This week I have just jotted down a few key things to watch out for when letting subcontracts for outsourced services. This is not meant to be exhaustive but it does cover the seven most important blunders that I have come across…

 (c)  pjcross / 123RF Stock Photo

(c) pjcross / 123RF Stock Photo

1.    Contract does not reflect the proposal – although seemingly obvious, I have seen subcontracts that omit or contradict parts of the original proposal or neglect to properly deal with exclusions. In many cases the contract replaces the proposal as the definitive statement of the agreement. Where the proposal becomes part of the contract it must be properly referenced by date and version.

2.    Clarifications and changes not captured – since the process between initial proposal and contract award normally includes one or more rounds of clarification and negotiation it is important that these are adequately recorded and the resulting agreements fully captured in the contract. Furthermore, any downstream changes need to be managed with the contract being formally updated. Relying on the memory of the various participants will simply not cut it (especially when the players change).

3.    Critical prime contract requirements not flowed down into subordinate subcontracts – it is essential that there is a continuity of obligations through the entire supply chain to ensure adherence to performance/quality standards, legal requirements, timescales and matters of liability. It is also important to ensure alignment of the key supporting activities (reporting and payments for example).

4.    Inadequate definition of deliverables and timelines – a difference of interpretation wrt what and when is a trap waiting to spring a nasty surprise. It is essential, therefore, that critical delivery milestones are established and that these map to well-defined products or services. Assuming that everyone has the same understanding of what “finished” looks like is unacceptably risky – a clear statement of what needs to be accomplished to qualify as “complete” must be documented together with the associated timelines.

5.    Misaligned incentives – I have worked in situations where there was a lump sum (fixed price) arrangement with the client for a complex integration activity but a primary subcontractor providing essential equipment and services was contracted on a day-rate basis. I’m sure you can imagine how the sense of urgency was different for each of the parties. The key takeaway is that effort should be expended to align the parties and consideration should be given to some form of incentive arrangement (a carrot) supplemented by a penalty system (the stick). Sadly, in most cases, it is only the latter that gets much attention.

6.    Inappropriate risk allocation – It is important that risk is managed by the party in the best position to do so. However, before trying to dump all of your risk onto the subcontractor, it is worth noting that contingency held by you need only be consumed if a risk actually eventuates whilst risk passed into a subcontract will be costed into their price and, thereby, consumed regardless.

7.    Blurred ownership of accountabilities and intellectual property – it is important to be clear who is responsible for what at critical interfaces so as to avoid information or logistical “black holes” – by this I am talking about clarifying accountabilities wrt deliverables, their security and deployment. Moreover, it is critical to identify how ownership will be apportioned when dealing with unplanned events that affect both parties (eg medical emergency). Furthermore it is necessary to be clear how and when ownership of the final deliverable items will be transferred and what intellectual property and usage rights etc. are actually being transferred along with them.

 

As I said earlier, not an exhaustive list but, for sure, if these seven points are addressed the good ol’ 80:20 principle will prevail…

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Posted
AuthorTrevor Lindars
CategoriesCommercial