2015 Canadian Construction Overview Graphic

Article

Procurement Perspectives: contract terms have price implications

0 108 Economic

by Stephen Bauld

As an industry, we are always talking about the implications of request for proposal (RFP) and tender documents.
Procurement Perspectives: contract terms have price implications

The fact of the matter is that legal requirements for a binding contract are fairly simple. They are: (1) the existence of a consensus between the parties; (2) sufficient certainty of terms; (3) the exchange of valuable consideration; (4) an intention on the part of the parties to contract — i.e., to enter into a binding legal relationship; (5) legality of purpose and performance; (6) capacity in the part of the parties to enter into a contract.

As we all know, most written contracts go far beyond these minimum requirements.

They impose a range of obligations and confer a range of rights well beyond the bare minimum to support a contract for the supply of goods and services.

No doubt, in most cases, these additional provisions are beneficial to the transaction. They clarify the extent of the commitment that each party — supplier and municipal customer — is making to the other.

Sadly, the contracts that tend to give rise to disputes are those which contain uncertain language or that seek to impose a risk on one party to the contract that departs markedly from what would ordinarily apply.

RFP and tender documents constitute some of the most important forms of business communication.

Attention tends to be focused on including the right clauses in order to permit modifications to the original specifications, where additional needs are identified during the contract competitions; protect the issuer from the risk of litigation; or allow some flexibility in the selection of a supplier. The more fundamental commercial needs of the customer entering into the contract are given too little attention. Some municipalities will invest thousands of dollars branding themselves, but will invest little effort in producing clearly written documents under which they propose to spend millions of dollars.

When I review several municipal documents, I can see that they are in some cases, more than 20 years old.

Many changes have taken place related to municipal tenders and RFPs during this time frame.

My feeling is that a full review of municipal documents should be done, at the very least, every five years.

We can only assume that no municipality would want to pay more than market price for what it buys, but insufficient thought concerning what to put into RFP and tender documents can have that effect.

Contract terms always have price implications.

In general, supplier prices reflect the costs incurred in filling the proposed order, plus allowances for the specific risks associated with the contract; the general business risk; and profit. The allocation of risk under a contract largely flows from the terms in which the contract is drafted.

It is a very simple math problem, the more risk assigned to the contractor, the more the quoted price will be. However, risk can also arise from uncertainty.

When the document's terms are vague or otherwise confusing, they tend to create uncertainty.

The more uncertain the meaning of the contract, the higher the quoted price will be. High-risk documentation increases the price in two ways.

First, it encourages suppliers submitting a bid to hedge their prices to offset any risk that they identify.

Second, it also encourages many suppliers and contractors not to bid at all.

The importance of this second problem is easily underestimated. Generally, the bidders who decide not to bid can sometimes be the top suppliers in the field, who are able to offer the best prices. Such entities usually have their choice of work because they know they are known to be highly stable, properly capitalized, offer good quality products and have an experienced and professional staff.

These companies have made it clear over the years that they do not need to bid for high-risk work.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

Leave a comment

Or register to be able to comment.

Copyright ConstructConnect TM. All rights reserved. "ConstructConnect" is a dba for CMD Holdings.
The following rules apply to the use of this site:
Terms of Use and Privacy Statement