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The not-so subtle art of contract negotiation

Outsourcing contracts are becoming more creative and more complex. This tip describes some new terms that you might see cropping up in your contracts.

Many organizations are moving towards the trend of outsourcing some or all of their IT department's duties, and contracts are becoming more creative and equally more complex. New terms have come into the picture like value engineering, cost-equivalency value add, and expenditure savings percentage allotments. It takes more then the Webster's dictionary to figure out the new concepts and real benefits. The greatest issue is whether these seemingly helpful concepts pan out over the life of the contract and if they will, in fact, be beneficial and a true cost savings.

Value engineering refers to a contractor or consultant's ability to change or delete items in a project or an order for a customer based on a savings over budget. These statements were designed to allow a consultant to make commission on any savings realized on a particular project. This can be a dangerous amount of authority. For instance, I know of a state of the art medical facility that allowed this type of contract with their general contractor (GC). The GC eliminated the generator and power conditioning stating that it was not necessary. Obviously, this was a dumb decision, and the equipment had to be put back into the project later. Can you imagine being inside an MRI machine and the power going out? The same applies to IT contracts. If a consultant has the power to decide if someone needs a new PC or whether a server needs an upgrade, the commission dollar sign hanging over their head could lead to poor business decisions.

Slow networks are one of the greatest thieves of company productivity dollars. It is in your best interest to provide the fastest equipment and networks possible for your employees -- balanced with their needs. If a contract allows a consultant or contractor to eliminate purchases, you should consider a very explicate process of checks and balances. Any item being value engineered out of your contract should be submitted to the proper authority in your company for approval. The submittal should include justification including the pros and cons of the suggestion. It is even a good idea to have a steering committee approve or disapprove these requests. In every instance, your company should have the final say, or it is kind of like the chocolate junky guarding the candy jar.

Another new type of contract is cost-equivalency value adds. These contracts work in a similar manner to value engineering, but are based on savings of equal product substitution. These can be dangerous if enough information is not known to determine if the products are truly equal or nearly alike. Considerations such as quality, warranty periods, support available, training, and performance should be reviewed. Just like value engineering -- you should keep the final say on allowing substitutions. Your users may be using the equipment long after any contract runs out and the company can be stuck with lemon. So much for any savings!

Expenditure savings are a bit easier to swallow. This is based on a company providing a bill of materials and the consultant or contractor finds the best price, but on the exact equipment or services. For equipment only, it is pretty easy to allow a bit more leeway provided that the companies being considered as vendors are all equally stable and reliable. On the services side, however, not all service companies are created equal. There are various levels of certifications and skill sets that could leave you vulnerable.

Fixed fee contracts used to be quite popular and still are for things like conversions and implementations. These contracts require that a fee be set prior to any work being done and that is the only fee that will be paid. A detailed scope of work with responsibilities of all parties should be included as part of this contract. There is a term coined as "scope creep" which refers to the project assimilating tasks that really should be under another contract or at least in a change order. Consultants will typically price the contract slightly above their hourly estimate to handle problems that normally arise during the term of the contract to protect themselves.

Hourly contracts are the preferred method for consultants. The customer pays for hours worked. As long as there is a good check and balance for work performed, these can actually save the customer some money over the fixed fee version. But if you are considering an hourly contract -- you should carefully review the skills of the persons that will be performing the work. You do not want to pay a high hourly price tag for them to train their people. Many consultants will provide discounted hourly rates if a certain number of hours are guaranteed. This is quite common as it is easier to budget time and resources with such a guarantee.

Liquidated damages are becoming increasingly popular. With downtime costs skyrocketing and hourly revenue per employee continuing to increase, companies are realizing that never ending implementations carry a greater cost burden than just the additional hourly fee. Liquidated damages are based on estimated costs of not being able to open for business or lost revenues related to not being operational. These can be very high estimates. It is critical for any consultant or contractor to feel comfortable with the terms of the contract and both should agree on both the scope of work and project timelines. Any deviation from the timeline and/or change orders should be reflected in the due date of the contract and a clause should be placed in the contract to address these issues.

Scopes of work can make or break any contract. They should include single points of contact for both parties, escalation procedures, the responsibilities of the customer and contractor, deadlines, and exactly what is to be performed and by what parties. There should be no room for "well, I assumed." If a consultant has a milestone that relies on information from the customer, each critical date should be listed in the responsibilities section and vice-versa. Scope creep can easily happen if the scope of work is not clear and concise.

Payment terms can be based around delivery or around the scope of work. Most vendors like to see either a deposit on hardware or a guarantee of payment on delivery for hardware. Some will even require that hardware costs be paid up front. Vendors that supply hardware to a variety of customers are keenly aware of tying up their credit lines on projects. It is a good idea to spell out in the contract when each deliverable will be invoiced and terms of payment due. Some public entities only process payments once each month. It takes money to make money, as the saying goes. Contracts should not force any vendor to tie up their resources for an unreasonable amount of time. For instance, if a customer pays for hardware upon delivery, the services can be invoiced upon completion or at various stages of completion.

The most important thing to remember in negotiating any contract is that each party must be happy with the terms, or at least be able to live with them. Each party must also live up to their responsibilities. Changes should be accompanied by a written change order and work on the changes should not proceed without a signed authorization. As a consultant, vendor or contactor, you will want to be sure that you know in advance what the customer's payment terms are including dates and approval cycles for payments. As a customer, you must be reasonable in your deadline requests – remember – Rome wasn't built in a day.

About the author
Carrie Higbie, Network Applications Market Manager, The Siemon Company
Carrie has been involved in the computing and networking industries for nearly 20 years. She has been involved in sales, executive management, and consulting on a wide variety of platforms and topologies. She has held Director and VP positions with fortune 500 companies and consulting firms. Carrie has taught classes for Novell, Microsoft, and Cisco certifications as well as CAD/CAE, networking and programming on a collegiate level. She has worked with manufacturing firms, medical institutions, casinos, healthcare providers, cable and wireless providers and a wide variety of other industries in both networking design/implementation, project management and software development for privately held consulting firms and most recently Network and Software Solutions.

Carrie currently works with The Siemon Company as the Network Applications Market Manager where her responsibilities include providing liaison services to electronic manufacturers to assure that there is harmony between the active electronics and existing and future cabling infrastructures. She participates with the IEEE, TIA and various consortiums for standards acceptance and works to further educate the end user community on the importance of a quality infrastructure. Carrie is one of the few that chose to work with applications and networks providing her with a full end-to-end understanding of business critical resources through all 7 layers of the OSI model. Carrie currently holds an RCDD/LAN Specialist from BICSI, MCNE from Novell and several other certifications.

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This was last published in June 2005

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