Learning Objectives
To understand:
 the relative advantages and disadvantages of different types of procurement contracts
 contract management as a form of business risk mitigation
 short- and long-term contracting objectives
 different types of ‘non-conventional’ contracts
 challenges of good contract design
 the importance of contract law and other laws that impact on the purchasing process
 elements of good contract writing
 contract management including risk mitigation and dispute resolution
 legal liabilities of purchasing managers.

9.1 Introduction

The contract is a formal legal document, which defines the terms of the deal and the rights
and obligations of parties to the deal. This topics considers how the procurement manager can
determine the most advantageous terms of the deal and design the associated contract to
reflect these conditions. This task is described as the contracting process and it is approached
from the buyer’s perspective. In short, the contracting process involves the selection of the
appropriate contract design and the subsequent contract management process. Figure 9.1
highlights the contracting process in the wider context of the acquisition cycle.

Procurement process
Procurement strategy: make or buy
Source selection strategy: how many suppliers
Requirements specification for deliverables
End product
Figure 9.1 Contacting process in the broader context of the procurement process

These issues are addressed by Chapters 14 and 15 of MHGP, L&F ch.7, and in part of Baily
et al, Ch 9 (pp. 239-243). These notes are intended to complement rather than replace the
textbook material. As in previous Topics, you are expected to read the assigned readings. In
particular, the present notes do not cover chapter 15 of the textbook.

The purpose of the contracting strategy is to set up deals and arrange contracts that maximise
broader strategic and business objectives of the purchasing organisation. That is, contracting
strategies are guided by the high level strategic and business objectives that frame the
overarching procurement strategy (make-or-buy and source selection decisions) and, at a
lower level, determine the sourcing strategy. Once how to source the required product and
solicit supply responses is decided, the procurement department has to select the most
advantageous way of framing the purchasing requirements as purchase deals and selecting
the most appropriate form of contract to define the terms of the deal, the rights and
obligations of each party, the nature of the relationship between them, and forms of redress
available to them in the event of contractual default.

To design or select an efficient and enforceable contract, the procurement department must
have a good understanding of its strengths and weaknesses as a buyer given the market power
of suppliers. It should also be aware of the limitations of its knowledge of the deliverable,
how it is produced and supplied and how it is going to be used. As observed in previous
Topics, there are considerable asymmetries in the way knowledge about the product and the
production/delivery process is distributed between the buyer and the seller. The buyer is often
in a poor position to be specific about technical and performance attributes of the product to
be purchased. Similarly, the buyer may have a very limited knowledge of the supplier’s
technological and organisational capabilities. If that is the case, the buyer should adopt a
contracting strategy that reflects its limited knowledge of the product and supply conditions
while allowing itself scope to learn as the relationship develops and protect its business
interests against the supplier’s opportunistic behaviour…………………………………..

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