Five factors to be considered For Awarding a Contract in Procurement and Suppliers

After a contract has been agreed upon, the signed contract documents such as the purchase order, Ts & Cs, and other relevant documents must be sent to the supplier for signature.

1.     Signature Authority

Only those individuals who are authorized by their organizations can approve and sign a contract. The type of contracts and approval amounts are stipulated by the organization and documented in company policies and procedures. Supply managers have purchasing authority for their organizations. It is important to ensure that the person signing the contract for the supplier has been delegated the authority to enter into contracts by his or her organization. Often the salesperson does not have signing authority, and the contract must be signed by the sales manager.

Awarding Contracts

After the all terms of a contract have been agreed upon with the supplier, the contract is awarded. Legal and regulatory protocols must be followed when awarding contracts.

Agency and Authority

The law of agency governs the legal relationship that exists between two parties by which one (the agent) is authorized to perform specific business activities for the other (the principal) (ISM Glossary 6th edition). When entering into contracts, supply management professionals are agents for their organizations. An agent is a person, or an organization, authorized to act for another person or organization (the principal) in prescribed dealings with a third party. Agents have a fiduciary duty to act in the best interests of the principal, be accountable for monetary transactions, follow the principal’s instructions, and perform their duties with reasonable care. In return, the principal must compensate the agent, reimburse them for expenses, indemnify them, and maintain proper records.

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Sign the contract

The principal grants authority to the agent to engage in legally binding transactions on its behalf (ISM Glossary 6th edition). The level of authority can be stated specifically in one’s job description (ISM Glossary 6th edition) or it can be implied based on what is needed to accomplish the principal’s expressed interests. Typically, for supply management professionals, authority is based on a spend value. Apparent rather than actual authority occurs when an individual behaves as if he or she has authority, but does not.

Who is Agent to Sign Contract?

Agents may be general and be involved in ongoing transactions for the principal. Special agents are only authorized for a single transaction. Typically, most sales personnel are special rather than general agents. Typically, their authority is limited and does not include entering into a contract. If a special agent acts outside his or her authority, the principal, generally, is not liable.

Involving Legal in Signing a Contract

Before signing a contract, if there are any questions it is useful to get advice from legal counsel. Issues that are important to explore include terms and conditions as well as applicable laws. For contracts to become legally binding they must be signed (and in some cases depending upon the requirements, sealed and notarized) by individuals who have signature authority for their organizations. Each individual signing the contract must have been granted the authority by his or her organization.

Involving Legal in Signing a Contract for Supplier

For suppliers, typically signature authority is not with the salesperson but is with a manager or someone at a higher level in the organization. If the organizations have agreed, and it is allowed by the countries’ laws and regulations, digital signatures rather than handwritten ones are legally binding. Because technology and the legal environment are rapidly evolving, it is important to understand the current laws affecting digital signatures.3

Awarding contract for buying organization

The buying organization’s policies and procedures typically state when a notice of award needs to be communicated to all suppliers who submitted bids. This is typically required for large dollar value or construction contracts but not for more routine types of contracts. In some cases, a debriefing after the award may be held with suppliers that did not receive the award. During the debrief, it is important to only focus on that supplier. Information about the winning supplier should not be shared. Further, suppliers who believe that they were treated unfairly during the sourcing process may protest. In the private sector, the process for addressing protests involves informal discussions with the supplier. A more formal process is used in the public sector. For example, in the U.S., protests for federal government contracts are filed with and investigated by the Government Accountability Office (GAO).4 All third-party organizations that will be involved in the contract should also be notified of the award.

2.     Execution of Instruments

For contracts to become legally binding they must be signed, and in some cases depending upon the requirements, sealed and notarized, by individuals who have signature authority for their organizations.

Legal and regulatory protocols

When awarding contracts, all legal and regulatory protocols must be followed. For example, the supplier may be required to submit proof of insurance and certifications as required by law or regulations before the contract is signed. Further, many countries allow electronic and digital signatures, but the laws and regulations vary and are evolving as technology changes (Adobe, 2015). Thus, it is important to understand the current legal and regulatory protocols that are required, especially when sourcing globally.

Organizational protocols

Organizations typically have specific processes and procedures with respect to the approval process that must be followed when developing and awarding contracts to suppliers.

Contract Administration Concepts

Contract administration is “the management of various facets of a contract to ensure that the contractor’s total performance is in accordance with the contractual commitments, and that obligations to supply management are fulfilled” (ISM Glossary 6th edition). Contract administration encompasses steps taken by the buying organization and the supplier to achieve the following objectives:

  • Ensure that each organization fulfills its obligations as agreed upon in the contract.
  • Ensure that the supplier’s performance complies with the contract.
  • Protect the buying organization’s interests by prompt and fair resolution of any problems that arise during contract performance.
  • Ensure fair treatment of the supplier during contract performance.
  • Document contractual transactions.

Post-Award Conferences

For large or complex contracts; contracts with new suppliers; or when awarding business to small, diverse, and historically underrepresented businesses, it is useful to hold a post-award conference with your internal stakeholders and the supplier’s team soon after the contract is awarded. During the conference you can review expectations, determine how to communicate during the contract performance, and build a cooperative relationship. For example, in its Federal Acquisition Regulations, the U.S. government has policies and procedures for conducting post-award supplier conferences.5

Work Control

The concept of work control is necessary because contract administration needs to ensure that the supplier’s performance complies with the contract and that the supplier is compensated for its work. Steps taken as part of work control include work ordering, work completion, work inspection and acceptance, invoicing, and payment. Once the work is ordered and completed, the outcome is inspected as a way of monitoring. When the work is accepted, the supplier submits an invoice and payments are made. To facilitate work control, larger projects may be broken down into smaller segments or milestones. When a milestone is reached, typically progress is reviewed to ensure compliance with all contract requirements before work continues. In some types of contracts, for example construction contracts, payments are scheduled based on attainment of milestones.

Ensuring Compliance

Contract administration processes need to be standardized, have effective internal controls in place, and be audited on a regular basis. According to COSO (Committee of Sponsoring Organizations of the Treadway Commission), internal control is defined as “a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.”6 The COSO framework identifies and defines five components that are required for internal control: 1) control environment, 2) risk assessment, 3) control activities, 4) information and communication, and 5) monitoring.

U.S. Sarbanes-Oxley Act of 2002 for Awarding a Contract

Many U.S. corporations have adopted this framework for reporting as required by the U.S. Sarbanes-Oxley Act of 2002.

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  • Control environment: The buying organization must have top management commitment and a supporting organizational culture. Policies and procedures must be standardized.
  • Risk assessment: The processes that are at risk for noncompliance and fraud should be identified and improved.
  • Control activities: Processes should be designed to separate duties such as ordering, receiving, and payment. Approvals should be required and information systems should be used to ensure compliance.
  • Information and communication: Relevant and timely data should be available. There should be a way for employees, suppliers, or other stakeholders to report concerns.
  • Monitoring activities: Monitoring and analytics should be used to identify irregularities and confirm the controls are working as expected.

How Auditing of a Contract Can be Done

Auditing is a structured review, normally conducted by an independent party such as an internal or external auditor. During audits, data are analyzed to verify that payments, accounts, records, or performance are as expected. The receiving reports and supplier’s invoices should be audited for price compliance and work flows should be reviewed.

Awarding Large Contracts

For large contracts that are critical to the buying organization, additional steps are needed to ensure compliance. While the contract is being performed, supplier activities are monitored to evaluate performance and identify potential problems. Day-to-day monitoring and administration may be done by internal customers or by third parties, especially if the contract is highly technical or complex. These individuals must understand the contract requirements and their roles, responsibilities, and authority.

Measure Supplier Performance After Awarding Contracts

Information about a supplier’s contract performance can come from a variety of sources. For example, you can hold regular progress meetings with the suppliers, obtain feedback about performance from internal stakeholders, require suppliers to submit regular progress reports, or visit the suppliers’ facilities. Supplier progress reports should show the supplier’s progress relative to the schedule, status of work to be done, any issues or problems encountered, and the steps taken to address the problems. In some cases, such as major construction projects, contract administrators are typically located onsite at the project. In other major projects, the contract administrator may be located at the supplier’s facility or the supplier may have a representative co-located at the buying organization’s location. The solicitation documents and contract should be clear about the supplier’s requirements and responsibilities, such as submitting progress reports or co-locating personnel.

Supplier monitoring should review quality, costs, schedule, potential changes, resources used, the supplier’s internal monitoring processes, adherence to Ts & Cs, documentation, subcontract plans, and legal and regulatory issues.

Financial Responsibility

From the award of a contract to closeout, suppliers are concerned about receiving timely payment for work completed. Fixed price, cost-reimbursable, and indefinite-delivery contracts create different financial relationships between the buying organization and the supplier. For instance, a firm fixed-price contract incentivizes suppliers to contain and reduce costs because for them, any amount saved below the contract price is additional profit.

Approving Systems

The logic behind approving systems is to add the final control point to make sure the supplier takes financial responsibility in labor-hour, time-and-materials, and cost-reimbursement contracts.

For labor-hour, time-and-materials, and cost-reimbursement contracts, however, approving system requirements include review processes for subcontract consent, supplier purchasing system, employee compensation, and other review programs. The supply management organization usually reserves the right to prior approval of subcontracting work planned by the supplier, and the subcontract consent review process is explained in the subcontracts clause of most major contracts. The goal is to ensure that the supplier has made decisions for expenditures in accordance with the interest of its constituents (for example, taxpayers) by reviewing the total system of subcontracts and POs awarded by the prime supplier to its suppliers. In the private sector, this type of review can be performed by a team from the buying organization or by an independent consulting organization specializing in external auditing.

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Administrative Responsibilities. 

When administrating a contract, supply management professionals have a broad range of responsibilities covering purchasing, contract law, transportation, health and safety regulations, and social responsibility. Most of these issues are delineated in the contract, and the supply management professional can collaborate with other experts in the organization to ensure that suppliers are meeting the contract requirements. However, the difficulty of administering a contract increases when a change or adjustment must be made. Changes fall into two primary areas: price adjustment clauses and administration change orders.

Stages in Awarding a Contract

Generally, price adjustment clauses are a “provision in long-term contracts to alter the agreed-upon price in accordance with changes in the contractor’s costs or other market factors” (ISM Glossary 6th edition). Adjustments are made according to the fluctuations in the supplier’s established prices and with applicable labor and material cost indexes. Adjustment clauses should be used when the contract is for a large amount of money, covers a long period, and there is a significant level of volatility in prices.

Because it is difficult to foresee all potential problems in advance, it is rare for a contract to be completed without some changes. Sometimes it is necessary to make changes to a contract after the work is already underway. A change order is “the purchaser’s written authorization to the supplier to modify or change an existing purchase order (ISM Glossary 6th edition). The administration of change orders is necessary when the terms as specified in the present contract must be modified regarding price, quantity, quality, delivery, or other terms of agreement. Therefore, it is critical that the original contract define an equitable procedure for handling such changes for an effective resolution of issues. However, change orders should be minimized because they generally increase costs and can lead to delays.

Awarded Contract Documents. 

Each contract has its own documentation requirements. The contract administrator is responsible for determining what they are and ensuring that they are met. The procedure may be formal with written checklists, or may involve notes in the contract file. The goal is to document all actions and verify all requirements.

Conflict and Dispute Resolution

It is inevitable that disagreements and conflicts will occur over the course of contract performance. Supply management professionals must understand the sources of conflict and effectively resolve disputes between the buying organization and suppliers. Supply management professionals often are viewed as impartial sources that both the supplier and the buying organization can look to for fair and just resolution of conflicts. The buying organization’s position must be considered, but the supply management professional must resolve issues in an ethical, legal manner so that both parties believe a fair solution has been reached.

Breach of Contract

The ISM Glossary 6th edition defines dispute resolution as the various means of resolving disputes or conflicts between the parties to a contract, including negotiation, arbitration, mediation, litigation and/or others. When resolving contracts, it is important to try to obtain a solution that is fair to both parties and supports a good buyer-supplier relationship. Ideally, issues with suppliers should be resolved before they result in a breach of contract by either party. A breach of contract is “the failure to perform any obligations included in the contract terms” (ISM Glossary 6th edition). If a breach occurs then a remedy, which relieves or corrects a legal wrong, is needed (ISM Glossary 6th edition). Typical remedies for breach of contract are monetary awards or an order of the court for specific performance. Common types of breach of contract and remedies are shown in Figure 7-1.

Curing BreachThe supplier is given a period of time to correct the problems and come into compliance.
Failure to PerformThe buying organization should be put in the situation it would have been in if the supplier had not breached the contract. This legal proceeding is referred to as restitution.
Partial PerformanceThe supplier normally covers the costs that are incurred by the buying organization to complete the performance of the contract.
Delay in PerformanceGenerally, the buying organization can recover the costs that occurred because of the delay.
Specific PerformanceThe supplier must perform the contract as agreed upon.

There are some special situations that should be considered. If there is a mistake in the original contract, it can be revised or “reformed” to correct the mistake. In some situations, a court may rule for “rescission” which makes the contract null and void from its inception and both the buyer and seller are restored to the position at the start of the contract (ISM Glossary 6th edition). Both parties may agree to rescission in writing.7 Misrepresentation or fraud are other situations that can lead to rescission.8

3.     Notice of Awards

Whether a notice of award is sent to all bidders typically depends on the buying organization’s policy, and on the nature and value of the pending contract.

In U.S. public sourcing, except when a bidder gives justifiable advance notice that a part of its bid is proprietary, bid and award records are public. Any bidder, as well as any other party, may have a right under the federal Freedom of Information Act or similar state and local laws to review the records upon request.

4.     Closeout of Award Process

When an award is made and a contract has been signed, the closeout process involves communicating with suppliers as well as with internal stakeholders.

  1. External closeout (e.g. debriefing) — Debriefing with suppliers who did not win the award can help them understand how they can improve their performance in the future. The debriefing should focus only on the strengths and weaknesses of the supplier’s own offer relative to the selection criteria, and the winning supplier’s offer should not be discussed in any way. Debriefing sessions are not opportunities for unsuccessful bidders to resubmit proposals or to attempt to reverse the buying organization’s decision.
  2. Internal closeout — As part of the closeout process, end users must be notified of the successful supplier, and arrangements may have to be made for introducing staff members who will be working together. Depending on the project, certain internal customers may also need to be debriefed to understand why the sourcing decision was made.

5.     Protest

Suppliers may protest if they believe they have been unfairly treated. In the private sector, the process is informal and involves a discussion between the salesperson and the supply management professional and sometimes managers. The intent is to explore the reasons for the supplier’s protest.

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In the U.S. public sector, the process can be more formalized and different local, state or national agencies have documented processes for supplier protest.

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