EPM5710 | Management | The Role Of Commercial Terms And Conditions

Consider the given case study (Procuring textiles made from recycled fibres: Ministry of Defence of the Kingdom of the Netherlands (MODNL); PDF file) and answer the following questions:

 

1. Explain each part of the "Flowchart for Optimal Utilization of Market Intelligence to Address Sourcing Challenges".

 

2. Analyze those factors that are important when MODNL needs to qualify and select suppliers for a project requirement.

 

3. Examine the key factors, including risk factors that affect buyer/supplier decisions concerning contract pricing and the selection of the proper contract type.

 

4. Given a procurement situation for a major contract, analyze the application of e-Procurement and other types of supplier bidding models available for MODNL.

 

5. Given a situation to solicit a bid proposal, evaluate technical, management, commercial and ethical requirements, and then prepare a RFP for MODNL.

 

6. Given the receipt of a proposal or competitive proposals for a major contract, determine the key factors used when negotiating an agreement or evaluating competitive proposals and establish a negotiating strategy for MODNL.

 

7. Analyse and select effective contract management techniques to control contract cost, schedule and performance factors; as well as manage contract changes, contract claims and contract close out for MODNL.

 

8. Given a claim on a major contract, analyse the role of commercial terms and conditions, the uniform commercial code (UCC) and applicable government regulations on the outcome for MODNE.

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The Process part of the flowchart includes two main categories namely sourcing execution and implementation.

Sourcing Execution – As per the requirement of sourcing execution, a list of suppliers is to be developed by considering whether they meet the business requirements or not. Next, it is required to understand the requirements of the potential suppliers in the business. Finally, the quotes against price benchmarks are to be analyzed and the price vs. value must be identified and understood.

Implementation – In the implementation phase, the best prices in contracting are to be determined before proceeding with the development of supply contracts. This is followed by developing suitable practices for supplier management. Finally, a continuous improvement plan is to be developed, implemented and monitored on the business performance context.

The main objective of this flowchart is to develop a suitable roadmap of marketing strategy development and also arrange the phases in specific sequences, the order of which must be followed for enhancing business strategy development process.

2. There are several important factors that are to be considered during selection of suppliers for MODNL. The factors include both technical and non-technical specification criteria and are discussed as follows.

Technical Factors – Since MODNL has taken initiatives to procure textile supplies containing recycled post consumer textile products, it has set some technical specifications regarding the products that will be procured. As per the specifications, the towels and overalls ordered by the company must contain at least 10% of recycled textile or else the suppliers will not be considered (Turner, 2017). Furthermore, in order to ensure the criterion is met, the company requires the suppliers to present test results of microscopic testing of the fiber quality. In this testing, the suppliers need to conduct microscopic test to determine length of the fiber, quantity of damaged fiber and the nature of fibers used in order to determine the percentage of the recycled fiber used. However, it is also specified that the fiber should only be from post consumer textile material instead of production waste and textile gathered from other sources. The company has also developed an awarding system in which the selected suppliers will be awarded additional points based on the amount of recycled fiber used in the materials.

Non-Technical Factors – In addition to the technical factors, there are some non-technical factors associated as well that are common in any form of contract like pricing, costs, supply strategy and others (Warner, 2017). MODNL has developed a contract specification that includes €430,000 worth of towels and wash clothes and €1.38 million for overalls. However, a drawback in this specification that has been faced is that the suppliers only bid for the towels and overalls and no one bid for scarves and handkerchiefs.

Hence, based on the analysis of the specifications above, it can be said a number of factors are to be considered for selecting suppliers for the proposed product. The first factor that is to be considered is the quality of the cloth as well as its components. The second factor to be considered is the contract value and the ability of the supplier to fulfill the contract criteria as per the supply and cost requirements.

3. The key factors that affect buyer / seller decisions concerning contract pricing and selection of proper contract type are discussed as follows.

Value for Money – The first major factor that is always considered during contract pricing in any project is the value for money. While developing the contract, both the parties need to determine whether the proposed contract is value for money or not (Kerzner & Kerzner, 2017). For instance, let there be two companies A and B who will sign a contract worth €200,000 between them. However, before signing the contract, both A and B will need to consider whether the said amount is value for money or not, A will decide whether the services or products they receive are worth that value and B will decide whether they are receiving sufficient profit in exchange of labor or service provided. If one of the parties thinks that the value is not worth the service they provide or receive, the contract negotiation will restart.

Client’s Priorities – In spite of the consideration for value for money for both the parties, the contract terms and pricings are generally developed as per the alignment with the client’s priorities. An example can be presented considering this particular case study that is being analyzed (De Araújo, Alencar & de Miranda Mota, 2017, pp. 353-377). MODNL requires a large volume of textile product supplies and there are several suppliers who are ready to supply the same to the company. However, the client i.e. MODNL has also specified that the products must have certain percentage of recycled textile and hence, based on the priority, the suppliers must fulfill this requirement before proceeding to procure the contract and provide supplies to the organization.

Quality Considerations – Often during development of contracts, depending on the type of project, there are certain quality considerations that are to be made while developing the contract. The quality considerations mainly include the desired quality of products or services to be delivered as per the prices determined for the same. In this project, MODNL has set certain quality requirements of the materials required that are mainly focused on reducing pollution from the textiles and reusing the post consumer use of textiles (Handfield, Primo & Oliveira, 2015, pp. 15-41). The suppliers must fulfill the quality consideration requirements in order to procure contract from MODNL.

Based on the factor considerations as well as the requirements of the case study presented, it is important to decide the type of contract that is to be used for the project. There are several different types of contract namely lump sum contract, incentive contract, cost plus contract, unit price contract, percentage fee of construction contract and others. This particular project is mainly based on the supply of textile units at a suitable price (Rendon & Rendon, 2015, pp. 710-730). Hence, the most suitable contract type to be used for the project is unit price contract i.e. the total value of the contract will be determined based on the total units of the products to be delivered, the unit prices of the products and some additional discounts due to ordering of a bulk quantity of products.

4. Based on the project requirements, MODNL has come across a procurement situation for a major contract regarding the supply of materials required. Accordingly, MODNL wants to conduct the offering of supply contract in form of e-procurement. This is mainly because physically handling and tracking of the contract and the huge volume of supplies are not sufficient. Use of e-procurement model significantly simplifies the overall process as well as provides a faster way of communicating with the supplier. In addition, MODNL also wants to adopt a specific supplier bidding model that will ultimately aid the overall business process.

For the e-procurement purpose, there are several models available that can be selected based on the type of business conducted by the organization (Hughes, Champion & Murdoch, 2015). The most suitable e-procurement model for MODNL is the business-to-consumer model as the contract is mainly developed between the business organizations (supplier) and the consumer (user). The adoption of this particular e-procurement model will save a lot of cost and time of MODNL as well as provide a much efficient way of ordering materials through the electronic medium without the need for manual handling or auditing.

For the bidding purpose, MODNL has a specific contract ready if they manage to procure a suitable supplier. Moreover, there are a number of criteria that are to be considered while selection of the supplier. The bidding model to be followed here is supplier bidding i.e. the suppliers will bid for earning a contract with the organization. There are several bidding methods for the project including timed bidding, unique bidding and others (Rendon & Rendon, 2016, pp. 748-767). However, for this project, timed bidding can be used in which the highest bidder within a specific amount of time will be chosen for the contract. However, the bidders must be able to fulfill certain criteria that are already discussed above. Furthermore, based on certain criteria like percentage of recycled textile used in the supplies, the bidders will have additional bonus points that will also be considered when accepting bids for the project.

5. For the purpose of the project along with the given set of conditions and situations, a request for proposal (RFP) is to be developed. However, before developing the RFP, several considerations are to be made as follows.

Technical Requirements – The main technical requirement for the project is that the towels and overalls that are to be delivered by the supplier must contain at least 10% of recycled textile in addition to the regular textile used for creating the textile products. Furthermore, in order to ensure the criterion is met, the company requires the suppliers to present test results of microscopic testing of the fiber quality (Selviaridis & Wynstra, 2015, pp. 3505-3540). In this testing, the suppliers will have to conduct microscopic test to determine length of the fiber, quantity of damaged fiber and the nature of fibers used in order to determine the percentage of the recycled fiber used.

Management Requirements – Management requirement mainly involve monitoring of the entire bidding and contract preparation process. The management needs to develop the best possible contract that will be profitable as well as will fulfill the requirements of the suppliers. The management also needs to ensure the entire process is conducted in a required way and the suppliers are providing the products as per requirements presented by MODNL.

Commercial Requirements – While MODNL is the user / consumer who will buy textile products from the suppliers, there are a number of commercial requirements associated with the project. Mostly, the price per unit of the products will have to be the lowest possible as commercially available. Furthermore, due to bulk quantity order, MODNL wants certain percentage of discount on the product prices.

Ethical Requirements – The bidding process must be conducted ethically ensuring there is a fair policy used to select a bidder based on the bid amount and the additional points for more percentage of recycled textiles in the product (Patrucco, Luzzini & Ronchi, 2016, pp. 739-761). If any bidder is found to be guilty of not following the ethical requirements, that bidder will not be considered for selection. Furthermore, false reports on the textile contents, wrong information on the unit prices of the products and other unethical activities will be penalized even if the contract is already signed.

Furthermore, a request for proposal (RFP) is developed as follows.

Statement of Work (SOW)

Company Name: Ministry of Defence of the Kingdom of the Netherlands (MODNL)

Project Manager: PLEASE FILL

Business / Organization Owner: Kingdom of the Netherlands Government

Project Duration: 82 Days

Work Requirements (Deliverables) and Proposed Duration:

For the entire project period, the following work requirements and duration need to be followed.

Task Name	Duration	Start	Finish	Status / Duty
Procurement of Textile Products for MODNL	82 days	Mon 11/5/18	Tue 2/26/19
Tender for Project Contract	9 days	Mon 11/5/18	Thu 11/15/18
Analyze the Contract Requirements	2 days	Mon 11/5/18	Tue 11/6/18	Done by MODNL Management
Analyze Supplier Requirements	2 days	Wed 11/7/18	Thu 11/8/18	Done by MODNL Management
Develop Tender	4 days	Fri 11/9/18	Wed 11/14/18	Done by MODNL Management
Release Tender for Contract Bidding	1 day	Thu 11/15/18	Thu 11/15/18	Done by MODNL Management
Contract Bidding Process	13 days	Fri 11/16/18	Tue 12/4/18
Select Suppliers Based on Responses Submitted	7 days	Fri 11/16/18	Mon 11/26/18	Work Requirement
Clarify Project Requirements	2 days	Tue 11/27/18	Wed 11/28/18	Work Requirement
Clarify Budget	2 days	Thu 11/29/18	Fri 11/30/18	Work Requirement
Start Bidding Process	0.5 days	Mon 12/3/18	Mon 12/3/18	Work Requirement
Accept Bids from Suppliers	0.5 days	Mon 12/3/18	Mon 12/3/18	Work Requirement
Select Highest Bidder	1 day	Tue 12/4/18	Tue 12/4/18	Work Requirement
Contract Discussion	5 days	Wed 12/5/18	Tue 12/11/18
Discuss with the Bidder Regarding Contract	2 days	Wed 12/5/18	Thu 12/6/18	Work Requirement
Determine Contract Details and Terms	2 days	Fri 12/7/18	Mon 12/10/18	Work Requirement
Sign Contract with the Supplier	1 day	Tue 12/11/18	Tue 12/11/18	Work Requirement
Production	44 days	Wed 12/12/18	Mon 2/11/19
Place Order for the Materials	4 days	Wed 12/12/18	Mon 12/17/18	To be Done by MODNL Management
Production of the Materials	30 days	Tue 12/18/18	Mon 1/28/19	Work Requirement
Delivery of the Materials	10 days	Tue 1/29/19	Mon 2/11/19	Work Requirement
Project Closing	11 days	Tue 2/12/19	Tue 2/26/19
Review Quantity of Materials Delivered	3 days	Tue 2/12/19	Thu 2/14/19	To be Done by MODNL Management
Review Quality of the Materials	5 days	Fri 2/15/19	Thu 2/21/19	To be Done by MODNL Management
Finish Payments as per Contract	2 days	Fri 2/22/19	Mon 2/25/19	To be Done by MODNL Management
Close the Project	1 day	Tue 2/26/19	Tue 2/26/19	To be Done by MODNL Management

Proposal Requirements

The selected supplier will have to follow the work packages in the timeline above except the ones that are specified to be done by the management. The budget will be specified later based on the total units of materials required but after deciding the budget, it will not be further changed. The proposal submitted by the supplier should fulfill the following requirements.

• The supplier must work within the timeline specified above and deliver the products on the mentioned delivery date. The timeline can only be changed if there is a delay due to a management fault regarding the contractual works or placement of additional order.
• The total value of the contract will be based on the unit price of the products. Hence, when submitting the budget, the bidder must mention the total budget inclusive of discounts for bulk order.
• The proposal should only be developed based on the work packages specified.
• The bidder must provide previous work details and background with valid proofs along with the proposal.

Contractual Provisions

The contractual provisions for the project are as follows.

• Once the contract is signed, the supplier cannot refuse to work in the project.
• Once specified in the contract and agreed, the budget will not be further increased.
• Half of the payment will be made in advance and the rest will be done once the products are delivered and quality is analyzed and ensured.
• Any faulty or poor quality products, late delivery of products, insufficient quantity of products delivered and similar other situations will call for penalty against the supplier.
• Fake information and background, no business license and working against contract specifications will call for legal action against supplier.

Any supplier is welcome to submit bid for the project if he is ready to follow all the provisions and requirements specified above.

6. After receiving the proposals or competitive proposals for the major contract, several key factors are to be considered as follows.

Supplier Background – Before considering the proposals, the supplier background is to be thoroughly checked and analyzed. If the supplier does not have a satisfactory background and past records cheating, the proposals will be immediately rejected.

Proposed Budget – Even after specifying the budget for the project, the budget requested by the suppliers have to be considered as they also include fulfilling certain supplier requirements like labor cost, transportation cost for delivery and others. Suppliers with unrealistic budgets will be rejected and those with reasonable budget will be selected and negotiated further.

Evaluation of Competitive Proposals – When competitive proposals are received with similar attributes like budget and delivery time, several other factors need to be considered before making final selection (Hackett & Statham, 2016). These factors include reputation and size of the supplier, the technical setup available to the suppliers, past records of delivery, technical specifications of the materials provided by the supplier and others.

The negotiation strategy for MODNL should be mainly focused on reducing the overall price / budget of the project. Furthermore, any negotiation should be done considering the decided delivery date as the final and unchangeable deadline for the project.

7. Several contract management techniques are available that are utilized by project managers to control contract cost, schedule and performance factors. Any suitable technique can be chosen but should include the following.

Request – In this phase, favored contractual terms are requested from the supplier. However, it is to be ensured that the proposed contractual terms are within the feasible and reasonable limits.

Generate – After sending the request, a number of different contract terms including budget, schedule, work orders, delivery and others are generated and submitted. These terms are listed down in the draft contract document.

Negotiate – This is the main phase when the contract terms are negotiated. While the target of the organization who will hand out the contract will be to reduce the budget as much as possible, it is also needed to be ensured that the suppliers are receiving their parts of the benefits (Ashworth & Perera, 2018). In addition, negotiations are to be done for inclusion or exclusion of certain terms of contract based on priority and convenience of both the parties involved in the project.

Approval – Once the negotiations are completed, the final terms of contract are noted down in the final contract document. The document is reviewed and final approval is granted by the management to proceed with the contract. Finally, the contract is signed by the two parties before proceeding to the project.

Execute – Based on the terms of contract, the project is executed. In this case, after the project is finalized, the suppliers will proceed to the production of the materials following the timeline specified in the contract. They will also deliver the materials within the provided deadline before receiving full payments for the project.

Search / Report – A preferable process is to keep the copy of the contract in the electronic media so that searching and reporting for the contract is much easier. Manual records may get destroyed or lost during the course of the project.

Comply – After the project is completed, a detailed analysis is to be undertaken to ensure every activity of the supplier has complied with the terms specified in the contract.

Amend / Review – Finally, a review process is to be conducted to determine whether the contract period is completed successfully. If not, amendments are to be made for remaining or further work after agreement between the two parties.

8. Commercial terms and conditions, the uniform commercial code (UCC) and various other government regulations will play major roles on the outcome of the contractual process of MODNL. There are specific commercial codes and regulations that have been developed solely based on the need to enhance the business processes and promote clean commercial exchanges and services (Luo, Li, Wan, Qu & Ji, 2015, pp. 274-283). Any organization that wants to undertake commerce based project must comply with all the codes, terms and conditions accordingly. If the organization is found guilty of breaking any of the rules and conditions, the project license may get suspended in addition to further penalties. These actions have significant negative impacts on the project itself. Hence, it is always recommended to follow all the rules, codes and guidelines throughout the course of the project. Some of the major terms and regulations are listed as follows.

• Follow all industrial standards regarding the materials desired and ordered to the supplier
• Procure the materials from the supplier who is fully licensed and listed in the industry
• All taxes must be paid while paying for the orders with all specific transaction details shown to the Government
• The bidder selection process must be fair and follow industry regulations
• The organization must fulfill all the terms of contract that have been signed with the supplier or the supplier is free to take legal action
• The supplier must provide appropriate quality and quantity of materials as decided in the contract itself or may face legal action

References

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Ashworth, A., & Perera, S. (2018). Contractual procedures in the construction industry. Routledge.

Baily, P. (2017). Procurement. In Contracting for Project Management (pp. 105-116). Routledge.

De Araújo, M. C. B., Alencar, L. H., & de Miranda Mota, C. M. (2017). Project procurement management: A structured literature review. International Journal of Project Management, 35(3), 353-377.

Hackett, M., & Statham, G. (Eds.). (2016). The aqua group guide to procurement, tendering and contract administration. John Wiley & Sons.

Handfield, R. B., Primo, M., & Oliveira, M. P. V. D. (2015). The role of effective relationship management in successful large oil and gas projects: Insights from procurement executives. Journal of Strategic Contracting and Negotiation, 1(1), 15-41.

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Patrucco, A. S., Luzzini, D., & Ronchi, S. (2016). Evaluating the effectiveness of public procurement performance management systems in local governments. Local Government Studies, 42(5), 739-761.

Rendon, J. M., & Rendon, R. G. (2016). Procurement fraud in the US Department of Defense: Implications for contracting processes and internal controls. Managerial Auditing Journal, 31(6/7), 748-767.

Rendon, R. G., & Rendon, J. M. (2015). Auditability in public procurement: An analysis of internal controls and fraud vulnerability. International Journal of Procurement Management, 8(6), 710-730.

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