contracts sometimes contain a provision under which the Seller is obligated to pay a stipulated sum of
money in the event that the Seller fails to perform its obligations as specified in the contract due to a cause
which is within the Seller’s control. Such provisions are called “Liquidated Damages” provisions.
Liquidated damages means a sum stipulated and agreed upon by the parties, at the time of entering into a
contract, as compensation for injuries in the event of a breach. Liquidated damages are appropriate in
principle where (1) the Buyer can suffer damages due to the failure of the Seller to perform its obligations;
(2) the damages are difficult to ascertain; and (3) the parties agree that the Buyer can be fully
compensated by the payment of the specified liquidated damages.
Keep in mind that liquidated damages must be reasonable in light of the anticipated harm to be caused by
the anticipated breach. A clause specifying unreasonably large liquidated damages may be deemed void as
a penalty. Therefore, where the customer insists upon an unreasonably large amount of liquidated
damages, argue that such a provision might be deemed void and therefore unenforceable. Where the
Project desires to accept liquidated damages for strategic reasons, incorporate as many of the following
protections as possible:
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1. Liquidated damages are the customer’s sole and exclusive remedy, and Project Taking
Organization’s sole liability, for delay under the contract. As an initial tactic, draft the provision to state
liquidated damages are the sole and exclusive remedy under the contract, without specifying only delay
damages.
2. Eliminate any other provisions that obligate Project Taking Organization to reimburse or
indemnify the customer for costs incurred as a result of Project Taking Organization’s performance under
the contract (see POME Comments to Indemnity above).
3. Obtain a grace period after the triggering event prior to application of liquidated damages. The
grace period should be reasonable in light of the schedule. If the customer is willing to negotiate the
liquidated damages provision, it is often possible to obtain a grace period of at least a few days. Even a
small grace period may provide Project Taking Organization the float necessary to meet the schedule
without application of liquidated damages. Consider tying the duration of the grace period to other time
periods in the contract. For example, if the customer requires that notices for non-directed Changes be
provided within 5 days, request a 5-day grace period for liquidated damages as well. The grace period can
be viewed as a risk trade-off. In other words, in exchange for Project Taking Organization accepting greater
risk under the Changes clause, it should accept less risk in other areas of the contract.
4. Include an affirmative obligation by the customer to invoke the provision and claim liquidated
damages. Avoid language that obligates Project Taking Organization to pay liquidated damages without a
demand from the customer.
5. Include the obligation of the end user/owner to concur prior to application of liquidated damages.
This is especially useful in situation where Project Taking Organization has a stronger relationship with the
Owner/end user than its immediate customer.
6. Exclude liquidated damages in the case of events outside Project Taking Organization’s
reasonable control. In addition, in such instances provide that the schedule will be extended by an
equivalent period of time.
7. Many contracts try to include both liquidated damages and actual damages in the event of a
breach. This is unacceptable since the purpose of liquidated damages is to compensate the Buyer for
damages that will be incurred, but cannot be determined. The Buyer must make a choice, to either include
a liquidated damages provision or to collect actual damages due to breach (which must be documented and
proven).
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i. Insurance.
The insurance provisions are consistent with guidelines from, or approved by, Project Risk Management.
Note that the Project Agreement and Services Agreement provide the following minimum levels of
insurance:
Project taking organization shall maintain Commercial General and Automobile Liability Insurance applicable
to the Services for not less than the following limits of liability:
POME Comments:
Compare the customer requirements to the insurance levels provided in Project Taking
Organization’s standard agreements. It is generally acceptable to agree to higher coverage
limits, but keep in mind that Project Taking Organization must be self-insured up to certain
amount of liability. Therefore, attempt to keep the coverage limits as low as possible. It is
Project Taking Organization’s desire to maintain flexibility to either insure or self-insure a
specific insurance coverage. If any issues arise, contact the Risk Management Department.
1. Information regarding the various types of coverage:
The Project Taking Organization Commercial General Liability insurance program must include
coverage such as products and completed operations, premises liability, contractual liability,
fire, legal liability and personal and advertising injury liability etc.
Project Taking Organization must maintain Automobile Liability Insurance. If there are
vehicles involved (newly acquired or leased) with a contract, then contact the Project Taking
Organization Risk Management Department and Fleet Department to schedule the appropriate
Automobile Liability Insurance coverage. Please note that Project Taking Organization is self-
insured for automobile physical damage.
Project Taking Organization maintains an “All Risk” property insurance program which also
affords coverage for Builder’s Risk (Construction All Risk/Erection All Risk).
Project Taking Organization maintains Workers’ Compensation and Employer’s Liability (which
includes occupational sickness or disease) as required by law. Project Taking Organization must
evidence the mandatory insurance coverage as required by the local laws utilizing the
Memorandum of Insurance (MOI) .The Project Taking Organization Insurance programs do not
maintain coverage for disability benefits or other similar benefit acts. Contact the Human
Resource Department for any issues related to these programs
2. Risk Management Guidance:
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a) Any request for the Customer to be granted “named insured”, “co-insured” or “joint-insured”
status on the Project Taking Organization insurance programs is to be avoided. Allowing the Customer
status as “named insured”, “co-insured” and “joint-insured” is unacceptable as this grants the same rights
to the Customer as Project Taking Organization maintains and increases insurance premiums and eroding
coverage for Project Taking Organization. These costs are allocated back directly to the individual business
units.
b) Providing a Customer “additional insured” status under the Project Taking Organization
Insurance programs is to be avoided as it may provide rights to defense and indemnity which may increase
insurance premiums and erode coverage for Project Taking Organization. In negotiating insurance
provisions, it should be emphasized that the Project Taking Organization programs contain contractual
liability provisions which may afford coverage for the liability of another party because of bodily injury or
property damage if Project Taking Organization agreed to assume that liability in a written contract, subject,
however, to the terms and conditions of the insurance programs. This offers protection to the Customer for
these liabilities, reducing the need for the “additional insured” status. If the Customer demands “additional
insured” status, then contact the Risk Management Department to discuss.
c) Any special insurance terms and conditions requested in the insurance section of a Contract
including “coverage on a per project basis”, “primary and non-contributory” or “cross liability” is to be
avoided. Project Taking Organization maintains significant policy limits thus eliminating the necessity of a
coverage on a “per project basis” which is generally required for smaller subcontractors. In regard to
“primary and non-contributory”, this clause makes the Project Taking Organization insurance program the
only policies that would respond to a claim even if Project Taking Organization is not solely liable. If the
customer insists on this requirement, then tie primary and non-contributory back to the indemnity
provisions. A “cross-liability” clause only applies when a Customer has been provided “additional insured”
status under a contract, otherwise it is not necessary.
d) Any Contract in which Project Taking Organization limits or waives the right (of insurers) of
subrogation is to be avoided. Subrogation allows an insurance company to substitute its rights for those of
its insured following a claim settlement to or on behalf of the insured. The reason is to pursue a negligent
party(s) for reimbursement of that claim payment. In most situations, the Project Taking Organization
insurance company will be paying first on behalf of the policyholder upon a claim and then seek to
subrogate against the party(s) actually liable, thus reducing the insurance costs and premiums.
e) Any language requesting or requiring that copies of the Project Taking Organization insurance
policies be provided to the Customer is unacceptable as these policies are confidential and proprietary.
Providing evidence of insurance is the common and preferred method for verifying the insurance programs
70
to Customers or other parties. The MOI which includes the “All Risk” Property, Commercial General Liability,
Automobile Liability and Workers’ Compensation insurance programs.
f) Avoid language that allows the Customer to determine “acceptability” of the Project Taking
Organization Insurance companies. Use the following wording ‘Project Taking Organization will utilize
insurance companies with ratings no lower than “A-, XII” by A.M. Best or equivalent rating agency.”
g) Project Taking Organization insurance companies are licensed in all States.
h) Project Taking Organization will endeavor to provide thirty (30) days notice of cancellation or
non-renewal to the Customer. Avoid providing notice from the insurance company of less than thirty (30)
days. Any language requiring additional notification conditions that are placed upon the Project Taking
Organization insurance programs such as “modification”, “alteration” or “diminution of limits” are impossible
to administratively manage and are to be avoided.
i) A request for issuance of specially worded endorsements under the Project Taking
Organization insurance programs is not acceptable. If special policy endorsements will be offered, contact
the Risk Management Department.
j) In the event that Project Taking Organization contracts the services of a subcontractor,
Project Taking Organization should ensure that the same indemnity and/or insurance provisions required in
the main Contract are passed on to the subcontractor in the Subcontract (flowed down).
k) If evidence of Professional Liability insurance is required in a contract, contact the Risk
Management Department
l) Any other insurance coverage requirements not specifically addressed that arise during a
contract negotiation (e.g. Environmental Liability), may be addressed by contacting the Risk Management
Department.
POME LIGHTER VEI0:
The Frog:
A operations manager was out walking in the countryside one day when a frog called out to him. He bent down, picked
up the frog and put it in his pocket. The frog called out again, saying, "If you kiss me I shall turn me back into a beautiful
princess, and I'll stay with you for a week as your mistress." The operations manager took the frog out of his pocket,
smiled at it, and put it back into his pocket. The frog called out once more, "If you kiss me and turn me back into a
princess, I'll stay with you for as long as you wish and do absolutely anything that you want". Again the Operations
manager took the frog out of his pocket, smiled at it and put it back. Finally, the frog demanded, "What's the matter? You
can turn me back into a beautiful princess, and I'll stay with you for ever and do anything you want. Why won't you kiss
71
me?" to which the operations manager replied, "Understand, I'm a operations manager. I simply don't have time for a
girlfriend, but a talking frog ....... that's cool."
j. Software Licenses.
Any software license agreements must be on standard Project Taking Organization forms.
POME Comments:
1. Project Taking Organization Intellectual Property (IP) counsel should review customer provisions
that do not meet the requirements of Project Taking Organization’s standards.
2. No modifications are allowed to the Project Taking Organization standard software licenses. Any
customer requests for changes to the software license must be reviewed and approved by IP counsel.
Failure to acquire IP counsel approval will result in the non-shipment of the software.
3. Project Taking Organization cannot agree to ownership of the software by the customer. The
customer is granted usage of the software under the conditions of the license agreement. Project Taking
Organization software usually contains third party protocol such as Windows NT which is under license to
Project Taking Organization.
4. Other unacceptable customer requests are:
a) ownership of the software in perpetuity
b) use of the software in perpetuity
c) the ability to make multiple copies
d) the ability to give the software to third parties
e) the ability to use the software in multiple locations
j. Patent Indemnity Contract Clause.
Any patent indemnities provided by Project Taking Organization should use Project Taking Organization’s
standard language. For any deviations, all of the following must be true (i) coverage must be limited to the
Patents and equipment manufactured by Project Taking Organization (ii) Project Taking Organization should
only be liable for direct damages, not consequential damages (iii) indemnity must relate to Project Taking
Organization equipment alone, not for any combination with other products or services and (iv) Project
Taking Organization must have the right to replace or modify alleged infringing equipment.
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POME Comments:
1. Rather than completely substituting Project Taking Organization’s standard clause for the
customer’s clause, first attempt to red-line the customer’s clause to comply with the above requirements.
This approach may avoid the customer involving its IP counsel. It is also acceptable to include protection
for copyright and other protected intellectual property rights if requested by the customer. IP counsel
should review customer provisions that do not meet the above parameters.
2. Acceptable modifications:
a) The Customer might insist that Project Taking Organization provide patent indemnity
coverage for third party equipment that is provided as part of Project Taking Organization’s overall scope of
work. Although this is non-standard, Project Taking Organization can accept this obligation, but the
acceptance must be limited to equipment actually provided by Project Taking Organization and not extended
to the equipment that already exists in the customer facility that is not Project Taking Organization
equipment.
b) The Customer might insist that Project Taking Organization remove the “as depreciated”
language in the remedy list. This change can be made, but acceptance increases Project Taking
Organization’s potential liability if this remedy becomes an option.
c) The Customer might insist that Project Taking Organization provide patent indemnity
coverage for all patent, copyright and intellectual property rights. Although this is non-standard and
increases the risk for Project Taking Organization, Project Taking Organization can accept this obligation.
3. Unacceptable modifications:
a) Customer requirements to defend the suit with their own counsel and have Project Taking
Organization reimburse for legal costs is unacceptable.
POME Prescribe
73
Q
Quitters never win,
and winners never
quit.
POME Prescribe
74
ADDITIONAL
CONTRACT
CONSIDERATION’S
FOR LARGE
PROJECTS
75
Additional contracting considerations for large projects:
For large projects the following additional terms should be reviewed to determine whether the contracts in
the contracting chain provide adequate protection against undue risk. Risk should be allocated to the party
in the best position to control the risk. Any terms that place risk on Project Taking Organization that is
beyond its control should be avoided.
a. Site inspection and acceptance clauses. Construction contracts typically require a contractor to
become generally familiar with the site of the project before providing a contract price. Sometimes the
owner or upstream contractor attempts to shift the entire risk of unforeseen site conditions to the
downstream contractor by disclaiming the accuracy of any information provided regarding the project site
and by requesting the contractor to perform an exhaustive site inspection. In most instances, this risk
shifting is not appropriate and may be unenforceable. Nevertheless, Project Taking Organization should
resist contract clauses that require more than general familiarity with the site. Project Taking Organization
should flow down to its subcontractors any kind of disclaimer or site inspection clause that it accepts in its
contract. Moreover, Project Taking Organization should insist on including in its upstream contract a clause
allowing for claims resulting from encountering undisclosed and unforeseen site conditions.
b. Flow-down/incorporation by reference. Most construction contracts contain a provision stating
that the lower tier contractor agrees to bind itself to the higher tier contractor to the same extent that the
76
higher tier contractor is bound to the prime contractor or owner. Often the scope of the flow-down clause is
too general. Any flow-down clause in Project Taking Organization’s contract with the prime contractor
should be narrowly tailored to include only those aspects of the work that fall within Project Taking
Organization’s own scope of work. In turn, Project Taking Organization’s downstream contracts should
contain a parallel flow-down clause so that Project Taking Organization does not create a gap between
Project Taking Organization’s performance obligations and those of its subcontractors. This is particularly
important when Project Taking Organization assumes design responsibility (e.g., in a performance
specification) that should be passed on to one or more subcontractors. Also, any contracts, schedules,
exhibits or other documents that are incorporated by reference in Project Taking Organization’s contract
should be obtained and studied carefully.
c. No-damages-for-delay. Owners often seek to include terms that prevent contractors from making
claims for additional compensation due to delays. These terms often state that an extension of time
constitutes the contractor’s exclusive remedy for delays beyond the control of the contractor. Although
such clauses are occasionally unenforceable (in specific jurisdictions where they have been outlawed or in
particular circumstances such as active interference by the owner), Project Taking Organization must
assume that a no-damage-for-delay clause will be enforced. If such a term cannot be avoided, the risk
associated with this provision should be taken into account in setting the contract price, and parallel
provisions should be included in downstream contracts.
d. As-directed clauses. Many subcontracts contain a clause requiring the subcontractor to perform its
work whenever, wherever, and in whatever sequence subcontractor is directed by the general contractor.
This type of “as-directed” clause is normally construed so as not to allow the general contractor to delay or
to hinder the subcontractor’s work in an unreasonable manner. However it is wise to avoid having this type
of language in Project Taking Organization’s upstream contract.
e. Written notice of claims. Most construction contracts require that all changes in the work be
ordered in writing before the work is performed. Often the contract further requires that the claimant
provide written notice to the owner or prime contractor within a specific time after occurrence of the event
on which a claim is based, or the claim is deemed waived. The purpose of a prompt notice requirement is
to permit the owner to investigate the validity of the claim early so that the owner can make meaningful
decisions in an effort to maintain control of the overall contract price. These requirements are generally
enforceable. Project Taking Organization should try to negotiate longer notice periods if the proposed time
77
periods seem unreasonably short under the circumstances of the project. It is also critical for Project Taking
Organization to include in its subcontracts provisions that require the subcontractors to provide Project
Taking Organization with the required notice several days before the deadline set forth in Project Taking
Organization’s upstream contract.
f. Termination. From time to time it may become necessary to terminate a construction contract.
Sometimes the termination is for an event of default that has not been cured after proper notice has been
given. At other times the owner or prime contractor may wish to terminate the contract for convenience.
Different standards and different formulas for determining Project Taking Organization’s compensation and
that of its subcontractors should apply to these circumstances. Contract termination, either of Project
Taking Organization’s upstream contract or of Project Taking Organization’s subcontracts, is fraught with
danger. In contract negotiations, avoid accepting termination for cause clauses based on anything other
than the equivalent of a Project Taking Organization insolvency. Whenever termination is threatened or
becomes a real possibility, legal counsel should be consulted.
g. Right to repair. When Project Taking Organization is faced with a claim of defective work, the law
implicitly gives Project Taking Organization the right to receive notice of the alleged defect and a reasonable
opportunity to remedy it. If the claimant proceeds to make repairs without notice and an opportunity to
cure, the claimant could be deemed to have waived its claim. However, Courts and arbitrators do not
uniformly apply this rule of law. Consequently, it is important that Project Taking Organization request that
a right to receive notice and to repair defects be included in its contract as a prerequisite to making a defect
claim.
h. Choice of law and venue. Project Taking Organization should insist that every U.S. construction
contract include a choice of law provision designating that the law of the jurisdiction in which the project is
being built will govern the relations between the parties. Some states have passed legislation requiring that
the law of the place of the project be applied, but many have not. If the law of a jurisdiction other than the
place of the project is designated in the contract, this creates uncertainty about how many important issues
(e.g., mechanic’s lien rights, bond rights, contractor licensure, etc.) will be decided. Similarly, Project
Taking Organization should resist forum selection clauses that designate a jurisdiction other than the state
in which the project is located. The only exception is for projects in which Project Taking Organization is
able to select its own forum, such as arbitration in a location designated by Project Taking Organization. As
with choice of law provisions, legislation in some states may bar enforcement of forum selection clauses. In
78
any case, Project Taking Organization should ensure that choice of law and choice of venue provisions are
consistent in upstream and downstream contracts.
i. Alternative dispute resolution. Alternative dispute resolution procedures such as mediation and
arbitration are commonplace in construction contracts. In most instances it is in Project Taking
Organization’s best interests to have disputes decided in arbitration, where an arbitrator with experience in
construction matters will decide the case, rather than court, where a jury or judge who may have no
knowledge of construction norms and who, in the case of a jury, may be biased against Project Taking
Organization as a large, out-of-state corporation with deep pockets will decide the case. Contract managers
should be wary of “dispute review boards” or other owner-controlled dispute resolution mechanisms. This
type of forum often places unduly burdensome obstacles in front of a claimant and may put Project Taking
Organization’s fate in the hands of an unfriendly decision maker. Project Taking Organization should seek
to have disputes decided in traditional arbitration or in court, rather than in an owner-controlled dispute
resolution mechanism. If that is not possible, Project Taking Organization should expressly require that all
subcontractors and suppliers agree to be bound by the same process.
POME Prescribe
R
Read, study and learn
about everything
important in your life.
POME Prescribe
79
80
POME LIGHTER VEI0:
The Tire Swing
81

82
TERM’S AND
CONDITION’S
83
Terms and Conditions:
To assist a company in evaluating inquiries and preparing proposals and contracts, a checklist of
contract considerations and provisions can be helpful in the evaluation of each proposal and form of
contract to insure that appropriate safeguards are incorporated. This checklist is also used for sales
letters and brochures that may promise or represent a commercial commitment. Its primary purpose is
to remind users of the legal and commercial factors that should be considered in preparing proposals
and contracts. Table below shows the typical major headings that would be considered in a checklist. A
key word concept also provides an excellent checklist of the key issues to be considered. It will be
useful as a reminder in preparation for contractor-client agreement discussions.
Table: TYPICAL MAIN HEADING FOR A CONTRACT PROVISIONS CHECKLIST
I. Definitions of contract terms
II. Definition of project scope
III. Scope of services and work to be performed
IV. Facilities to be furnished by client (for service company use)
V. Changes and extras
VI. Warranties and guarantees
VII. Compensation to service company
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VIII. Terms of payment
IX. Definition of fee base (cost of the project)
X. State sales and/or use taxes
XI. Taxes (other than sales use taxes)
XII. Insurance coverages
XIII. Other contractual provisions (including certain general provisions)
XIV. Miscellaneous general provisions
The following contract provisions will minimize risk, and should be included in proposals and contracts:
Scope of services and description of project
Contract administration
Terms of payment
Client obligation and supplied items
Warranties and guarantees
Liability limitation and consequential damages
Indemnity
Taxes
Patent indemnification
Confidential information
Termination provisions
Changes and extras
Assignments
Delays, including force majeure
Insurance requirements
Arbitration
Escalation (lump sum)
Time of completion
Because of the variations among proposals and contracts, it is not feasible to prepare material
specifically suited for each situation. It is also not practical to establish a standard form of contract or
standard provisions to be included in a contract.
However, an increasing number of clients have certain set ideas as to the content of the proposal and
contract. Therefore, it would be extremely helpful to develop a standard list and file of draft contract
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clauses that could be used with some modification for each bid. In addition, because clients
occasionally ask for a "typical" contract, the draft clauses can be combined into a "typical" or "draft"
contract that can be given to a client. Even though this "typical" contract agreement may not be
sufficient for every situation, it can be a starting place. It would also be valuable to maintain a
summary of commercially oriented company policies for reference in reviewing a client's contract
provisions.
Negotiating for the type of contract is a two-way street. The contractor desires a certain type of
contract to reduce risk. The client desires a certain type of contract to reduce costs. Often the client
and contractor disagree. It is not uncommon in industry for prospective projects to be canceled
because of lack of funds, disagreements in contract negotiations, or changing of priorities.
Although all contracts can be somewhat different, there are certain contract terms that are among the
most commonly included in Projects contracts. Not all of these provisions will be included in every
contract, and most contracts will include additional provisions that relate specifically to their particular
subject matter. The following checklist is, however, a basic and general POME guide as to what
provisions it may be important to include, or at least consider, in the Project contracts that you enter
into.
Identity of the parties
• Individuals or Projects entities?
• If Projects, what type? (partnership, corporation, etc.)
• Name of person signing on behalf of the business
• Signer's official title
• Does he or she have authority to bind the Projects?
Addresses of the parties
Purpose(s) of the contract
Underlying assumptions
Contract terms
• In general
• Duties of each party
• Rights of each party
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• Relevant dates
• Relevant prices or other dollar amounts
• Relevant quantities
• Payment terms
• Lump sum, COD, installments?
• Payment due dates
• Taxes
• Interest
• Late fees
Warranties
Disclaimers
Limitations on liability
Liquidated damages
Confidentiality provision
Indemnification agreement
Default
Arbitration clause
Governing law
Venue of lawsuits involving the contract
Statement that contract constitutes entire agreement
Severability of individual provisions
Signatures of authorized signatories
Notarization
Terms and conditions in project/ product/service based operations:
Normally, term reflects that it may/may not happen, but the condition says that it must happen,
unless there is a formal deviation.
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Note: The clauses, mentioned below are only recommended, which would be apt full depends upon
the ethics compliances of any organization, as per POME visualization. But, is not mandatory that it
would be always be sanctified and could be amended as per the business requirements.
Acceptance of the Product:
The standard product acceptance creates a reasonable set of commercial rules to govern acceptance
by the customer of products sold by Project/ Product/ Services Organization. These rules simplify
contract administration, particularly for contracts involving numerous deliveries.
Without an acceptance clause, it may be unclear when an acceptance has taken place. While a buyer
has a legal duty to accept products, the Buyer is afforded a reasonable opportunity to inspect and
reject non-conforming products. Acceptance occurs if the Buyer:
• Fails to make an effective rejection within a reasonable time period;
• Acknowledges that the products conform to the contract; or
• Acts in any way inconsistent with the seller's ownership.
The standard Acceptance clauses reduce the uncertainty associated with acceptance by defining the
acceptance period. This is not intended to reduce the Buyer's inspection rights. Instead, it creates a
reasonable, fixed time period on which the parties can rely to manage their obligations, and it reduces
the likelihood of disputes over whether an acceptance occurred.
Buyers typically seek to expand the acceptance period or leave it undefined. This gives them more
leverage to return products without paying for them. The act of "acceptance" is important to Project/
Product/ Services Organization for two main reasons:
• Project/ Product/ Services Organization is not entitled to payment for rejected product - so
acceptance is critical for revenue recognition and collections; and
• After acceptance (with the exception of latent defects), the Buyer's remedy for non-conforming
product is under the terms of the standard product warranty. The product warranty typically limits
Project/ Product/ Services Organization's liability and the Buyer's remedies under the contract.
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Commercial Sales Agreement Standard Terms & Conditions
The Project/ Product/ Services Organization contracting community must develop a model set of
standard contracts clauses, applying across the Project/ Product/ Services Organization businesses, for
use in commercial sales agreements with Project/ Product/ Services Organization's customers. For
each subject addressed, the standard clause addresses issues that are important to the Organization
and provide Project/ Product/ Services Organization’s preferred language. This model set of terms and
conditions is to be used by Organization's Strategic Business Groups (SBG's) as the basis for the
standard provisions in commercial sales contracts (which are frequently found on the back of the
Organization customer quotation and order acknowledgement forms) as well as when negotiating
customer form terms. Each SBG will need to supplement the model set of terms and conditions with
its own business specific clauses, if any.
Deviations or changes from these model contract clauses must be in accordance with respective
organizations SBG specific policies and processes.
Sales Agreement Term & Condition Standard Assignment
An assignment of a contract is a transfer of the benefits of a contract from one party (the assignor) to
another individual or entity (the assignee) that was not a party to the original contract.
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In certain jurisdictions the general principle of assignment (subject to certain conditions) is that the
benefit of a contract may be freely assigned to a third party without the consent of the other party.
However, the burden of an agreement cannot be assigned without a “novation agreement” signed by
the existing parties and the new party. A key exception to the general principle is that rights under a
personal contract may not be assigned because in such contracts it makes a difference to the non-
assigning party who performs it.
Usually parties do not want the other party to be able to freely assign a contract and so the general
principle of law may be excluded by contract terms. For example, a buyer may select a seller based
on its unique skills and does not want an unknown or unapproved seller to be the one to perform the
contract.
The standard assignment clause is intended to satisfy a customer's desire to control assignment, while
providing the Organization with one critical exception: Project/ Product/ Services Organization is
permitted to assign the contract in connection with the sale of the product line or business. This is
very important to the Organization. The value of the business being sold may be reduced if an
acquiror cannot take assignment of all of the contracts. Buyers generally are willing to accept this
exception because the third party assignee will also own all of the assets associated with the product
line or business.
Audit
Overview:
Customers may request the right to audit specific aspects of Project/ Product/ Services Organization’s
operations to ascertain that its contract is being performed in accordance with its terms. While such
requests may appear reasonable use caution to ensure that the customer receives only contract-
specific information as will reasonably evidence performance in accordance with applicable terms.
Examples of audits include quality-control to confirm contracted quality; a review of inventory intended
for those products for which the customer is paying; or a confirmation of direct labor hours to make
certain they are in line with hours charged under time and material contracts and cost type contracts.
Under no circumstance, however, should a customer gain access to company-sensitive information
including specific manufacturing techniques, proprietary processes and controls, internal financial data,
etc. Additionally, all audit rights should be limited in scope to non-proprietary areas of the
Organization's facilities and should be exercised only during normal business hours and with proper
pre-notification.
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When audit rights are provided for in a contract, the Audit clause should provide that all audit rights
and findings be:
• limited in scope and fully defined as to what exactly can be audited and only to determine
compliance with the terms of the agreement
• pre-coordinated between the parties
• completed during normal business hours
• restricted to non-proprietary areas only
• held in confidence between the parties with no right of the buyer to disclose such findings outside
of their own company
• conducted a maximum of only once per year at the auditing party’s sole expense for a period no
greater than the preceding 24 months, this period not to precede the start date of the contract or
end date of any prior audit and not to exceed the end date of the contract
• if addressed, any record retention period should not exceed the agreed upon audit period
Audits involving Project/ Product/ Services Organization’s financial records require use of an
independent industry approved third party accounting audit organization to conduct the audit in
accordance with the agreed to limited terms of the audit rights as stipulated in the contract.
Change in Control
Overview:
Change in Control clause sets out the contractual consequences of a change in ownership, control, or
management of one of the parties to a contract. A Change in Control clause typically allows a buyer to
terminate a contract if the ownership, management, or control of the seller changes. A buyer may
have a genuine concern regarding the possibility or effect of a change in control of its supplier. A
change in control conceivably could impact the supplier's ability to reliably perform or result in a
competitor owning the supplier. The buyer avoids these risks with a Change in Control clause.
Change in Control language may be proposed as a stand-alone clause or embedded in a termination
clause.
As a large public company, Project/ Product/ Services Organization's ownership, management, and
control can change at any time. In fact, such changes routinely occur in large public companies
without any effect on the companies' ability or willingness to meet its commitments. Including a
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typical Change in Control clause presents a risk to the Organization because contract termination can
result in a substantial financial loss.
A Change in Control clause should be strongly opposed in negotiations. If unavoidable, a Change in
Control clause must be approved by the SBU Director of Contracts or legal counsel. The standard
clause (provided below) is an example of a clause that protects Project/ Product/ Services
Organization's interest by:
• Limiting the types of events that constitute a change in control;
• Requiring an actual detriment to result from the change; and
• Entitling Project/ Product/ Services Organization to compensation.
The standard clause is drafted as one-way, and does not apply to a change in the control of the buyer.
Whether Project/ Product/ Services Organization is best served by making the clause mutual or
seeking an alternative concession is left to the judgment of the deal team and their legal counsel.
Project/ Product/ Services Organization recommended Standard Clause:
Change in Control
Buyer may terminate this Agreement without cause upon 90 days written notice to Seller upon a
Change in Control that results in a transfer of this Agreement to a direct competitor of Buyer and a
material adverse impact on Buyer's interest in this Agreement. If Buyer terminates Seller under this
section, Buyer will pay Seller a termination fee equal to, as per the payments sufficient to mitigate the
financial impact. The termination fee will be due to be kept within 30 days of receipt of invoice from
Seller. “Change in Control” means: (1) a merger, consolidation, or reorganization involving all or
substantially all of the assets of Seller that results in a change in the effective control of Seller; or (2)
the acquisition of beneficial ownership or a controlling interest in Seller; or (3) sale or other disposition
of all or substantially all of the common stock of Seller. But a “Change in Control” does not include an
assignment or transfer permitted by any other section of this Agreement. Seller will notify Buyer of a
Change in Control within 10 days after the Change in Control.
Buyer Caused Delay:
If a Buyer delays Project/ Product/ Services Organization’s performance of its obligations under an
agreement, Project/ Product/ Services Organization’s performance and cost of delivery may be
adversely affected. In order to protect Project/ Product/ Services Organization from such adverse
consequences, contracts should include a clause enabling Project/ Product/ Services Organization to
make adjustments to order schedules and/or price in the event of Buyer-caused delay.
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Project/ Product/ Services Organization recommended Standard Clause:
Buyer Caused Delay. Seller should not be liable for any delays or increased costs caused by a failure
of Buyer including, but not limited to: delay in providing information, delay of other Buyer deliverables
or delay in providing goods or services by Buyer designated suppliers. In the event of a non force
majeure Buyer-caused delay, the price and other affected terms will be adjusted to reflect Seller’s
increased costs and other adverse impacts associated with such delay. In addition, if delivery of goods
or services is delayed due to the acts or omissions of Buyer or Buyer-designated suppliers, Seller may
store the goods at Buyer’s risk and expense and may invoice Buyer as if there had been no delay in
delivery.
Audits - Scope of Access for Customer Audits of Project/ Product/ Services
Organization:
This term policy is established to provide guidance regarding the scope of information Project/
Product/ Services Organization will provide to customers who are granted audit privileges to Project/
Product/ Services Organization financial information in a contract. Contract terms should clearly
reflect the scope of audit privileges to be allowed.
In some instances, Project/ Product/ Services Organization contracts include Audit privileges for our
customer. Audit privileges normally require that access to the books and records of the company
and/or its various operating units are provided to our customer. Prior to and after contract award,
representatives of the customer may visit a Project/ Product/ Services Organization facility to perform
their audit responsibility under the terms of the contract in question. It is the policy of Project/
Product/ Services Organization complying with contractual commitments that establish the customer's
right to audit certain information.
For commercial customers, audit rights are usually part of the negotiated agreement, and can vary
significantly from contract to contract. This policy defines the maximum access that Project/ Product/
Services Organization considers appropriate for commercial customers.
This policy is not intended to limit a Project/ Product/ Services Organization operating unit from
disclosure of information or records, which will be determined on a case-by-case basis, depending on
the contract specific reasons for such disclosure.
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Bailment (Consignment and Loan) of Project/ Product/ Services Organization
Property:
Bailment, loan or consignment of any Project/ Product/ Services Organization property requires prior
approval from the SBU Vice President, Contracts. All bailment (including consignment or loan) of
Project/ Product/ Services Organization property will be accomplished under a written agreement,
which establishes the rights and obligations of the parties. The Project/ Product/ Services Organization
standard bailment template must always be used for these types of transactions since it is Project/
Product/ Services Organization hardware that is involved.
Project/ Product/ Services Organization Credit and Treasury Services (CTS) must approve any credit
terms included in the agreement.
Whenever Project/ Product/ Services Organization Property is bailed (consigned or loaned) the SBU
must track that property using internal SBU sales release, sales order or other standard SBU process
for entering orders into their order management system so that appropriate contracts and financial
tracking of the property can be made.
As a condition of the bailment (loan or consignment) Project/ Product/ Services Organization must
take a security interest in the bailed Project/ Product/ Services Organization property and require the
customer to execute all such documents necessary for Project/ Product/ Services Organization to
perfect its security interest under the Uniform Commercial Code. A decision not to perfect a security
interest must have the prior approval of the SBU office of the Vice President, Contracts or if none the
SBU General Counsel.
Credit Terms:
Project/ Product/ Services Organization policy is that Credit and Treasury Services (CTS) is the only
department that should officially recommend credit terms for any customer. Prior to offering any
credit terms to a customer, or including such terms in proposals or contracts, those credit terms must
be recommended in advance by CTS and approved in accordance with Corporate Treasury policy. The
Corporate policies referenced below provide complete guidance on the process to obtain approved
credit terms, including "standard" net 30 day terms, baseline terms (terms specific to countries and/or
customers), extended credit terms (longer than 30 days) and customer financing.
Customer Financing:
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The objective of Corporate Treasury and CTS is to work with the business units to collectively satisfy
customer requirements for financing and pursue the corporate growth initiatives while meeting cash
flow goals and corporate policy.
Any need or request for innovative financing for customers must be handled in the same manner as
with extended credit terms, that is, through CTS. It is mandatory that unit Finance be closely involved
in these matters to ensure that the effect of such agreements are properly reflected in business unit
plans and analyzed in accordance with Corporate.
Contract Review:
Contract review is the activity performed to (1) ensure that Project/ Product/ Services Organization
knows and understands the customer requirements set out in any Request for Quotation, extended in
any Project/ Product/ Services Organization proposal, or tendered by Project/ Product/ Services
Organization pursuant to a bidding process and (2) that Project/ Product/ Services Organization can
meet those requirements. corporates must have detailed processes for contract review prior to
issuance of any sales related proposals and bids; and before the acceptance of any resulting
agreements or contracts. Contract review will also ensure that all agreements or contracts meet the
requirements of a site's third party ISO certification audit agency. These processes must as a
minimum ensure that the following concerns are addressed:
•Contract requirements are identified and defined (known and understood)
•Contractual provisions extended or agreed upon are in accord with corporate policy
•Differences between the Project/ Product/ Services Organization bid or proposal and the customer
requirements (customer’s counter-offer purchase order) are resolved in writing
•The SBU has the capability to comply with the contractual requirements
•Contract documentation and records of contract reviews are maintained
•Legal and risk assessment issues are reviewed and resolved
Bid, Proposal and Contract Approval Process:
SBU's must have documented processes for approving sales proposals and contracts submitted to or
proposed to be entered into with customers. These processes must ensure that adequate business,
contract, financial, legal and technical reviews have been conducted and appropriate approvals are
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obtained prior to the submittal of a sales related proposal, bid, offer or contractual agreement with a
customer. These processes must include specific guidance as to what must be reviewed and who must
approve specific elements of bids, proposals and contracts and how records must be kept. Approvals
must conform to the Corporate Schedule of Executive Approvals (SEA, also known as the Authority
Matrix) and associated SEA delegations within the SBU.
Escrow:
Occasionally Project/ Product/ Services Organization may be requested to place into escrow with a
third party company a copy of the software supplied (usually the source code) and other relevant
documentation used on a project. The buyer's intent is to make the software/documentation available
to it in the event that Project/ Product/ Services Organization becomes bankrupt or otherwise fails to
fulfil its contractual obligations or obligations regarding maintenance of the software code. Project/
Product/ Services Organization Policy is not to agree to any such escrow requirements. The Project/
Product/ Services Organization position on this issue is that Project/ Product/ Services Organization is
a mature and stable company that represents an extremely low risk for the type of situations that
might support this type of action and the costs of such escrow arrangements do not justify them.
No escrow arrangements may be established with any party without the prior documented approval of
the SBU office of Vice President, Contracts or if none the SBU General Counsel. Such approval must
include the prior approval of all the details of the escrow arrangement including the specific contract
language involved.
De-booking of Contract Obligations:
Contracting functions must have specific policies in place detailing the requirements for the de-booking
of previously booked business. These policies must include SBU specific guidance regarding
management notification and where appropriate approval. If the de-booking is the result of a contract
breach or claim from a Project/ Product/ Services Organization customer, the SBU office of the Vice
President, Contracts and SBU General Counsel must be advised of all the facts regarding such breach
or claim in accordance with the respective corporate Claims Policy.
Export Compliance:
This policy must addresses all of the following areas:
A. Corporate International Trade Compliance Leadership
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B. Centers of Excellence to Support Business Units
C. Export and Import Control Coordinators (or International Trade Compliance Coordinators) at
each Site
D. Employee Commitment to International Trade Compliance
E. Implementation Procedures at Business Units
F. Identification of Applicable Laws
G. Ban on Sales to Prohibited Countries
H. Procedures for Hiring and Assignment of Foreign Nationals and Proposed Site Visits by Foreign
Nationals
I. International Trade Compliance Audits
J. Special Procedures for Compliance with Customs Regulations for Permanent Import of Products
and Materials
Non-disclosure and Confidentiality Agreements:
When Project/ Product/ Services Organization confidential information is to be disclosed to another
party, Project/ Product/ Services Organization and the other party must enter into a non-disclosure or
confidentiality agreement to safeguard against unauthorized disclosure. Project/ Product/ Services
Organization’s business partners may also request that Project/ Product/ Services Organization enter
into a similar agreement when the business partner’s confidential information is to be disclosed to
Project/ Product/ Services Organization.
The form of agreement and the applicable policy vary with the subject matter of the confidential
information, the context in which the information is being disclosed.
The two major types of agreements and the general policy governing those agreements are as follows:
(1) Non-disclosure Agreements (“NDA”s) Governing the Disclosure of Intellectual Property and
Other Confidential Commercial Information. The Project/ Product/ Services Organization policy
regarding NDAs in this context is set forth below. Model forms for disclosure by Project/
Product/ Services Organization, disclosure to Project/ Product/ Services Organization.
(2) Confidentiality Agreements (“CA”s) Governing Disclosure in Connection with Mergers,
Acquisitions and Divestitures. Project/ Product/ Services Organization policy regarding CAs is
the responsibility of the Deputy General Counsel, Corporate & Finance, and Corporate Business
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Development. SBU General Counsels are responsible for negotiating and executing CAs in
consultation with the Deputy General Counsel, Corporate & Finance (or his/her designees), and
the Corporate Business Development function. The policy governing CAs, including but not
limited to terms, retention and ownership, is in the sole discretion of the Deputy General
counsel, Corporate & Finance. No one is authorized to commence negotiations of the terms of a
CA or to execute a CA without the express written approval of the Deputy General Counsel,
Corporate & Finance or the authorized representative of Corporate Business Development. No
exceptions.
Guidance/selected terms and conditions.
Non-solicit Provisions. The other party may request that Project/ Product/ Services Organization
agree not to hire certain of the other party’s employees for a certain period of time after the disclosure
of confidential information. Non-solicit provisions are generally inappropriate for an NDA, unless a
specific necessity to protect specific key employees is identified. Non-solicit provisions must be
approved by the SBU General Counsel. No exceptions. Project/ Product/ Services Organization does
not request non-solicit provisions in conjunction with the execution of an NDA.
Stand-stills on Investment. The other party may request that Project/ Product/ Services
Organization agree not to take an ownership position in the other party for a certain period of time
after the disclosure of confidential information. Stand-stills on investment are generally inappropriate
for an NDA. If requested by the other party, a stand-still on investment must be approved by the SBU
General Counsel in consultation with the Deputy General Counsel for Corporate and Finance or his/her
designee. No exceptions. Project/ Product/ Services Organization does not request stand-stills on
investment in conjunction with the execution of an NDA.
Definitions. All NDAs must include a specific description of the topic of the agreement as a whole,
including generic types of information to be disclosed and examples, if possible, and a specific
description of the range of uses of the information. This requirement is particularly important because
many NDAs involve the exchange of confidential information by or to competitors or near-competitors.
No exceptions.
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Subject Matter. If the other party is a competitor, a potential competitor, or could reasonably be
considered to be a competitor, the exchange of information may not include cost or pricing information
or other competitively sensitive information that could be used by either party to disadvantage other
competitors or customers. The exchange of information regarding individual customers who may be
targeted by Project/ Product/ Services Organization and the other party is prohibited. No exceptions.
All doubts must be resolved by the SBU General Counsel prior to disclosure.
Letter of Intent:
In some instances, it may be appropriate for Project/ Product/ Services Organization and a customer
to establish in writing a basic understanding of their intentions regarding a potential business
transaction. A letter of intent can be used to identify key issues, provide guidelines or ground rules for
continued discussions or negotiations or similar considerations typically aimed at reaching a definitive
business agreement. Letters of intent can be used to establish a basic understanding of the parties.
Contrasted to a Letter of Contract, letters of intent are generally non-binding unless they specifically
identify certain provisions as binding. A letter of intent will usually contain a provision that states that
its terms are subject to the execution of a definitive agreement.
As the objective of a letter of intent is likely to set forth the party's understanding of the scope, price,
terms and schedule applicable to a specific opportunity, a standard template is not used. In general,
the more detail that can be included in the letter of intent, the more helpful it is in facilitating a final
formal contractual agreement between the parties.
Elements of a letter of intent that are normally considered binding and which should be identified as
such include:
• Confidentiality
• Non-Solicitation of employees
• Both parties covering their own expenses
• Exclusivity
• Penalty provisions associated with not proceeding
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Such clauses when included need to have specific language to clearly show the intent that these
elements are to be binding.
A non-binding letter of intent should clearly state that it is non-binding (with the exception of any
specifically binding provisions.)
When it becomes necessary to use a letter of intent the office of the SBU Contracts, Vice President or if
none the SBU General counsel must be contacted to assist in the drafting of the letter and the
approval of the letter before it is provided to any customer or potential customer. When a letter of
intent is provided to Project/ Product/ Services Organization from the customer, approval for
acceptance of the letter must be obtained from the office of the SBU Contracts, Vice President or if
none the SBU General Counsel prior to accepting the letter.
In no case must a Letter of Intent be used to book an order. However, in many instances, a
letter of intent can be used to engage the customer and therefore expedite a bookable
contract.
Letter of Contract:
Occasionally it may be appropriate to enter into a sales transaction with a customer prior to the time
at which the customer may provide a purchase order for the work to be performed. Typically the
conditions involved are associated with protecting lead-time because the customer's administrative
time to issue an order is substantial enough that waiting could negatively impact performance dates.
In these situations it is likely that the customer wants Project/ Product/ Services Organization to begin
work and Project/ Product/ Services Organization requires a binding commitment from the customer
prior to doing so.
To accommodate these circumstances a Letter of Contract can be utilized. A Letter of Contract is
designed for the typical situation where Project/ Product/ Services Organization and another party
want to establish a basic agreement in a binding legal document for a sales transaction. Project/
Product/ Services Organization must develop a standard form Letter of Contract for use in these
situations. A Letter of Contract can be written to contractually obligate the parties to the entire project
or can be limited to a portion of the project, such as, the Engineering Front End loading. The exact
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details of the portion to be booked using a Letter of Contract must be clearly and completely spelled
out in that Letter of Contract. In no case can a Letter of Contract be used to book an entire project
unless the entire project is clearly identified in that Letter of Contract and agreed to by both parties.
A Letter of Contract is not substantially the same as a Letter of Intent. A Letter of Intent
must not be used to book an order.
Licensing Agreements / Technology Transfer:
This implements and applies to the transfer of any rights to intellectual property (patents, copyrights,
software, trademarks, know-how, and other proprietary technology) owned or to be controlled by
Project/ Product/ Services Organization.
The following transactions are specifically covered by this Policy:
• Licenses to customers covering the use of Project/ Product/ Service Organizations
intellectual property hat are part of a sale of a product or system.
• Licenses to suppliers for the use of Project/ Product/ Service Organizations intellectual
property to produce a part or system
• Licenses to third parties for the use of Project/ Product/ Service Organizations
intellectual property to repair or maintain.
• Software Licenses to third parties of software developedin whole or in part by Project/
Product/ Service Organizations intellectual property
• Divestures of businesses or product lines
• All other transactions in which the transfer of intellectual property rights is a significant
element of the transaction.
Surety Bonds:
On occasion, Project/ Product/ Services Organization is required to provide a surety bond,to a
prospective customer as a condition of submitting a proposal (e.g., a bid bond) or to a customer in
accordance with a requirement in Project/ Product/ Services Organization’s contract with that customer
(e.g., a performance bond, payment bond, labor and material bond, warranty bond, maintenance
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bond, and the like). All bonds must be obtained through the Project/ Product/ Services Organization
Risk Management function or through a broker authorized by Risk Management.
In addition, since obtaining a surety bond may involve substantial cost to Project/ Product/
Services Organization, all costs associated with a surety bond must be determined in advance
and included in the estimate of the contract cost applicable to any agreement/proposal
containing the requirement to provide such a bond.
Taxes and Duties:
A. The following recommended clause to be included in all Project/ Product/ Services Organization non-
cross border (or that will not become cross border) sales contracts and cross border sales contracts
that are only for the sale of goods:
Taxes:
Seller’s pricing excludes all taxes (including but not limited to, sales, use, excise, value-added, and
other similar taxes), duties and charges. Buyer is responsible for all taxes, duties and charges
resulting from this Agreement or as a result of Seller’s performance under this Agreement, whether
imposed, levied, collected, withheld, or assessed now or later. If Seller is required to impose, levy,
collect, withhold or assess any taxes, duties or charges on any transaction under this Agreement, then
in addition to the purchase price, Seller will invoice Buyer for the taxes, duties, and charges unless at
the time of order placement Buyer furnishes Seller with an exemption certificate or other
documentation sufficient to verify exemption from the taxes, duties or charges. This clause will
survive expiration or any termination of this Agreement.
B. The following clause should be included in all Project/ Product/ Services Organization cross border
transactions that include anything other than just the sale of goods:
Taxes:
Seller’s pricing excludes all taxes (including but not limited to, sales, use, excise, value-added, and
other similar taxes), duties and charges. Buyer is responsible for all taxes, duties and charges
resulting from this Agreement or as a result of Seller’s performance under this Agreement, whether
imposed, levied, collected, withheld, or assessed now or later. If Seller is required to impose, levy,
collect, withhold or assess any taxes, duties or charges on any transaction under this Agreement, then
in addition to the purchase price, Seller will invoice Buyer for the taxes, duties, and charges unless at
the time of order placement Buyer furnishes Seller with an exemption certificate or other
documentation sufficient to verify exemption from the taxes, duties or charges. If any taxes are
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required to be withheld from amounts paid or payable to Seller under this Agreement, (a) the amount
will be increased so that the amount Seller receives net of the taxes withheld equals the amount Seller
would have received had no taxes been required to be withheld, (b) Buyer will withhold the required
amount of taxes and pay the taxes on behalf of Seller to the relevant taxing authority in accordance
with applicable law, and (c) Buyer will forward proof of withholding sufficient to establish the
withholding amount and recipient to Seller within 60 days of payment. In no event will Seller be liable
for taxes paid or payable by Buyer. This clause will survive expiration or any termination of this
Agreement.
Intellectual Property Indemnification:
An intellectual property indemnification clause protects Project/ Product/ Services Organization if a
supplier’s goods or services are alleged or found to infringe the intellectual property rights of a third
party. The supplier (the indemnitor) is required to pay any costs incurred by Project/ Product/
Services Organization or its customers (the indemnitees) in connection with the defense of the claim
and any settlement or judgment. In addition, if Project/ Product/ Services Organization is enjoined
from obtaining the goods or services in question from supplier, supplier is required to provide Project/
Product/ Services Organization with alternative, noninfringing goods or services. When Project/
Product/ Services Organization buys goods that are incorporated into a Project/ Product/ Services
Organization product or licensed or sold on a stand-alone basis as part of Project/ Product/ Services
Organization’s product portfolio, it is critical that Project/ Product/ Services Organization obtain from
its suppliers adequate protection for Project/ Product/ Services Organization and Project/ Product/
Services Organization’s customers if the goods do or are alleged to infringe third party intellectual
property rights.
Policy & Guidance:
An intellectual property indemnification clause must be included in all sourcing agreements.
Standard Recommended Clause:
Intellectual Property Indemnification
For Goods provided under this Purchase Order, Supplier will, at its expense, defend and indemnify
Indemnitee from and against any and all loss, cost, expense, damage, claim, demand, or liability,
including reasonable attorney and professional fees and costs, and the cost of settlement,
compromise, judgment, or verdict incurred by or demanded from Indemnitee arising out of, resulting
from, or occurring in connection with any alleged: (a) patent, copyright, or trademark infringement;
(b) unlawful disclosure, use, or misappropriation of a trade secret; or (c) violation of any other third-
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party intellectual property right, and from expenses incurred by Indemnitee in defense of such suit,
claim, or proceeding if Supplier does not undertake the defense thereof. Supplier will have the right to
conduct the defense of any such claim or action and, consistent with Indemnitee's rights hereunder, all
negotiations for its settlement. But in no event will Supplier enter into any settlement without Project/
Product/ Services Organization’s prior written consent, which will not be unreasonably withheld.
Indemnitee may participate in a defense or negotiations to protect its interests. If any injunction or
restraining order is issued, Supplier will, at its expense, obtain for Indemnitee either the right to
continue using and selling the Goods or replace or modify the Goods to make them noninfringing.
Approved Alternate Clause Language:
The last sentence may be deleted if there is a standard survival clause in the final agreement terms
that calls for the survival of this clause.
If the Supplier insists that Project/ Product/ Services Organization indemnify Supplier when the
infringement results from Supplier’s compliance with Project/ Product/ Services Organization’s
specifications or designs, the following additional language is acceptable:
Project/ Product/ Services Organization will defend, indemnify and hold harmless Supplier to the same
extent and subject to the same restrictions set forth in Supplier’s indemnification obligations for any
suit, claim or proceeding against Supplier based on a claim of infringement which could not have been
asserted but for Supplier’s exclusive compliance with Project/ Product/ Services Organization designs
or specifications.
Supply Chain Security:
In the wake of international terrorism many governments are enacting voluntary programs intended to
address security issues relating to imported goods. While the participation requirements may vary
among countries, the basic premise is largely the same: to build relationships between the
government and importers on a cooperative basis to strengthen and improve overall international
supply chain and country border security. The benefits of participation, which may vary among the
different countries’ programs, could include (a) reduced border delay times, (b) priority processing for
import inspections, (c) government assistance to enhance participants’ supply chain security, (d)
access to supply chain security training offerings, and (e) the ability to participate in certain special
import programs. Because this issue is of great importance to Project/ Product/ Services Organization,
Financing, Banking and Cash management:
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I. For this policy statement, the terms "financing, banking and cash management activities"
include, but are not necessarily limited to the following:
a. Financing
1. Establishment of lines of credit and terms thereof;
2. Issuance of letters of credit or bank guarantees for any purpose;
3. Discounting or sale of receivables with or without recourse;
4. Issuance or repurchase of debt and equity;
5. Investment of cash and other Corporate funds;
6. Arranging for intercompany loans;
7. Leases or rentals of more than twelve months duration including all capital leases and
sale/leaseback transactions.
8. Receiving or making payment for goods or services in other than standard, baseline or
normal terms or currency; for example notes or other security, extended credit terms,
barter, irregular currency, product in which the Corporation does not normally trade;
9. Issuance of financial or performance guarantees, endorsements and comfort letters;
Creation of any security interest in property of the Corporation or acceptance of any
security interest in the property of another;
10. Hedging foreign exchange, interest rate, commodity, metal lease, equity and other
financial exposures, using financial products including, but not limited to swap, option,
future and forward contracts.
11. Exchange financing including back-to-back loans, parallel loans and currency swaps;
12. Capitalization and dividend payments for the Corporation and all other business units
worldwide;
13. Off balance sheet project financing;
14. Trade or customer finance transactions;
b. Banking
16. Selection of banks to service the needs of the Corporation worldwide;
17. Opening and/or closing of bank and escrow accounts, including lockboxes;
18. Designation of authorized signatories;
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19. Determination of the required levels of bank compensation;
c. Cash Management
20. Control activities relating to:
a. The cash mobilization process; i.e., receipt, concentration, transfer and
disbursement of funds;
b. Funds utilization; investments of cash;
c. Banking practices and relationships;
d. Short-term cash forecasting and control methodology;
e. Selection of lockbox collection points, and
f. Selection of cash management systems.
II. Employees of the Corporation or its Business Units who act as directors or officers of business
units will be guided by this policy and are expected to consult with the Vice President and
Treasurer or delegate of the Corporation on all matters covered by this policy.
III. In any jurisdiction where the Boards of Directors of the Corporation's subsidiary companies are
vested with full powers over financial matters
a. Boards of the subsidiary companies should be fully informed of the Corporation's
financial objectives; and
Close consultation on financial matters should be maintained between the subsidiary,
SBU financial management and the Vice President and Treasurer or delegates.
Sales Representative, Consultant, Agent and Similar Agreements
Introduction
Project/ Product/ Services Organization regularly faces the choice of selling its products and
services through its own employees or, alternatively, by engaging outside sales representatives,
sales/marketing consultants, agents or distributors/resellers. The use of such outside support
for marketing and sales of the Company's products is a common practice around the world, and
may be the best marketing option for a number of business reasons. Nonetheless, the use of
such outside marketing support creates certain compliance risks that need to be addressed. The
purpose of this Policy is to address these compliance risks by establishing procedures for the
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selection and retention of persons who will represent the Company but who are not employed
by the Company and not directly subject to its policies and controls.
This Policy does not address the full range of business issues which need to be considered in the
decision to go to market through these types of representatives, nor their selection, training and
management. The compliance requirements of this Policy should be incorporated and made an
integral part of such management decisions and implementation.
The retention and compensation of sales representatives, sales/marketing consultants and
agents (together, "SRs") require compliance with numerous laws and regulations.
Sales Representative Agreement ("SRA") means any contract or agreement with any third party
who will be authorized to solicit sales or promote Project/ Product/ Services Organization products or
services or who may or will appear to act on Project/ Product/ Services Organization's behalf, including
agency, sales representative, pre-sale or post-sale service, consultant and all similar agreements,
regardless of how they are labeled, to which Project/ Product/ Services Organization or any Project/
Product/ Services Organization majority-owned subsidiary is a party, regardless of the basis of
compensation associated therewith (e.g., whether commission or fixed fee or any combination
thereof).
Sales Representative ("SR") means any person, company, agency or other entity (other than
Project/ Product/ Services Organization) that is a party to a SRA. Distributors, resellers and dealers,
are not considered SRs for purposes of this Policy, if and only if (1) they independently determine the
price, terms and conditions of the sale and contract directly with the customer, (2) they take legal title
to products purchased from Project/ Product/ Services Organization and then resell them, and (3) their
compensation for such sales consists solely of the difference between the price paid to Project/
Product/ Services Organization and the resale price. If Project/ Product/ Services Organization sets the
price or terms and conditions of sale to the customer, and then arranges the sale through the
distributor, such distributor arrangement will be treated as a SRA for the purposes of this Policy.
Selection and approval of distributors, resellers and dealers as defined above will not be subject to this
Policy, but will be subject to legal review by the attorneys in the relevant Business Group.
Government Official means any:
• Officer or employee of any national or local government or any instrumentality of a
government, or any person acting in an official capacity for or on behalf of a government or its
instrumentality
• Officer or employee of a corporation owned or controlled by a national or local government, or
any person acting in an official capacity for or on behalf of such a corporation
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• Officer or employee of a public international organization, or any person acting in an official
capacity for or on behalf of a public international organization
• Political party, party official or candidate for political office
• Nominee of any person described above.
Recommended Policy:
Project/ Product/ Services Organization requires written agreements with all SRs. Project/
Product/ Services Organization will enter into SRAs only with parties that have been subjected
to the due diligence process detailed below and have a commitment to the highest ethical
standards. All SRAs entered into by any Project/ Product/ Services Organization business
require Corporate and Business Group approval, as detailed below. Project/ Product/ Services
Organization will retain and pay a SR, including any consultant that provides marketing or sales
support services, only when the SR will provide actual services that are valuable to the
Company's marketing and sales efforts. Such services must be clearly defined by the SRA, and
the fees or commissions provided for under the SRA must be reasonably related to the value of
the services actually provided.
SRs are required to act consistently with the Project/ Product/ Services Organization Code of
Business Conduct (the "Code") and applicable laws and regulations. The Code strictly prohibits
bribes, kickbacks or any other form of improper payment, direct or indirect, to any
representative of a government, labor union, customer or supplier in order to obtain a contract,
some other commercial benefit or government action. The Code also states that Project/
Product/ Services Organization will not give, or encourage anyone else to give, inducements of
any kind to any government employee or to any supplier under government or non-government
contracts or subcontracts, in order to gain any business advantage or contract. These provisions
of the Code may go beyond the minimum requirements of applicable laws, and SRs are required
to comply with these - and all other - provisions of the Code even where they are stricter than
applicable laws or local customs. In addition, Project/ Product/ Services Organization will take -
and expects its employees to take - reasonable steps to prevent its SRs from violating the Code
or applicable laws and regulations. The steps taken must include, at a minimum, the procedures
established by this Policy to ensure that Project/ Product/ Services Organization has sufficient
information to know its SRs and understand their business practices.
Compliance with the Code should satisfy the requirements of applicable laws. Even so,
personnel who work with SRs should be familiar with the requirements of certain laws that may
apply to the activities of Project/ Product/ Services Organization's SRs.
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Generally, Project/ Product/ Services Organization, based upon the subjections of that region,
will not retain a Government Official, a company owned by a Government Official, or a close
relative of a Government Official as a SR, except in circumstances where that person's official
responsibilities are unrelated to Project/ Product/ Services Organization's business. A
Government Official must never be hired because of his or her position in the government or
because of his or her contacts in the government. Similarly, a company controlled by a
Government Official should not be appointed because of its owner's official authority or contacts
in the foreign government, and a relative of a Government Official must not be retained because
of his or her familial ties to the Government Official. If the business reasons for retaining a
Government Official, company owned by a Government Official, or relative of a Government
Official are strong enough, and Project/ Product/ Services Organization's business is unrelated
to the official duties of the Government Official, Project/ Product/ Services Organization may
decide to retain the Government Official or his or her company or relative. If the most qualified
candidate for a SRA is a Government Official, company owned by a Government Official or a
close relative of a Government Official, it is imperative to document the business reasons for
believing that candidate to be the most qualified. The decision to hire a candidate despite his or
her position as a Government Official requires final approval by the President of the Business
Group, with the advice of counsel.
The procedures listed below apply to all of Project/ Product/ Services Organization's operations,
and all of its sales and marketing efforts. These procedures must be followed, and the records
and documentation required by these procedures must be retained in the appropriate Company
files. Violation of the procedures prescribed below may constitute cause for termination of any
employee responsible for such violation. Any employee aware of circumstances that may
indicate a violation of these procedures must report those circumstances to that individual's
supervisor, a member of the Law Department, or the Company Helpline. Failure to report
circumstances that may indicate a violation of these procedures may constitute cause for
termination of employment. There will be no retaliation against any employee who reports such
circumstances as long as the report was made in good faith. Any employee who attempts to
retaliate against someone making such a report will be subject to discipline up to and including
termination.
Due diligence procedures and requests for approval of SRAs
The primary objectives of due diligence are to identify the best candidate for the position and to
ensure compliance with the Code and similar laws, including the laws and regulations of the
local jurisdiction. For the same reasons, if sub-agents, sub-consultants or sub-representatives
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will be used by a SR, Project/ Product/ Services Organization will retain final authority over
approval of the sub-agent, sub-consultant or sub-representative, and these same due diligence
procedures will be followed before a sub-agent, sub-consultant or sub-representative, receives
Project/ Product/ Services Organization's approval. Project/ Product/ Services Organization
discourages the engagement of SRs for one-time sales or tenders, as such engagements limit
the opportunity to develop a long term relationship through the SR with customers in the sales
territory, and increase the risk of opportunistic actions by the SR to the detriment of Project/
Product/ Services Organization and non-compliance with Project/ Product/ Services
Organization's ethical standards.
It is imperative that the Strategic Business Enterprise ("SBE") and Regional Sales Team
coordinate the due diligence/SR approval effort.
Due diligence steps:
1. The SBE or Regional Sales Team/Market Segment that requires the services of a SR will identify
qualified candidates ("Candidates") for the position. At least two Candidates should be
identified. The Regional Sales Director/VP/Account Team Leader will assist in evaluating the
potential Candidates. The relative qualifications of each Candidate will be compared in the Due
Diligence Report, described below, which will be prepared in connection with the Request for
Approval of the SRA. Where only one Candidate is evaluated, the Due Diligence Report must
include an explanation as to why other Candidates were not sought.
2. Before the initial meeting with the Candidate, the SBE or Regional Sales Team/Market Segment
will obtain from the Candidate an executed Memorandum of Understanding ("MOU"), in the
form attached as Appendix A to this Policy, and provide a copy of the MOU to the Manager,
Global Compliance - Sales Representatives. No oral commitments related to a SRA will be made
to any prospective or existing SR at any time.
3. Each Candidate will provide the relevant SBE or Regional Sales Team/Market Segment with a
completed Application, in the form attached as Appendix B to this Policy. All questions on the
form must be answered completely and accurately and all documentation requested must be
provided, unless this requirement is waived or excepted by the Manager, Compliance - Sales
Representatives, with the concurrence of the Vice President, Global Compliance.
4. The SBE and Regional Sales Team/Market Segment will review the Applications and other
information provided by the Candidates and determine which Candidate(s) will be further
considered. The SBE and Regional Sales Team/Market Segment will then interview each
Candidate that has not been eliminated. The interviews should cover the same topics as the
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Application, focusing on any weak points as well as strengths, and should allow the interviewers
(who should include both sales and marketing and business management personnel who should
understand the services needed from the SR) to get a feel for the Candidate(s). Interviewers
should take notes during the interview and produce a brief written memorandum on the
interview for inclusion in the Due Diligence Report.
5. The SBE or Regional Sales Team/Market Segment must contact each business reference
identified by the Candidate in the Application. Each reference should be asked about his, her or
its experience with the Candidate, his, her or its opinion of the Candidate's reputation and
business practices, and any other appropriate questions related to the Candidate's
qualifications. References with the necessary information should be asked to confirm
information obtained from the Candidate itself. The responses of each reference should be
documented and included in the Due Diligence Report.
6. The SBE in coordination with the Regional Sales Team/Market Segment will prepare a Due
Diligence Report. The Due Diligence Report will contain the following elements:
o A comparison of Candidates considered
o The Application provided by the Candidate selected
o A memorandum summarizing the interview with the Candidate selected
o Documentation of the reference checks for the Candidate selected
o A description of the services to be provided under the SRA
o The products and territory covered ("Territory") and the business being pursued
o Justification of the proposed compensation
o Discussion and resolution of any issues raised by the due diligence review.
The SBE or Regional Sales Team/Market Segment should submit the Due Diligence Report,
along with a Request for Approval of the SRA, in the form attached at Appendix C to this Policy,
to the Manager, Global Compliance - Sales Representatives. Note that the Request for Approval
Form requires the approval of the individual(s) who interviewed the Candidate, the SBE
Director/VP Sales and Marketing (or similar function), the SBE Director/VP Finance (or similar
function), and Market Segment International VP (if Aerospace) signifying that each of them
recommends appointment of the Candidate as a SR, and has no reason to believe that entering
into the proposed SRA with the Candidate will result in a risk under the FCPA or the Code.
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7. The Manager, Global Compliance - Sales Representatives will take steps to confirm information
provided by a Candidate through independent sources, including (A) a search of an on-line
database for references to the Candidate, its principals or affiliates, including checking current
U.S. government lists of persons who are prohibited from export transactions or with whom
U.S. companies may not do business, (B) a Dun & Bradstreet report, and/or (C) an
International Company Profile ("ICP"), where available, or a letter from the U.S. Embassy, U.S.
Chamber of Commerce or similar independent source in the Territory or the Candidate's home
country, if deemed necessary. The Manager, Global Compliance - Sales Representatives may
delegate any of these steps to the SBE or Regional Sales Team/Market Segment.
8. The Manager, Global Compliance - Sales Representatives will maintain files of all Project/
Product/ Services Organization SRAs (the "SR Files"), including agreements that have expired
or were terminated within the last eight years. The Manager, Global Compliance - Sales
Representatives will review the SR Files to determine whether they include any relevant
information on the Candidate.
9. The Manager, Global Compliance - Sales Representatives will consult outside counsel and/or
other sources to review relevant provisions of the laws of the Territory or other applicable
foreign laws, to assure that the SRA and the services and compensation provided for under the
agreement are consistent with applicable foreign laws.
10. The Manager, Global Compliance - Sales Representatives will maintain a file of all Due Diligence
Reports and Requests for Approval of SRAs. The file on a Candidate will be maintained for at
least five years after expiration or termination of all Project/ Product/ Services Organization
agreements with the Candidate.
Approval of SRAs
Project/ Product/ Services Organization SBE, Regional Sales Team/Market Segment and
Corporate approval is required before Project/ Product/ Services Organization enters into any
SRA. In addition to the approvals required under item 6 in the Due Diligence Steps, the
following additional approvals are required depending on the characteristics of the proposed
SRA.
1. Approval of the Corporate Manager, Global Compliance Sales Representatives is required for all
SRAs, except for certain SRAs or classes of SRAs that do not create a significant compliance risk
with respect to the FCPA, for which SRAs the Manager, Global Compliance - Sales
Representatives will have discretion to delegate authority for legal review to the Business
Group, SBE, or Regional, Counsel. Only approved SRA forms may be used. If in doubt contact
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the Corporate Manager, Global Compliance Sales Representatives for review of the agreement
form contemplated or to obtain approved agreement forms.
2. Approval of the Corporate Vice President, Global Compliance is required for all new SRAs for
military applications. The Manager, Global Compliance - Sales Representatives will submit all
Requests for Approval of such SRAs to the Vice President, Global Compliance, along with a
recommendation to either approve or reject the proposed SRA.
3. Approval of the cognizant Business Group President (with advice of counsel) is required for any
SRA with a Government Official, company owned by a Government Official, or close relative of
a Government Official, or any post-sale sales and marketing services contracts in excess of
$5,000 per month.
4. The Manager, Global Compliance Sales Representatives will insure the final SRA has the
approval of the Regional Sales Director/VP, if required.
Renewals and amendments of SRAs
Renewals and amendments require the same level of Project/ Product/ Services Organization
Corporate approval as the original SRA, except that amendments that do not materially affect
Project/ Product/ Services Organization's obligations under the SRA (e.g., do not increase the
compensation, the term, or the Territory) require approval of the Manager, Global Compliance
Sales Representatives only. At the time of execution of any renewal or amendment, the
Candidate must execute a new Compliance Certificate, in the form attached as Appendix D to
this Policy.
Payment to Sales Representatives
Fees or commissions due to SRs will be paid in accordance with the payment terms of the SRA,
provided that under no circumstances will Project/ Product/ Services Organization obligate itself
to make payment to a SR in cash without the approval of the Business Group President, upon
advice of counsel.
Payments will be made by bank transfer to the SR's designated bank account in the Territory or
in the country where the SR is incorporated or otherwise legally established, which account
must be held in the name of the SR. Exceptions to this policy require written authorization from
the Manager, Global Compliance Sales Representatives and the Business Group Director of
Finance.
Fees and commissions will be paid to SRs on a pro rata basis reflecting and following receipt of
payment by Project/ Product/ Services Organization under the sales or service contract in
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respect of which the SR's services were rendered. Exceptions to this policy require the approval
of the Manager, Global Compliance Sales Representatives and the Director of Finance of the
relevant SBE.
The fees or commissions provided for under a SRA must be reasonably related to the value of
the services actually provided. The value of the services is determined by comparison to what
Project/ Product/ Services Organization and/or other companies pay other providers for
comparable services, in comparable sales territories. In addition, fees for sales and marketing
consulting work or post-sale services must be based upon a defined statement of work, and the
services performed must be documented.
Terms and Conditions Delegations
1 – Delegation to Regional Contract Managers
Except as indicated below, the authority to approve terms and conditions are delegated to the Regional
Contract Managers1. When approving terms and conditions, the Regional Contract Managers should
use the Business Terms Policy as guidelines. Unless specific exemption is granted, any contract that is
not a Business template or pre-approved form must be reviewed by Legal Counsel or the appropriate
Contract Manager.
2 – Approval of terms and conditions requiring consultation with other departments
The following terms and conditions require consultation by the Regional Contract Manager with the
relevant department:
Contract Terms In Consultation with
Delivery schedule, acceptance, invoicing and payment Operations
procedure
Arbitration and Choice of Law & Forum Law Department
Changes and variations Operations
Insurance Risk Management
Warranties Operations
3 – Terms and conditions requiring SBU level of approval
Any contract valued at x amount of $ specified value or more must be reviewed by the SBU General
Counsel and the SBU Contracts Director. Moreover, the following terms must be approved by the SBU
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General Counsel and Director of Contracts when the minimum requirements set out below are not met
:
Contract Minimum Requirements
Terms
Audit Must be limited to cost reimbursable portion of a contract; and the contract
must not have a “Most Favored Customer” clause.
Indemnity a For contracts in High Risk Projects, It’s liability must be limited to an amount
nd Liability
not exceeding the Contract Value.
Consequential damages must be excluded from liability, except in jurisdictions
where the exposure to onerous consequential damages is low2.
Any indemnity must be limited to it's negligence to the extent harm was caused
by Companyl or its subcontractors. No indemnification of third parties.
Intellectual The ownership of all intellectual property rights must remain.
Property Any software license must be in accordance with Honeywell’s Software Licensing
Agreement.
Any patent indemnities provided by Honeywell must follow the minimum
requirements set by the SBU IP Counsel or General Counsel3.
Liquidated LDs must be capped at maximum 15% of the Contract Value or not accumulate
Damages at more than 2% of the Contract Value per day.
Except in contracts with public authorities where the Contract Value is below $ 1
million and in all contracts with a Contract Value below $ 100k, LDs must be the
sole and exclusive remedy to the customer for the breach concerned.
Most Must comply with ACS policy.
Favored
Customer
4 – Terms and Conditions requiring Corporate level of approval
Approval of General Counsel, Finance Leader and President is required for deviations from Company's
standard mold disclaimer as indicated in the Companies Contracting Policy.
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PROPOSAL-
CONTRACTUAL
INTERACTION
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Proposal –Contractual Interaction
It is critical during the proposal preparation stage that contract terms and conditions be reviewed and
approved before submission of a proposal to the client. The contracts (legal) representative is
responsible for the preparation of the contract portion of the proposal. Generally, contracts with the
legal department are handled through or in coordination with the proposal group. The contract
representative determines or assists with the following:
Type of contract
Required terms and conditions
Any special requirements
Cash-flow requirements
Patent and proprietary data
Insurance and tax considerations
Finance and accounting
The sales department, through the proposal group, has the final responsibility for the content and
outcome of all proposals and contracts that it handles. However, there are certain aspects that should
be reviewed with others who can offer guidance, advice, and assistance to facilitate the effort. In
general, contract agreements should be reviewed by the following departments:
Proposal
Legal
Insurance
Tax
Project management
Engineering
Estimating
Construction (if required)
Purchasing (if required)
Responsibility for collecting and editing contract comments rests with the proposal manager. In
preparing contract comments, consideration should be given to comments previously submitted to the
client for the same form of agreement, and also previous agreements signed with the client.
Contract comments should be reviewed for their substance and ultimate risk to the company. It must
be recognized that in most instances, the client is not willing to make a large number of revisions to
his proposed form of agreement. The burden of proof that a contract change is required rests with the
company; therefore each comment submitted must have a good case behind it.
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Occasionally, a company is confronted with a serious contract comment for which it is very difficult to
express their position. In such instances, it is better to flag the item for further discussion with the
client at the conference table. A good example of this is taxes on cost-plus foreign projects. Normally,
when submitting a proposal for such work, a company does not have sufficient definitive information to
establish its position relative to how it would like to handle taxes; that is:
What is the client's position on taxes?
Will one or two agreements be used for the work? Who will the contracting parties be?
Time will not permit nor is the cost justifiable for a complete tax assessment.
Contract procedures have not been established. Would we buy in the name of the company or
as agents without liability for the client?
The legal department should be advised of information pertinent to its functions as promptly as
possible as negotiations develop. Proposal personnel should also be familiar with the standard contract
forms the company uses, its contract terms, and available conditions, including those developed jointly
between sales and the legal department, as well as the functions, duties, and responsibilities of the
legal department. In addition, key areas that are normally negotiated should be discussed so that
proposal personnel have a better understanding of the commercial risks involved and why the
company has certain positions.
By the time the client has reviewed the proposal, the company's legal position is fixed commercially if
not legally. Therefore, sales and proposal personnel should understand and be prepared to put forward
the company's position on commercially significant legal considerations, both in general and on specific
issues that arise in connection with a particular project. In this way, sales will be in a position to
assert, and sell, the company's position at the appropriate time.
Proposals should send all bid documents, including the client's form of contract, or equivalent
information, along with the proposal outline or instructions to the legal department upon receipt of
documents from the client. The instructions or outline should indicate the assignment of responsibility
and include background information on matters that are pertinent to sales strategy or specific
problems such as guarantees, previous experience with client, and so on.
Proposals should discuss briefly with the legal department what is planned by way of the project, the
sales effort, and commercial considerations. If there is a kickoff meeting, a representative of the legal
department should attend if it is appropriate. The legal department should make a preliminary review
of the documents before any such discussion or meeting.
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The legal department reviews the documents and prepares a memorandum of comment and any
required contract documents, obtaining input where necessary or advisable. If the client has included a
contract agreement with the inquiry, the legal department reviews it to see if it has any flaws or is
against some set policy of the company. Unless a lesser level of effort is agreed upon, this
memorandum will cover all legal issues. This does not necessarily mean that all such issues must be
raised with the client.
The purpose of the memorandum is to alert the proposal department to the issues and suggest
solutions, usually in the form of contract comments. The memo may make related appropriate
commercial suggestions. If required, the legal department will submit a proposed form of contract,
joint venture agreement, and so on. Generally, the legal department follows standards that have been
worked out with sales and uses standard forms and contract language that were found to be salable in
the past and to offer sufficient protection.
At the same time, proposals reviews the documents and advises the legal department of any pertinent
issues known by or determined by proposals. This is essential not only because proposals has the final
responsibility but also because proposals is responsible for providing information to, and getting
comments from, others, such as purchasing, engineering, and estimating.
Proposals reviews and arranges for any other review of the legal department's comments and
documents and suggests the final form of comments, contract documents, and other relevant
documents including the offer letter. Proposals reviews proposed final forms with the legal department
as promptly as possible and prior to any commercial commitment.
Normal practice is to validate proposals for a period of thirty to sixty days following date of
submission. Validation of proposals for periods in excess of this period may be required by special
circumstances and should be done only with management's concurrence. Occasionally, it is desirable
to validate a bid for fewer than thirty days. The validity period is especially important on lump sum
bids. On such bids, the validity period must be consistent with validity times of quotations received for
major equipment items. If these are not consistent, additional escalation on equipment and materials
may have to be included in the lump sum price, and the company's competitive position could thereby
be jeopardized.
Occasionally, you may be requested to submit with your proposals a schedule covering hourly rate
ranges to reimbursable personnel. For this purpose, you should develop a standard schedule covering
hourly rate ranges and average rates for all personnel in the reimbursable category. The hourly rate
ranges are based on the lowest-paid person and the highest-paid person in any specific job
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classification. In this connection, if there are any oddball situations, the effect of such is not included.
Average rates are based on the average of all personnel in any given job classification.
One area that is critical to the development of a good contract is the definition of the scope of work
covered by the contract. This is of particular importance to the proposal manager, who is responsible
for having the proper people prepared for the scope of work description. What is prepared during
proposal production most likely governs the contract preparation and eventually becomes part of that
contract. The degree to which the project scope of work must be described in a contract depends on
the pricing mechanism and contract form used.
A contract priced on a straight per diem basis or on the basis of reimbursement of all costs plus a fee
does not normally require a precise description of either the services to be performed or the work to
be accomplished.
Usually, a general description is adequate. This, however, is not the case if the contract is priced by
other methods, especially fixed price, cost sharing, or guaranteed maximum. For these forms of
contracts, it is essential that considerable care be taken to set forth in the contract documents the
precise nature of the work to be accomplished as well as the services to be performed.
In the absence of a detailed description of the work prepared by the client, you must be prepared to
develop such a description for inclusion in your proposal. When preparing the description of the work
for inclusion in the contract documents, the basic premise to be followed must be that the language in
the contract will be strictly interpreted during various stages of performance. The proper preparation of
the description of the work as well as the evaluation of the requirements demands coordination among
sales, administration, cost, and technical personnel both inside and outside the organization. Technical
personnel within the organization or technical consultants from outside must inform management
whether there is an in-house capability to successfully complete the work. Determination also must be
made of whether suitable subcontracts or purchase orders can be awarded. In the major areas, firm
commitments should be obtained. Technical projections must be effected relative to a host of
problems, including delivery or scheduling requirements, the possibility of changes in the proposed
scope of work, client control over the work, quality control, and procedures.
An inadequate or unrealistic description of the work to be undertaken or evaluation of the project
requirements marks the beginning of an unhappy contract experience.
SUMMARY
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While it is essential that companies obtain good contracts with a minimum of risk provisions, it is
equally important that those contracts be effectively administered. The following guidelines can aid a
company in preparing its proposals and contracts and administering operations:
Use of the checklist in the preparation of all proposals and contracts
Evaluation of risks by reference to the suggested contract provisions wherever appropriate
Review by the legal department prior to submission to the client of all major proposals and
contracts and of other contracts with questionable provisions
Appropriate pricing or insuring of risks under the contract
Improving contract administration at appropriate levels
Periodic review and updating of the entire contract procedure including basic risk areas,
administration, and so on
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CHANGE ORDER
AND CLAIM
MANAGAMENT
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Change Order & Claim Management
“Every body resists change, and the only person who likes change is a wet baby! However,
change is inevitable. One well-tried better way to change is to set a dead line- and setting a
deadline is ultimate inspiration to change. Make friends who will support you towards
change. It works.”
This section would address what a Project Manager needs to know in order to :
• Convert any change, or disputed change, of the Contract Baseline scope into additional
revenue and gross margin.
• Register, drive or defend Contract Claims
Important Points to be noted:
Identification of Scope Changes will not always come automatically from the client. All Project
staff are responsible for identifying potential scope changes.
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The availability of written records (“site diary”) is crucial to successful claim management. It is
essential that Site diaries / records are kept and the subcontractor ‘attendance’ records also include
where the works were going on (workface). (Very important if you are dealing with the general
contractor.)
Get any instruction in writing. If necessary write the instruction on companies stationary and
simply ask the client to confirm ‘verbal instructions’. Adopt a “No Signature – No Additional Work”
attitude.
Note that delays in receipt of information should automatically lead to a claim for ‘extension to
contract’ or ‘acceleration costs’ to mitigate the delay caused by others (which is why we earlier
indicated putting these dates on the original programme).
Every job estimate was built up from a Schedule of Rates, irrespective of the tool used. The
Project Manager is expected to have sight of that schedule and know how to apply it for pricing
Change Orders.
Project Managers are expected to be able to put together Change Order request documentation.
The foremost part of the chapter is designed to look at the ongoing operational risks and opportunities
that may arise as the scope of the Project develops or changes during the implementation period.
The contents will cover:-
Where to look for the changes
What the implications of the changes could be
How to register, track, book and receive payment
Don’t forget to check the CAP( Contract Approval Process) Risk Assessment documentation that should
be part of the data handed over by ‘Sales’ when the Project is booked.
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Contract Compensation Triangle
Schedule Time Scope
Money
Conditions
We want to get paid for all the work we do
Definitions pertinent to change order and claim management:
‘Contract Baseline’
• The original official set of documents defining the requirements of the binding
agreement (the contract) between the contractor and the Customer.
• Consider the implications of a “Fully Designed Specification” versus a “Performance
Specification”
‘Change / Variation’
• Any alteration or modification to the design quality or quantity as specified in the
‘Contract Baseline’
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• The addition , omission or substitution of any work
• Changes to the working space, working hours or site works as originally specified
• Execution or completion of the works in a different sequence or time frame from
originally specified
Types of Change Order
There are two main types of changes :
Directed
1. A formal, written statement by the buyer specifically directing the seller to
perform differently
2. The area of performance changed must be expressly identified as being within
the buyer’s unilateral control.
Directed Changes include:
An Architects Instruction
A Main Contractors Instruction
A Site Instruction
A Variation Order
Constructive / Implied #
1. In the absence of a directed change, any set of facts for which reasonable
inference can be made that the buyer required the seller to perform differently
2. Treated (Implied) as a directed change issued under the changes clause
Constructive / Implied Changes include:
Verbal requests
Letters / eMails / Faxes
Minutes of Meetings
New or revised Drawings
New or revised Specifications / Equipment Schedules
New or revised Programmes
Responses to ‘Requests for Information’ (RFI)
# It is the ‘Constructive / Implied’ changes that represent the biggest risk or opportunity
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Implications of Change Orders
There is an expectation that:
1. The Customer will make an equitable adjustment in price, delivery schedule, or
both.
2. Contractor (and it’s subcontractors) will proceed with the contract as changed,
even if the contract adjustment has not been negotiated.
3. Contractor has the right to seek clear direction (raise any queries associated with
any Change Order).
4. The Customer has an obligation to respond to any request for clarification.
But you will have to establish ‘Entitlement’ and ‘Compensability’
Note: But don’t forget the simple rule – Get it in writing, DO NOT work to verbal instructions
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How to establish ‘Entitlement’ & ‘Compensability’
It is the Project Managers responsibility to:
1. Fully understand the contents of the ‘Contract Baseline’ set of documents,
especially with regards to the ‘Changes’ clause.
2. Ensure that all ambiguities are resolved with the customer as quickly as possible.
This includes any Deviations from Specification / Assumptions that were included in Contractor’s Bid
letter.
3. Use the ‘Changes’ clause as a tool and strictly adhere to its requirements.
4. Always communicate in writing (including confirmation of verbal discussions or
agreements).
5. In the event of a disagreement, preserve Contractor‘s rights under the contract
to make a claim at the end of the Project.
6. Notify the Customer immediately upon recognition of a potential Constructive
(Implied) change and request a formal Directed Change Order.
7. Evaluate the work associated with any form of Change Order and formally advise
the Customer of the impact on Price and Schedule as quickly as possible.
8. Claim payment for the changes at the earliest opportunity
9. Track the status of all changes and associated correspondence / instructions.
10. Recognise the associated costs and revenue in an appropriate manner in the CTC
process
11. Formally ‘book’ any Change Orders only upon receipt of the appropriate
paperwork from our Customer
How to recognise ‘Changes’
o Change Mechanisms
As mentioned earlier there are several mechanisms for changes to occur on a Project. We shall look at
these under the headings:
• Schedule
• Scope
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• Conditions
Schedule Changes
Disruption of the normal schedule of workflow: stacking of trades, crashing the schedule, re-
deployment (asked to move), etc.
Work done out of sequence or building preparation not ready in time for Contractor to begin
with enough time remaining to finish as planned.
Disruption of normal workflow due to over inspection of work.
Disruption of normal workflow due to partial occupancy prior to the completion of work
Disruption of normal workflow due to holds on work progress. (delay)
Have there been any scheduling delays in general?
Acceleration or compression (either constructive, owner-initiated or contractor initiated).
Is all work finished in a timely manner so that Contractor can proceed? Was there slow:
submittal return, RFI review, decision making or approvals?
Is there a lack of direction or decision making?
Are there erroneous contract terms that prevent Contractor from completing work or getting
paid on time?
Is payment untimely or is there nonpayment?
Others
Acceleration
– The need to accelerate your contracted works could indicate either a delay to the
preceding works and a failure to be granted a Time extension or an inherent lack of realistic Time
Schedules in the first place.
– Acceleration is not necessarily working quicker. It can sometimes be achieved by
working differently :-
Overtime
More resources
Changes to activity sequences
– Carry out activities in parallel
– Divert resources away from activities with large ‘float’
– However, every time you need to change your original plans there will be a cost
implication. This is very difficult to prove without having a record of what you intended to do in the
first place.
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Delivery Statements
What are the implications of someone asking us to change our original obligations. We are not a
registered charity but have shareholders that demand we make profit on everything we do and our
customers know that. However we do have an obligation to establish our entitlement
Cash Flow
– If your payment is linked to reaching milestones then progress delays with also mean
delays in payment . Contractor will therefore continue to have an adverse Cash Flow position and you
should think about claiming for ‘interest’.
Scope Changes
Are there changes in scope (directed or constructive change)?
Have there been excessive quantity overruns or under-runs on unit price contracts?
Have there been many or excessive changes and/or RFIs?
Are there owner-caused changes that impact bid work or that cause extra work?
Were there design errors, omissions, and/or ambiguities?
Was the design incomplete?
Is the prescribed design not capable of being built?
Were there materials specified that were discontinued or unobtainable?
Has your Functional Specification been formally approved with clear differences from the
original Contract Specification *
* Please note that your Functional Specification will only take precedence over the original Contract
Specification if it has been formally approved. If it isn’t then you have a ‘risk’ situation.
Request for Information (RFI) - Standardisation / Tracking
An RFI is a standard template form that should be used to formally resolve any design ambiguities
with the Customer.
The questions should be worded in such a clear way as to ensure there is no possible ambiguity in the
response.
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Potentially each RFI response is a ‘Change Order’ therefore it is very important to record the status of
each RFI on a log.
Scope Changes
– Claims will develop because there will be individual Variations or Change Orders
requests that the Customer does not want to recognize.
– In addition to the content and status of individual Change Order Requests you may be
entitled to further compensation simply because of the Scale or Timing of instructions in general.
Clearly to have 90% of the Changes registered in the last 2 months of a project will have a different
impact than having them all at the design stage. In general, the later the change the bigger the impact
on the project as a whole
Conditions Changes
Are restrictive Union work practices interfering with progress?
Are unexpected area labor shortages interfering with progress?
Are the contractor or owner interfering with work progress?
Have any regulatory agencies failed to issue permits to Contractor in a timely
manner?
Is there a lack of access, late or inadequate access?
Is there crowding due to owner changes or the presence of other contractors
under the owner or superior contractor’s control?
Have the conditions of work changed?
Is there damage to installed work by other trades under the general contractor’s
or owner’s control?
Is there a failure to coordinate other parties under the owner’s control
(interference)?
Did the contractor or owner have knowledge of conditions that they did not
reveal to Contractor prior to the bid? (superior knowledge)
Have ‘hazardous materials’ been discovered (e.g.Asbestos) ?
Are the promised ‘storage areas’ and ‘parking facilities’ on site no longer available
?
Have you been asked to relocate your office to another area ?
Site Conditions
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– By definition these are the changes on or around the site where you are contracted to
work. Therefore by implication you would have to know about those changes before you could register
them as the cause of any claim you wish to make.
– Because you as Project Managers are generally not on site every day it is important to
have a mechanism to collect any data related to Site Condition changes.
– Make sure that you get everyone that works for you to record anything that happens
when they are on site (including pictures). This includes Engineers, Commissioning Technicians and
Subcontractors.
– Your customer will normally have a bigger and better site presence than you and you
can be sure that these people will also be recording the same sort of data, sometimes to use against
you.
– Conditions / Schedule Changes (Examples)
Coiling of Cables because terminations cannot be made due to construction constraints (no
walls or ceilings)
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Coiling of Cables because terminations cannot be made due to construction constraints
(electrical cable trays – installed by others)
Conditions / Schedule Changes (Examples)
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Water damage to Contractor installation
Conditions / Schedule Changes (Examples)
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Removal of Contractor installed cables to allow installation of electrical trunking – by others
More Clues to possible Changes
Large numbers of action items coming from Design Review meetings
Engineering Submittal / Functional Specification / Drawings are rejected without clear reasons
or are approved after long time delays.
More Site meetings are scheduled than was anticipated or there is an absence of meeting
minutes / agendas.
More Inspection Checks are carried out than were envisaged
More System Tests / Demonstrations are requested than estimated
Meetings or Demonstrations are delayed by Customer or are attended by ‘non-authorised’
Customer personnel.
How to calculate the impact of ‘Changes’
Looking at each of the Change mechanisms we will now look at the impact on Time and Money:
• Schedule
• Scope
• Conditions
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Schedule Change Impact
What have all the changes done to our anticipated programme of works ?
Do the changes disrupt the way we were going to work ?
Do the changes delay when we were going to carry out activities ?
The actual timing of the changes can be a critical factor – changes late in
the programme have a far more dramatic effect
Can we prove it ?
What are we comparing the current situation with ?
Did we produce a Programme with our original bid or at the beginning of
the Project ? Do either of them have any contractual significance or are we forced to compare
progress with the Original Customers programme (that may not even show Contractor activities) ?
If we have not issued or received a programme at the beginning of the
project which shows the detailed Contractor activities then we may have little or no basis upon which
to show Time related impact.
Have the changes affected our Cash Flow ?
Delayed recovery of Variation Costs until the end of the project ?
Delays to Milestone payment dates ?
Having to pay Subcontractors / Agencies before you will get paid ?
Does that mean we have to accelerate to execute the additional works and still meet the original end
date ?
Do we want / need an ‘additional time’ to complete the new work ?
Consider this carefully as this usually relies heavily on availability of resources with the appropriate
skills.
Do you need to hire new labour ? (Expense & Time delay)
Do you need to change the sequence of work to accommodate available resource skills (disruption)
Do you need to work overtime ? (premium rates)
Do you need to subcontract more work ? (premium rates / Overhead & Profit dilution)
Don’t forget to involve your subcontractors in any commitments you make on their behalf.
Did we consider extended overheads due to work schedule extension?
• Larger office / stores hire charges
• Larger utility (gas , electricity, water, telephone) bills
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• More task lighting / power charges
• More Scaffolding hire charges
• More Tools
• More HSE obligations
• More Project Management / Supervision
• Etc.
Scope Change Impact
What have all the changes done to the actual scope of work to be delivered ?
Is the additional equipment / solution directly related to the original scope (i.e more of
the same)?
(If you have not issued a schedule of rates at the beginning of the project you may find
it more difficult to assess / agree the cost of additional works impact.)
If the new equipment / solution is unrelated to the original scope how will you get
agreement on costs (Cost +, ‘Star Rates’ etc.)
How will the additional scope be quantified ?
If the additional scope is to be carried out under ‘Daywork’ principles do you know what
process to follow, forms to use, applicable rates and mark-ups ?
What resources do you need to price / agree the scope change ?
Is the PM doing this all himself, does he need a Salesman / Estimator to calculate the
cost and a Commercial Manager to negotiate the value ?
Who is authorised to agree these values on behalf of the Customer
Make sure you know who you can deal with and where they can be contacted
Did we consider increased overheads due to work scope expansion ?
• Bigger office / stores
• More task lighting / power
• More Scaffolding & Tools
• More Project Management / Supervision
• Etc.
Condition Change Impact
How have Site Condition changes affected our works ?
Consider what the implications are of other persons interfering with your capability to
deliver the solution within the anticipated time and budget. Make sure that you or your direct reports
and subcontractors record EVERY disruptive event, giving names, dates, location, duration, event
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descriptor etc. and that they report these issues immediately they happen. Use ‘date stamped’
photographic evidence where possible and register witnesses .
It is this group of changes that are nearly always disputed by our Customers and
inevitably lead to “Claims” that need negotiating at the end of the Project.
How to respond to ‘Changes’
Apart from reacting to changes promptly it is absolutely essential that the Customer is formally
advised of the situation.
As has been repeated many times DO NOT work to verbal instructions because then there is no
formal basis to your request for compensation. The very least you must do, if faced with this
circumstance, is immediately write a ‘Confirmation of Verbal Instruction’ notification to your Customer.
If you can do this at the time, and get a countersignature from the Customer’s representative, even
better.
How to respond to ‘Changes’
The other critical document to raise in a ‘Notification of Scope Change’ in order to formally
claim for Contract adjustment.
Within this document you need to:
o Define the old and new scope, highlighting the change that has occurred (reference the
specification or whatever is relied upon for that particular interpretation of change)
o Declare the impact to the contract price (just the summary – the details go in the
attached documents)
o Confirm the impact to the the schedule (be precise – it must be quantified – who / what
/ when / how much ?)
o Attach any supporting data (Copies of relevant documentation)
Formal Instructions (or documents containing Constructive / Implied changes)
Copies of Contract Documents / Specifications
Original & Revised programmes
Price calculation basis - Contract BOM / BOQ, subcontract quotes etc.
Photographs
Technical data
Etc
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How to track Change Order status
Having now recognised the change, acted upon it and notified the Customer, it is critical
to track the status of all any change.
Use a tracking tool (database / spreadsheet) recording the status of every potential
variation that indicates :
1) What has been considered as a change
2) Any Formal instruction reference numbers
3) Those that have formally been reported to the Customer
4) The price that was submitted to the Customer
5) Those where the price has been agreed & the value (these should have been ‘booked’)
6) Those where the price has not been agreed (subject to Claims at the end of the project)
7) Cross reference to any instructions that you have given to your subcontractors
Educate the engineers and technicians to recognise what a Change Order is and to
report every opportunity
Show the Change Orders as individual activities on your revised Project Schedule
Remember these are potentially part of the PM incentive scheme
How to claim payment
Having now done all the paperwork associated with registering the change with your
Customer, and having carried out what was asked of you, it is now ABSOLUTELY ESSENTIAL to ask for
payment for the work done.
This should be done, irrespective of whether the Customer has agreed a final figure for
the additional work, at the earliest opportunity.
Note: Include Change Order values in any Invoices / Applications for payment every month.
Show them as separate and above the original contract value.
Impact on CTC process
The POC (Percentage Of Completion) tool is designed to forecast the Revenue, Cost and GM of
a project at completion. The scale of Change orders on most projects means that they potentially have
a large impact on this forecasting process.
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Every time a change is recognised that associated cost must be built into the Cost forecast on
the CTC sheet for the project.
Note: The only exception is where Contractor are proposing a scope change that has not yet been
agreed by the Customer.
If the sell price associated with these changes (Revenue) has not been agreed with the
customer then no entry should be made in the ‘Variation’ field. If, however, a priced instruction has
been received it is appropriate to insert this value in the ‘Variation’ field until such time as the Change
Order has been formally ‘booked’ into the Field Financial System
Note: It should be possible to verify the appropriate actions by reference to the tracking database /
spreadsheet. Do not include anything that has not been agreed with the customer
Booking of Change Orders
The Booking of Change Orders should follow the same rules as the Booking of the original Project.
Comply with any CAP requirements
• A Variation must be approved in accordance with the Contract Approval Process and the
Approval Matrix if such Variation results in a change in the contract’s original terms and conditions or
risk profile
Ensure that any Variations recorded in the POC process, and that are subsequently Booked, are
deleted from the CTC sheet the following month
The other part is designed to look at how to address the situation where the Customer does not
acknowledge, or will not evaluate, the impact of Project scope changes during the implementation
period.
The contents will cover: - Different types of claim, How to gather data on which to build a claim, How
to register a claim, How to avoid claims or contra charges being made upon Contractor, How to
negotiate a claim / resolve disputes
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Definitions
A Claim is legally defined as the demand or assertion of a right to money or property.
A Claim must show the existence of a right, an injury and a request for damages.
In practical terms Claims usually arise in our business because the Customer is unwilling to
resolve requests for additional Time and Money in a timely manner.
These therefore represent a potential risk, or opportunity, for Final Account settlement.
A ‘Loss & Expense’ claim is largely related to ‘Time’ issues rather than ‘Measured Account’
matters.
Liquidated and Ascertained Damages (LAD’s)
In some contracts the parties attempt to agree in advance the damages which will be payable by the
party in breach to the innocent party. This is a common feature in particular of building contracts
where the "liquidated damages clause" sets out the amount of money payable by the builder to the
employer if the builder fails to construct the building on time.
The court will allow the parties to pre-agree damages in this fashion, but will not allow a party to
enforce a liquidated damages clause if that clause in fact operates as a penalty which imposes
unfair burdens upon the party in breach of contract.
Unliquidated Damages (Consequential Loss)
Damages are ‘at large’ – compensation for reasonably foreseeable loss or expense resulting from
breach of contract
Extension of Time
An extension of time is a valid excuse for being late. Without such a valid excuse, delayed completion
beyond the agreed programme is a breach of contract making you liable for Damages
Set-Off
This is where your customer will try and deduct money from your payments – usually associated with
issues like clearing rubbish, labour for unloading materials etc.
Practical Completion
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“Sufficient degree of completion to permit occupation and use of the works – the building is reasonably
safe and not unreasonably inconvenient”
Achieving Practical Completion may affect:
• Release of Retention
• Start of the Defects Liability Period
• Insurances
• Liability for Damages
Beneficial Use
In some circumstances the end user will achieve ‘beneficial use’ of some or all of the building prior to
formal Practical Completion. In that event it should be made very clear how the Practical Completion
contractual obligations are affected.
Defects
There a many formal definitions but basically Contractor has an obligation to make good, at it’s own
expense, all defects and faults that were listed at the time of Practical Completion (Defects Lists,
Punch Lists etc) and any that may arise until the end of the Defects Liability Period.
Retention
The payment withheld to provide security for fixing Defects. Normally expressed as a % of the contract
value and usually released in stages (50% at the Practical Completion stage and the balance at the
end of the Defects Liability Period).
Different types of claim
Generally Claims will fall into one of two categories:
– Claims associated with misinterpretation or perceived expectations due to unclear scope
definition
– Financial Claims or ‘set off’ associated with system performance guarantees or damages
associated with contractual performance
Delays
What is a delay?
– An event that interferes with, defers, prohibits the progress of the work
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Types of delays?
– Excusable
– Compensable
– Inexcusable
– Concurrent
Excusable Delay
Delay is beyond the control of Contractor, i.e., acts of God, acts of customer, strikes,
government
acts, etc.
Contractor’s excusable delay clause protects Contractor if our performance is delayed by causes
beyond our control.
Allows for extension in time equal to the delay
Allows for extension of time, as well as monetary compensation, for customer caused delays
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Compensable Delay
A delay where the owner is liable in damages and/or time to the contractor.
Inexcusable Delay
Contractor not performing in accordance with contract schedule for various reasons which are
under our direct control.
Some of the reasons might be:
o Lack of Personnel
o Material Shortages
o Unforeseen complexity in project
o Technical difficulties
Concurrent Delay
A delay which occurs when both the owner and the contractor are responsible in some measure
for the same delay or delays occurring in the same period of time.
Absence of delay clause in contract...
Contractor takes on the responsibility for all delays, whether excusable or not
No vehicle to recover time and/or monetary compensation for excusable delays
If you settle for a delay clause that provides only time extensions, then that is all you get!
How to build a claim
(1) Process
(a) Time analysis
(b) Payment analysis
(c) Correspondence analysis
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(d) Contract analysis
(2) Records
(a) Copies of all programme revisions
(b) Copies of all drawing revisions
(c) All customer correspondence
(d) Minutes of meetings
(e) RFI log (delays in response)
(f) Approval records (drawings / schedules / Contractor programmes)
(g) Invoice / Payment records
(h) Variation 'Log'
(i) Site Diaries (Job Site Journal)
(j) Subcontractors records
(k) Manpower / workface / progress
(l) Photos (with dates)
(m) Timesheets
(n) Commissioning reports
Delay Notice/ Claim for Extension to the Contract Time:
How to avoid claims being made upon Contractor
Consider the way that the Claim or Dispute is brought to your attention
– Establish that the Claim or Dispute is defined and real
– Verbally - request confirmation in writing
– Contractual Claim notice or correspondence
Number 1 - exhaust all avenues of negotiation first
Be familiar with the contract
Keep project paperwork in order
Never leave issues or correspondence unanswered
Communicate effectively and regularly with Customer
Avoid specification ambiguity
Manage expectations
How to negotiate a claim / resolve disputes
Legally defined as a conflict of claims or rights and summarized in writing
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What Does the Contract Say
Contract may require negotiation, adjudication, mediation or arbitration prior to litigation
Contract Managers will attempt to add dispute resolution provisions to a contract
– provides delivery organizations guidance on timing and steps in resolution
Never allow one party the right to make “final and binding” decisions or resolve conflicts in best
interest of one party
– this includes Government and Municipal contracts
Review the Claim or Dispute and consider the contractual defenses that you have available to
you
– Discuss with local Management and Contract Management
– Respond in writing immediately, defending our position
– Discuss with Customer and resolve
Negotiation Skills can be learned
• Most people don’t like to negotiate – it’s normal to be apprehensive
• Good negotiators are not bad people – they are people who can resolve conflicts in ways that
meet the needs of both sides
• Negotiation can be stressful and uncomfortable, but such feelings are insignificant compared
with the anguish you may feel when you never get a good deal
• When you want something – ask for it. The worst thing that can happen is that the other party
will say “NO”
• The dumbest question is the question not asked !
Negotiation – When to use a Team approach
Pros:
• Teams are frequently more creative than individual negotiators.
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• Teams reduce the likelihood of serious errors of judgement.
• A team member can act as recorder or observer of body language
• If the other side bring a team, so should you.
Cons:
• In general, the fewer the participants, the quicker the agreement
• Differences of opinion amongst team members can weaken your position, especially if others
talk out of turn (needs a pre-meeting strategy agreement)
POME Negotiation – Tactics
• Never give a concession without getting one in return.
Have a list of ‘giveaways’ that your customer wants but costs you less than what you receive
• Don’t hesitate to say ,no’
Just say “I’m sorry I can’t do that”.
• Keep a running total of both sides negotiated values
If you don’t, you will not understand the potential net result
• Try to avoid ‘piecemeal’ concessions, make the other party work hard for them and never be
afraid to withdraw them.
Remember - All concessions are tentative until the deal is finally closed
• Know when to stop negotiating
There is a breaking point in every negotiation. If you push too far the other party may just walk out
Negotiation – Common Errors
• Never assume that your opening offers are too high (or low) enough.
They are probably too reasonable – aim higher to give yourself room to negotiate.
• Don’t start bargaining until you get the other party’s full shopping list
Make sure all the requests are on the table
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• Don’t believe everything you are told about deadlines.
Be sceptical, deadlines are nearly always negotiable themselves
• Avoid quick negotiations
The quicker the deal the greater the risk. Quick settlements are frequently extreme Win-Lose deals.
• Don’t bargain over an issue unless you are fully prepared to do so.
If something unforeseen comes up – call a ‘time out’ to review it.
• Don’t get angry
Never lose your temper – that gives the advantage to the other side.
ASS U ME nothing
Likely Solutions to Claims...
Payment in full
Partial payment
System upgrade plus partial payment
No cost rework
Claim successfully avoided
Likely Solutions to Disputes...
Elevate within the organization for resolution
Alternative Dispute Resolution
Adjudication
Arbitration
Court
Subject Change Control
To identify & manage the impact of design & other changes upon engineering deliverables
Purpose throughout all phases of the project and to support associated Variation management
activities by the Project Manager
All changes proposed to the project scope, both customer and Company initiated, must be
Scope
identified and approved by the Project Manager before proceeding
148
STEP WHO STEP NOTES
Change Control Register, Original scope documents, Original
INPUT -
engineering plan, Change Request Form
Identify Change Request
All proposed or requested changes to the scope of
Project Engineer works must be identified and captured to enable
/ Project proper assessment of impact, including potential
1
Manager / variation claims, additional risk, extension of
Technician time.
Identify all changes by completing the change
identification section of the Change Control
149
Register (contained in the Change Control
Workbook)
Change Requests may include:
• Verbal requests or instructions from customer or
customer representatives
• Written requests or instructions
• Receipt of revised or new design inputs
• Scope defects or omissions identified late in the design
process or during implementation
• Alternative solutions or ideas arising through the design
or implementation process
• Necessary changes to align or interface correctly
with 3rd party equipment or systems
Determine Impact of Change
Update the Change Request Register to identify,
where appropriate:
2 Project Engineer
• Design output categories requiring revision
• Physical work elements requiring rework
Define & communicate Change Scope
Use a Change Request Form (contained in the
Change Control Workbook) to define the change
scope in sufficient detail for the Project Manager
to assess the validity of the change and for any
3 Project Engineer effected engineers or technicians to implement
the change, if approved to proceed. Where
possible, estimate the labour resources and
materials required to implement the change.
Forward the completed Change Request to the
Project Manager for review & authorisation. Do
150
not proceed with the change until the Project
Manager has authorised the change to proceed.
Validate & assess Change Request
Review the Change Request against the project
scope and determine if the request warrants a
variation claim - if so, proceed to Project
Management procedure Variation Administration.
Update the Variation Register, contained within
the Change Control Workbook, and use this to
track progress of all Variation Claims.
4 Project Manager
Seek further clarification from the Engineer or
customer where necessary in order to determine
if the change should:
• Proceed as requested
• Proceed in an alternate manner
• Await, pending variation approval or contract instruction
• Be rejected
Reject Request for Change
Project Manager • Reject the Change Request & inform the Engineer
5 / Project accordingly (return the rejected request).
Engineer • Update the Change Request Status in the Change
Control Register
Authorise Change to Proceed
Project Manager • Obtain approval from appropriate stakeholders. If
6 / Project necessary, agree modifications or amendments to the
Engineer change scope with the Engineer then return the
approved Change Request to the Engineer as
authorisation to proceed with the requested change.
151
• Update the Change Request Status in the Change
Control Register
Implement Change
• Implement the change in accordance with the approved
Project Engineer Change Request scope.
7
/ Technician • Use the Change Request Form to monitor & record
progress against each of the effected engineering
deliverables & work elements.
Verify / Validate Change Completed
• When completed, the nominated verifier should review
& validate the change has been satisfactorily completed
& documented. Sign off the Change Request Form as
Project Engineer the formal record of verification and update the register
8
/ Lead Engineer accordingly.
• Where the change is associated with a Variation Claim,
be sure to notify the Project Manager that the change
has been completed & validated so that claims can be
submitted accordingly.
Change registered, Change Request approved / rejected,
OUTPUT - change implemented & validated, Variation Administration
invoked where appropriate
152
Report for the month of ---------- Claims
- 2007 Register
SUBMISSION REALIZATION
Remark
Notic s
e Rate Expec (Reason
Valuation of Claim Amount received
Project Project Item Issue Analysis Confirm ted s of
No. Name Description Claim d ation delays
Date of & Month
Notification Receive in
Instruction As Records d / VO of
No. Date of US realizati
US per maintain No.
Realiz
AED Submis ed AED Dollar Date ation on)
Dollars Claus
sion s
e
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1
0 0
2 0 0
3 0 0
4 0 0
5 0 0
6 0 0
7 0 0
8 0 0
9 0 0
10 0 0
0 0
0 0 0 0
153

Concluded Note:
Change, Claim and Dispute Management starts at the sales phase and finishes when the defect
liability period ends
Using the Contract Management processes and procedures correctly should significantly reduce
the risk of having to manage a Change, Claim or Dispute issue
Know the contract
Never leave project correspondence unanswered
Performance and/or silence regarding a Change, Claim or Dispute may constitute acceptance
Golden Rule of Claims –
“You can never have enough RECORDS”
POME Prescribe
S
Stop
procrastinating.
POME Prescribe
154
© 2007, POME, Gautam_Koppala, All Rights Reserved
155
MANAGING
CHANGE
REQUEST’S
156
Managing Change Requests
Considering the effort that it takes to gather requirements, assemble a team, get approvals, and put
your project down on paper, it's hard to welcome change within any element of your project. But
change is a reality in any project situation. To begin with, projects occur over a span of time, and with
the passage of time, underlying circumstances and conditions can change. In addition, projects are
completed by people, and people have new ideas, recognize mistakes and change their minds. Under
these circumstances, it would be unwise, if not impossible, to proceed with any project without
recognizing, accepting and preparing for the possibility of change.
So, the basic idea is not to prevent change, but to control it. This is the essence of project change
management - to identify, evaluate and adopt changes so that project results are enhanced. To that
end, project should be managed with a structured process designed to accept positive change and
avoid negative change.
And, any effective process for project change control needs to consider the two primary types of
change:
Reactive Change: when changes are necessary to respond to project problems (i.e. delays, technical
failures, funding shortages, resources issues, etc.). In all likelihood, reactive changes are not optional
as long as you wish to sustain or salvage the project.
Requested Change: when changes to project requirements, scope, deliverables or related
management plans are requested by end-users or other project participants. These changes can arise
from new ideas, new information, or new perspectives, and usually are requested by project customers
(i.e. your end-users). In any event, requested changes are usually discretionary, and therefore, are
difficult to control. While certain changes can enhance and improve a project, if left uncontrolled,
excessive change can lead to problems. Excessive project changes can overwhelm a project to the
point where original benefits are lost, and the project can no longer be completed as expected. The
trick to change control is to continually balance change requests against original project goals,
ensuring enhanced value, without diminishing schedules and results.
THE CHANGE CONTROL PROCESS:
Any effective change control process needs to account for the five basic elements of change
management:
• What types of changes will be allowed?
• How will changes be requested (procedures and formats)?
157
• How will changes be reviewed?
• How will changes be approved or rejected?
• How will changes be incorporated into project plans and deliverables?
Change Request Form
What types of changes will be allowed?
In order to properly control changes for any given project, you should set change boundaries...... to
establish and limit the types of changes you will consider. Obviously, if a change is required to sustain
or save a project, that change must be accepted. But if change is discretionary, then that change
158
needs to be weighed against established boundaries. For example, within a web development project,
you may be willing and able to change page design to suit end-user preferences, but you may not be
willing or able to add additional functionality (i.e. a shopping cart). A change on that level would
probably change project scope beyond its original purpose. That is not to say the shopping cart should
not be added, but that may be better left to a different project, on a different day.
In order to set effective change boundaries for a particular project, you will need to consider several
issues:
• Value and Priority. If a project is very visible and important, you may need to limit
discretionary changes to very small levels to avoid unwarranted risks.
• Timing. If the change request arrives at an early stage in the project, that change can
probably be absorbed, but if the project is more than 50% complete, that same change may
actually interfere with timely completion.
• Cost. Project changes can increase (or decrease) project costs. In order to properly manage
changes, you should set limits on change related costs, so that your budget is appropriately
maintained. In addition, for large projects, separate change budgets (also known as a
contingency fund) should be established to set limits for change costs outside of the original
budget. In effect, your initial budget establishes expected costs, and your change budget
controls the costs of subsequent changes.
• Impact. In order to maintain proper control of project change, you will need to assess change
impact - i.e. how will a given change impact your project? Will the change impact scope,
deliverables, schedules, resources, or some other project element? With this detailed
understanding, you can set appropriate, yet flexible limits as a guideline for change review and
approval.
In order to execute your change control process, you will need to establish workable procedures and
mechanisms for change request initiation. To that end, you should to address the following:
• How will changes be requested - on paper, email, or some other change request system?
• Who has the authority to request a change?
• How will requests be received and logged for further action?
At a minimum, change request forms or databases should include the following information:
• Name of the Project (including any coding system you use to track projects)
• Name of the Requestor
• Date of the Request
• Change Request Number or Code (to track change requests)
159
• Description of the Change (detailing the change and explaining the benefits)
• Disposition Status (Approve or Reject)
• Signature Lines
Once change requests are submitted and documented, these requests have to be reviewed to assess
value, timing, cost and impact. In order to deal with change requests in an efficient, timely manner,
you should establish a structured process for change request review, addressing the following:
• How will changes be reviewed?
• What is the required turn-around time for review?
• Who is responsible for change request review? (i.e. individual team members, the project
manager or a change review team?)
• How will changes be approved or rejected?
Depending upon project specifics, and the size and structure of your project team, request review
activities can be undertaken as a separate step, or can be combined with the related activities for
approval/rejection. A separation of review and disposition tasks can serve as a project "check and
balance", whereby one individual (or group) has responsibility for assessing and recommending
change action, and another individual (or group) has responsibility for actual approval or rejection.
Whether one process is used, or separate steps are followed, change disposition should address the
following:
• What is the required turn-around time for change request approval or rejection?
• Who is responsible for approval and rejection?
• How will the approval or rejection be communicated and documented?
• Will there be an official process for appeal?
• What procedures and formats will be followed to ensure that change request rejections are fully
documented (explaining the reason for the rejection)?
How will changes be incorporated into project plans and deliverables?
Once change requests are processed, reviewed and approved, the corresponding changes have to be
incorporated into the ongoing project. Depending on the specific type of change, one or more
elements of the project may be affected, and this may necessitate changes to project plans, technical
designs, resource assignments, budgets or other project documentation. No matter how many areas
of the project are affected, changes should be recorded to ensure that original documents and plans
are maintained as a baseline, with changes clearly identified. Most automated project planning tools
will track changes to plan, and will produce reports of all variations. However, as time passes, and
160
with multiple projects underway, these reports may not provide sufficient "lessons learned"
information as to the "whys and wherefores" of change approval, and the related change results.
To that end, a Change Impact Statement can be used to record change reasoning, execution and
consequences. The Change Impact Statement should document approved changes from several
perspectives:
• What was the nature of the change?
• Why was it approved?
• How was it executed?
• Were the anticipated consequences realized?
• Was the change positive or negative, and what can be learned for the future?
Concluded Note:
Change control procedures should be used to assess, track and manage inevitable changes, but
procedures and standards are only part of the picture. To effectively manage project change, you will
also need to sharpen communication and negotiation skills. In the event that a change request is
denied, you must be able to communicate and justify that decision. In the event that resistance is
encountered, you will probably need to negotiate some sort of compromise. And, on the flip side,
should an approved change result in unexpected negative consequences, you will be expected to
justify your approval decision. Change management is a risky, sensitive process, requiring a
combination of planning skills, communication, logic, experience and common sense. Any steps taken
to structure the process will help you meet those challenges.
POME Lighter Vein:
161
POME Prescribe
T
Take control of
your own destiny.
POME Prescribe
162
ACCEPTING AND
HANDLING LEGAL
DOCUMENTS
163
Accepting and Handling Legal Process Documents:
Project People are
basically not good in
handling legal aspects.
halegallegalrprocvtendenci
From time to time, Projects would be receiving or is served legal notices, court orders and other
judicial documents. These notices and documents must be handled and transmitted to the
proper internal departments of Operations as described in this administrative instruction.
164
Corporate Laws
The laws corporations should follow:
o They must respect human rights even when
capitalist governments violate them and non-
capitalist governments legislate against them.
o They are not ethically obliged to practice/provide
welfare rights when a capitalist government
does not require them to do so.
Therefore, corporate corruption may thus be
defined as either violation of human right and/or
violation of laws sanctioned by capitalist states. 1
Corporate Ethics
As the corporation is singularly self-interested, it is ethical for
the CEO to:
o Put others at risk and manipulate them.
o Avoid social responsibility.
o Present an exaggeratedly appealing image of themselves
and of their products (marketing).
All of these are traits of a human psychopath.
Downsizing is unethical not because it causes anguish to
those being dismissed, but because it may leave the firm with
few technicians to ensure safety of the corporation.
1
165
Corporate Corruption
Regulations tend to reduce profits, therefore
corporations have started giving ‘donations’ to
political parties.
‘We are dangerously close to the co-option of
government by corporations” (Deitz).
Charters of major corporations are never revoked,
only small and weak corporations suffer this fate.
1
Consult the table below
for the appropriate
Types of legal processes and
point of contact based
documents
upon type of legal
process or document.
Legal Process or Document Point of Contact
Summons and complaints in civil suits Law Department
Non-earnings garnishments Law Department
Grand jury subpoenas Law Department
Inspector General subpoenas Law Department
Search warrants Law Department
Documents concerning work-related Safety Health department
166
injuries/illnesses
Vendor garnishments/tax levies Accounts Payable
Earnings garnishments and tax levies Payroll
Child support wage assignments Payroll
Marriage dissolutions (divorce) Human Resources
Workers compensation Human Resources
Dept. of Economic Security Human Resources
(unemployment) notices or orders
Equal Employment Opportunity Law Department
Commission (EEOC)
Arrest warrants Security and Human
Resources
Legal process directed to an employee Refuse to accept
• Employee responsibilities :
If you receive or are served with a legal process document, immediately and personally do the
following, in your Project:
• Attach a note to the document that states:
• Name of person and the Project which received it
• Date and exact time received
• Name of person who served or transmitted the document.
Take the document to the point of contact listed above.
Law Department responsibilities:
167
In general, except in the areas noted above, the Law Department must act as the initial point of
contact with process servers and for receiving mail and other types of delivery of court papers
and legal documents affecting the Project. The Law Department reviews the documents received
and determines the department(s) which are to undertake compliance.
HR and Finance responsibilities :
HR and Finance are not required to bring the types of documents listed above under its domain
of responsibility to the attention of the Law Department unless the advice of the Law
Department is desired.
In regards to the receipt and handling of legal documents, HR and Finance designate a
particular employee and an alternate within the department to act in its behalf to receive these
documents and to forward the documents to the proper function within HR and Finance.
In addition, HR and Finance respond on behalf of the Project’s Company to the process
accepted, and consult the Law Department as necessary
The Corporate administratively responsible for all legal matters affecting the Projects, including
management of litigation. The Office of General Counsel's authority in this latter area is limited
by statutory provision delegating to the Attorney General of primary responsibility for
representation of the System in the Courts. However, the Office of General Counsel (normally,
part of Contracts department) does have responsibility for identifying the need for such
representation and for ensuring prompt notice of same to the Attorney General.
It frequently happens that subpoenas, notices, citations, legal processes, etc., are made on
persons other than a proper service agent, or upon someone who may not be familiar with such
matters. This service may be made on employees of Projects or administrative offices not
involved, or on persons other than officials or agents of the System or its institutions.
Under these circumstances, the risk is that the person served with process, notice, demand,
etc., will not immediately know how to handle it and thereby bring about a delay in its handling
or even its loss. It goes without saying that this could seriously impede proper protection of the
interests of the System and its Projects or, in some cases, the interests of individuals.
Accordingly, in order to minimize this risk, when any employee of the Corporate/ Project is
served with legal process, citation, subpoena, notice, demand, etc., such person should contact
Office of Legal Affairs immediately. If the document does not indicate on whom and on what
date the document was served, the employee should write this information clearly on the face of
the document. The original of any papers served should then be delivered immediately to the
Office of Legal Affairs/ Contracts department. Responses to subpoenas are processed by various
168
departments of the operations, at the direction and coordination of the Office of Legal Affairs.
Internal procedures for the processing of subpoenas can be found on the Office of Legal Affairs.
It is the responsibility of the Office of Legal Affairs to forward other legal process or documents
to the Office of General Counsel (main corporate legal body). As soon as possible the Office of
Legal Affairs should mail such process to the Project Sponsor/ Project Director/ Project Manager
and General Counsel,
Subject Litigation and Contentious Matters
To protect the interests of the Corporation, all contentious and
Purpose litigation matters are to be reported to the Law Department.
Step Who Actions / Notes
Identify any issues where:
There is a potential for Company to either
be exposed to significant liability or incur
1 Employees
significant losses;
Litigation or arbitration is threatened or
has commenced.
Report litigation issues including all relevant
2 Employees details via e-mail and/or hardcopy to your
immediate manager.
Based on relevant details, prepare (see Tools
and Templates):
A chronology of events;
3 Manager
A list of key personnel involved in the
matter; and
Instructions to the Law Department as to
169
what outcomes are desired.
Forward all of the above to the Law
Department representative via e-mail and/or
hardcopy.
4 Law DepartmentTo provide advice as to next steps.
Commencement of legal action by Company
requires approval of both the Business and
the Law Department in accordance with the
Schedule of Executive Approvals. The
Note
Business will be required to prepare a
business case showing commercial
justification for commencement of legal
action.
Subject Legislative Compliance
To ensure Company's compliance with the requirements of all Acts, regulations,
Purpose standards and operational licences applicable to its operations
170
Step Who Steps/Notes
1 HSE Develop and maintain a list of state and
Leader Commonwealth legislation that relates to
Company operations.
A regular report will be received from
HSE with identified changes to
legislation. The HSE Leader will
periodically review the report (at
least annually) and update the
published list of legislation, the
published list shall show a revision
number and/or date of revision.
The legislative report shall also be
included with this procedure and
included in the HSE component of
the Team Brief.
2 Sales Determine from tender or contract specifications
Engineers, what legislation, regulations, codes of practice or
Project standards are applicable for the scope of work
Managers, Company is responsible for.
Contract Should the information not be
Managers. referenced within the tender or
Team contract documents research will
Leaders, need to be conducted to identify the
Facility specific requirements. This can be
Managers. carried out through;
• Discussion and agreement with the
customer
• Industry associations
171
3 Sales All identified legislation, regulations, codes of
Engineers, practice or standards should be added to the risk
Project management plan for the prospect, contract or
Managers, project and control measures identified to ensure
Contract requirements are met.
Managers.
Team
Leaders,
Facility
Managers.
4 Sales Undertake regular legislative compliance audits on
Engineers, all major projects and contracts. The scope of the
Project audit is to confirm implementation of the following
Managers, documents.
Contract
Managers. • Health and Safety plan
Team • Environmental Management Plan
Leaders, • Risk management plan
Facility • Quality management plan
Managers • Identified statutory requirements
and
Audit reports are to be forwarded to
Auditors
the contract or project manager and
the relevant business manager.
Corrective actions are to be managed
in accordance with the OFI
procedure.
Note The intent of this procedure is to ensure all
statutory requirements are identified, understood
and implemented to minimise risk and maximise
172
customer satisfaction. The legislation lists are to
be used for reference purposes only; they are not
to be considered to be 100% accurate. It is line
managers responsibility to ensure legislative
responsibilities are identified and adhered too for
their operations.
POME Prescribe:
About Recognition:
Rewarding works better than nagging: A reward can be something as simple as a coin or a note of
appreciation – as long as your employees perceive it as a symbol of recognition, it works.
173
Any Questions?
Comments? For
better
improvement
Contact:
georgegautam@gmail.com
00918912550564
174
175
Heated gold becomes ornament. Beaten copper becomes
wires. Depleted
stone becomes statue. So the more pain you get in life you
become more valuable.
But year's later collection of

mistakes is called experience,
which leads to success.
176
177

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1

Kanaka maha lakshmi Thalli

Be bold when you loose and be calm when you

"Changing the Face" can change nothing.

2007, POME, Gautam_Koppala, All Rights Reserved

The Tire Swing

2007, POME, Gautam_Koppala, All Rights Reserved

2007, POME, Gautam_Koppala, All Rights Reserved

But year's later collection of

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