Relationship between Contract Law and Procurement

Write a critical and analytical report on the following topic:

“Should procurement professionals know fundamental principles of contract law essential for making sound contact negotiations and decisions?”

The report intends to examine whether the procurement professionals should know the principles of contract law essential for making sound contract negotiations and decisions. The report will eventually focus on why is it important for procurement professional to know the contract laws in order to make negotiations, explain the essentials required to fulfill for successful business. This report further discusses the domestic and international procurement and the strategies to be followed for contract negotiation.

A lay-man’s version of contract means an agreement which legally binds the parties. However, contract is much more than that. Law of contract lays down the conditions following which the agreement or promises made will be legally binding and parties to the contract can enforce it only when the contract fulfills the conditions. Contract law and procurement has a strong nexus between them as all the transactions made between the organization and the customers are within a proper legal framework.[1]  Procurement means the process used to acquire services or goods from any external source through Tender. It is used to ensure that the goods or services provided are upto the mark without involving any risk. Almost all the organizations have professionals who look after the procurement activities of the organization. Both private and government departments procure through Tenders. Therefore, the professionals need to have the basic knowledge regarding the contractual rights and obligations because people are gradually becoming aware of their basic legal rights. [2]

The report is structured as follows: the purpose of procurement in an organization, analyzing the relationship between laws of contract and procurement, the requirements for a sound contract negotiation, findings on international procurement and strategies to be followed for contract negotiation. These topics will be critically analyzed to see how law of contract is an essential part of any procurement activity carried on in an organization.

Purpose of procurement

Procurement is a process in any organization that works to gather information regarding suppliers, making negotiations, maintenance and monitor the quality and quantity of products. Procurement helps the organization to maintain their competition in the market. It is an important component that helps in the management of the company. Therefore, professionals are hired for this purpose. Procurement professionals help in delivering benefits and the organization can take better business decisions.[3] The work of the professional varies from one company to another as some may involve only purchasing energy needed by the factory and raw materials whereas some may involve sourcing in order to supply the goods needed. The procurement professionals always have to be ready with the recent trends and technologies in order to remain in the market race. The activities that are involved in procurement process are sourcing of suppliers, managing budgets, negotiation of contracts, building relationship between suppliers and company and so on.[4] The goal in case of public procurement is to provide cost-effective and timely contracts to the suppliers and contractors in order to support operations of government services. Stakeholders, beneficiaries and actors play the main role in public processes. They have to win the trust of the stakeholders and ensure that they are aware of the procurement process.[5] They give advice during the execution of contracts.[6] There is difference between private and public procurement systems. One is focusing on social benefit whereas other is profit based.

The Purpose of Procurement in an Organization

Relationship between contract and procurement

There goes a saying that little learning is a dangerous thing but complete ignorance is more disastrous. Without knowledge, it will never be possible to recognize the early signs of danger. Any person who on behalf of an organization is purchasing, should have proper knowledge to recognize the pitfalls that might come in the way. It is very important for the professionals to practice sound procurement process in order to maintain higher quality of goods production and service delivery.[7] An integral portion of the procurement process involves contract management. Contract management is given importance to a large extent because all the transactions and operations are based on contractual relationships. The professionals ensure that the parties to the contract fulfill their part of the commercial obligations. The basic components of contracts that the procurement professionals must keep in mind are:[8]

• Consideration- one of the parties must provide the other something which is of value in return of some service, goods or payment.
• Lawful purpose- the contract can be enforceable only when the purpose of it is lawful
• Intention- the intention of the parties must be to be legally bound. If they agree otherwise, then they have to mention it in the document.
• Offer and acceptance- one party has to make an offer to the other that the other accepts for some payment.
• Parties have to be competent- the parties of the contract have to be capable of entering into the contract.

The procurement professionals therefore need to have the basic understanding of the law of contract. It helps to build better working relationship.  A procurement work which is great can be easily undone if the contract management is weak whereas if the contract management is effective, even a procurement work which is not much successful gets recovered. The most essential task of a procurement professional is to negotiate the terms of contract and then making it visible to the stakeholders that would help the suppliers and promote understanding of the end-user.[9] It is very important for the suppliers to meet the commitments that they make in the contract. When legal boundation is involved, people tend to become more responsible towards their commitments. When any party makes a breach of a term of the contract, the other party can bring an action against that party and claim damages. This will in future ensure the security of the company or the purchaser in the market. The basic idea of business is to make profits and therefore, no party wants to suffer loss while running business. They will obviously enter into such contracts that will protect their business goals even though that needs some negotiations. Negotiations are made so that each party finds it easy to adjust to the terms of the other party and can have an easy flow of business. [10]

Requirements for sound contract negotiations

In a contract negotiation, parties to the contract compromise on one or the other issues in order to adjust and get the work done. This in return protect them from certain losses. Two factors that are to be kept in mind while making the negotiations are revenues and risks involved. The professional must have the skills to analyze the issue and alter terms in order to achieve the goals.  Contract negotiations that are made between the suppliers and companies are at times very complex.[11] All persons must be aware of every aspect in the process so that the agreement entered into by them gives effective end result. Negotiations entered into must be kept confidential beforehand. For this purpose, non-disclosure agreement is to be signed. Even the opposite party is required to sign an agreement by way of which he is prevented from approaching any client of the other party in the business. This is known as non-poaching agreement.[12] Before entering into the actual contract, many pre-contractual agreements are entered into by the business. Successful business outcome can be achieved when one party patiently listens to the other party’s claims and view point. Secondly, before negotiating, it is important to do a background study of the other party and understand what they are going to offer. While negotiating, we have to consider the time constraints, the alternatives and the leverage one has in the negotiation. A fundamental principle regarding negotiation is that it is very important to draw a skeleton of the proposed terms of the contract. this will in future help to frame the real deal and input key points. Balancing the terms of the contract is always preferable. It is never fine to give into unwanted terms and demands and time is a big factor while making negotiations. Wasting unnecessary time on a certain negotiation will derail it. Therefore, the professionals have to keep these in mind so as to get away with proper negotiations as they want. Contract management can be successful when :[13]

1. Arrangements made for the delivery of service is satisfactory to both and value is being realized
2. Organization understands what obligations it needs to fulfill under contract
3. No surprises or disputes are present
4. There must be efficiency

The Essentials required for Successful Business

When goods or services are being availed on the terms and conditions of the suppliers, three steps have to be kept in mind, firstly, the personnel whose responsibility is to purchase goods have to take care of the risks involved such as payment terms, fitness, quality and delivery of goods. Secondly, a clear idea has to be made regarding what can be accepted and what not. The last step is to make preparations to deal with risks that are unacceptable.

Domestic and International procurement

A business is domestic when the transactions of the business are within the geographical domain of the country whereas, in case of international business, the transaction takes place with other countries of the world.[14] The quality standard in domestic procurement is generally  quite  low nad in case of international, it is very high. In a procurement system, the main purpose of domestic procurement remains the ensuring of meeting the needs of government in an effective manner and cost friendly way. It assists the government agencies to perform in a proper manner and supplying products of good quality on time. The immensity of government’s expenditure on procurement which usually goes upto billion dollars annually creates a golden chance to implement national policies.[15] The Bureau has taken initiatives to improve the procured goods’ quality and attain socio-economic objectives while doing the procedures of procurement. For this purpose, emphasis is to be laid on the promotion of small enterprises that are the backbone of the country’s economy. Foreign procurement intent to purchase goods from foreign with relative advantage over domestic ones which would invite foreign breeders. Thus, the goods that are purchased through such procurement process are likely to change according to the changing time.[16] As the world has leapt into globalization with sophisticated structure of industry and economic growth, simple machinery is no more used and the industries have taken up high technology. The global leap of the world market and strong competition has led the industries and companies to shift to international purchasing policy. This includes huge price reduction, enhancement in quality, more response towards the customers and better fiscal conditions. For the purpose of globalization, the key factor of the companies depend on the strategies of international sourcing. They focus on purchasing supplies from vendors of the world market instead of depending on domestic supplies. Many times companies do lack upgraded management or lack co-ordination in transactions between the supply sources and subsidiaries. [17]Therefore, the companies have to make strategies regarding their technologies, materials and process based on global purchasing.[18] After going through the facts it seems clear that a company while considering where to set the supply base and source products manufactured by it, would prefer to go for domestic sourcing as it permits better control of quality and needs less time for marketing whereas on the other hand, international sourcing is comparatively cheap. It is very important for the company to take proper strategic decision regarding when to switch from one to the other. A company whose headquarter is in a country having weak currency compared to that of the supplier one, it would be preferred to source locally as that would be cheaper. A company working locally with the manufacturers finds it easy to yield production control in order to ensure that the suppliers are fulfilling the requirements of good quality and deadline. In case of local sourcing, there is hardly any communication cost or wastage of time. When a company is going to source internationally, it is necessary to be aware of the possible risks involved in the region which may disrupt the supply chain.[19] Some factors which have to be taken care of in international procurement are volatile currency, economic disruptions and new suppliers emerging. Shipping is another big factor for which necessary precautions are to be taken. As there are several changes in the economic, social, environmental and political factors across different nations, the companies find it hard to adjust and expand globally.[20] In order to come out as a strong and successful player , these firms should plan their strategies as per the need of the changing times.

Domestic Procurement and International Procurement

Contract Negotiation Strategies

The final step while choosing vendor is to develop a strategy on contract negotiation. Contract negotiation means a process in which parties give and take to agree on a point. It is not based on what a party deserves but is based on complete negotiation. Any business transaction is depending on negotiation. In a bad contract negotiation, the objective is to take every last penny left with the vendor for the lowest value. Whereas, in a successful negotiation, both the parties look forward to the bright side and to benefit in the areas by getting into fair deal.[21] It should be remembered that both the parties are contracting in order to meet their individual corporate goals. Hence, a contract which is sound will give them both benefits and lay a strong foundation for them to build a good relationship.

 Objectives[22]

• The essential terms of the contract must be explained clearly
• Proper definition of services and goods are to be provided
• The financing terms and compensation must be stated
• Identifying the risks involved
• To set the expectations arising out of this relationship

Strategies

1. Setting of priorities and alternatives: when negotiation strategies are developed, it is important to negotiate those areas first which deserves more priority. It is necessary to check the important items so that the less important ones can be given up.
2. Difference between needs and wants : while reviewing the contract negotiation process, it is important to ask whether it was a priority for the company or was it just good for the company.
3. Knowing the time to walk away: when the company finds that there is some clause that cannot be negotiated, as it is their top priority in that case, the company can walk away for their benefit.
4. Defining time limitations: it is always important to set some performance guideline. If they are required for your business then penalties can be set in the negotiation contract.
5. Assess risks involved: the contract must cover certain areas of risk like unforeseen costs, violations of government regulations and other.

Negotiation in business is very important because it is not possible to accept all the terms and conditions while ignoring our problems therefore, an agreement has to be made to make few adjustments and gain some benefits.[23] These tools of negotiation will help us to grow further in future. If we intend to attract the other party towards our deal then we have to make certain negotiations which will seem to be valuable to the party. When approaching suppliers for purchasing negotiation, we must take care of the persuasion and communication skill as it is the only way to persuade the suppliers. Suppliers having written arguments deal with issues such as payment terms, intellectual property, insurance, warranty period and dispute resolution. Contracts are entered into so that when disputes arise with suppliers, it is easy to blow out the fire. The clauses of the contracts are then taken into consideration. Public contracts are made for the government services and public bodies because they involve various goods and services.  It is not possible for the public sector to choose their provider unlike private sectors. Public sector contracts provide big opportunities that are not possible in case of private sector. [24]

Conclusion

The report lays down an overview of purchasing and procurement process and how contract management plays an integral role in it. Procurement helps in deciding the things to purchase and the sources, in determining whether expectations can be met or not. It can be seen from the above discussion that contract is the skeleton of any basic business transactions. All transactions made involves certain terms and conditions of business which are to be strictly followed by the partners of the business. This document helps to regulate the business and protect it from various risk factors like fraud and unseen costs. Entering into a contract can prevent unnecessary domination of one party over the other. It is not possible for the parties to accept every terms and in that case certain negotiations are entered into. For this purpose, contract is very essential as all the negotiating terms are put into it for the easy flow of transactions. Basically it can be seen how important contracts are for procurement process, so it is expected that the professionals who deal with the procurement process must have the basic ideas of contract law. They should know how to enter into an agreement, what are the requisites for a valid contract, how to claim compensation in case there is any breach of the contract. Only when the professionals are well aware about the laws and loopholes then only the business can flourish because when transactions are done, it is totally based on certain factors and the suppliers and partners should abide by it. The procurement professionals should have proper business skills, communications skills and common sense. The process of procurement is very essential for a business as it can affect the overall cost and production. In private sector, strategies are made in the procurement to improve the performance and profitability of the organization. Procurement deals with managing a part of the non-pay expenditure of a company and to make sure that the best value is received when the expenditure is committed.

Strategies for Contract Negotiations

Adabi, Sepideh, Ali Movaghar, Amir Masoud Rahmani, and Hamid Beigy. “Negotiation strategies considering market, time and behavior functions for resource allocation in computational grid.” The Journal of Supercomputing 66, no. 3 (2013): 1350-1389.  https://doi.org/10.1007/s11227-012-0808-4 

Amann, Markus, Jens K. Roehrich, Michael Eßig, and Christine Harland. “Driving sustainable supply chain management in the public sector: The importance of public procurement in the European Union.” Supply Chain Management: An International Journal 19, no. 3 (2014): 351-366.  https://doi.org/10.1108/scm-12-2013-0447 

Benoliel, Michael. “Building negotiation capital.” (2017): 54.  https://doi.org/10.1142/8960 

Bertrand, Olivier, and Michael J. Mol. “The antecedents and innovation effects of domestic and offshore R&D outsourcing: The contingent impact of cognitive distance and absorptive capacity.” Strategic Management Journal 34, no. 6 (2013): 751-760.  https://doi.org/10.1002/smj.2034 

Brewer, Barry, Cynthia Wallin, and Bryan Ashenbaum. “Outsourcing the procurement function: Do actions and results align with theory?.” Journal of purchasing and Supply Management 20, no. 3 (2014): 186-194. https://doi.org/10.1016/j.pursup.2014.02.004 

Dumas, Marlon, Marcello La Rosa, Jan Mendling, and Hajo A. Reijers. Fundamentals of business process management. Vol. 1. Heidelberg: Springer, 2013.  https://doi.org/10.1007/978-3-642-33143-5_1 

Feng, Qi, and Lauren Xiaoyuan Lu. “The role of contract negotiation and industry structure in production outsourcing.” Production and Operations Management 22, no. 5 (2013): 1299-1319.  https://doi.org/10.1111/poms.12026 

Fort, Teresa C. “Technology and production fragmentation: Domestic versus foreign sourcing.” The Review of Economic Studies 84, no. 2 (2017): 650-687.  https://doi.org/10.3386/w22550 

Gelderman, Cees J., Janjaap Semeijn, and Niels Plugge. “The role of critical incidents in the development of global sourcing-results of an in-depth case study.” Journal of Purchasing and Supply Management 22, no. 3 (2016): 214-224.  https://doi.org/10.1016/j.pursup.2016.05.003 

Haapio, Helena, and George J. Siedel. A short guide to contract risk. Routledge, 2017.

Jacobs, F. Robert, Richard B. Chase, and Rhonda R. Lummus. Operations and supply chain management. New York, NY: McGraw-Hill/Irwin, 2014.  https://doi.org/10.2139/ssrn.1664561 

Kim, Minkyun, Nallan C. Suresh, and Canan Kocabasoglu-Hillmer. “A contextual analysis of the impact of strategic sourcing and E-procurement on performance.” Journal of Business & Industrial Marketing 30, no. 1 (2015): 1-16.  https://doi.org/10.1108/jbim-01-2012-0010 

Marsnik, Susan J., and Dale B. Thompson. “Using contract negotiation exercises to develop higher order thinking and strategic business skills.” Journal of Legal Studies Education 30, no. 2 (2013): 201-248. https://doi.org/10.1108/jbim-01-2012-0010 

Meri?ková, Beáta Mikušová, and Juraj Nemec. “Contract Management and its Impact on Contracting Public Services: Slovak Republic.” Ekonomicky casopis 07 (2013): 690-699. https://doi.org/10.1787/sits-v2014-2-table114-en 

Mitra, Amitava. Fundamentals of quality control and improvement. John Wiley & Sons, 2016.  https://doi.org/10.1109/mmm.2016.2611418 

Neiman, Paul. “A social contract for international business ethics.” Journal of Business Ethics 114, no. 1 (2013): 75-90.  https://doi.org/10.1007/s10551-012-1332-4 

Perols, Johan, Carsten Zimmermann, and Sebastian Kortmann. “On the relationship between supplier integration and time-to-market.” Journal of Operations Management 31, no. 3 (2013): 153-167.  https://doi.org/10.1016/j.jom.2012.11.002 

Ruigrok, Winfried, and Rob Van Tulder. The logic of international restructuring: The management of dependencies in rival industrial complexes. Routledge, 2013. https://doi.org/10.4324/9781315004198 

Steven, Adams B., Yan Dong, and Thomas Corsi. “Global sourcing and quality recalls: An empirical study of outsourcing-supplier concentration-product recalls linkages.” Journal of Operations Management 32, no. 5 (2014): 241-253.  https://doi.org/10.1016/j.jom.2014.04.003 

Subramanian, Nachiappan, Shams Rahman, and Muhammad D. Abdulrahman. “Sourcing complexity in the Chinese manufacturing sector: an assessment of intangible factors and contractual relationship strategies.” International Journal of Production Economics 166 (2015): 269-284.  https://doi.org/10.1016/j.ijpe.2015.03.012 

Thomas, Stephanie P., Rodney W. Thomas, Karl B. Manrodt, and Stephen M. Rutner. “An experimental test of negotiation strategy effects on knowledge sharing intentions in buyer–supplier relationships.” Journal of Supply Chain Management 49, no. 2 (2013): 96-113.  https://doi.org/10.1111/jscm.12004 

Uyarra, Elvira, Jakob Edler, Javier Garcia-Estevez, Luke Georghiou, and Jillian Yeow. “Barriers to innovation through public procurement: A supplier perspective.” Technovation 34, no. 10 (2014): 631-645.  https://doi.org/10.1016/j.technovation.2014.04.003 

Wagner, Stephan M., and Christoph Bode. “Supplier relationship-specific investments and the role of safeguards for supplier innovation sharing.” Journal of Operations Management 32, no. 3 (2014): 65-78. https://doi.org/10.1016/j.jom.2013.11.001 

Wilkinson-Ryan, Tess, and David A. Hoffman. “The common sense of contract formation.” Stan. L. Rev. 67 (2015): 1269.  https://doi.org/10.1093/acprof:oso/9780198728733.003.0029 

Meri?ková, Beáta Mikušová, and Juraj Nemec. “Contract Management and its Impact on Contracting Public Services: Slovak Republic.” Ekonomicky casopis 07 (2013): 690-699.

Marsnik, Susan J., and Dale B. Thompson. “Using contract negotiation exercises to develop higher order thinking and strategic business skills.” Journal of Legal Studies Education 30, no. 2 (2013): 201-248.

Bertrand, Olivier, and Michael J. Mol. “The antecedents and innovation effects of domestic and offshore R&D outsourcing: The contingent impact of cognitive distance and absorptive capacity.” Strategic Management Journal 34, no. 6 (2013): 751-760.

Amann, Markus, Jens K. Roehrich, Michael Eßig, and Christine Harland. “Driving sustainable supply chain management in the public sector: The importance of public procurement in the European Union.” Supply Chain Management: An International Journal 19, no. 3 (2014): 351-366.

Dumas, Marlon, Marcello La Rosa, Jan Mendling, and Hajo A. Reijers. Fundamentals of business process management. Vol. 1. Heidelberg: Springer, 2013.

Benoliel, Michael. “Building negotiation capital.” (2017): 54.

Wilkinson-Ryan, Tess, and David A. Hoffman. “The common sense of contract formation.” Stan. L. Rev. 67 (2015): 1269.

Perols, Johan, Carsten Zimmermann, and Sebastian Kortmann. “On the relationship between supplier integration and time-to-market.” Journal of Operations Management 31, no. 3 (2013): 153-167.

Wagner, Stephan M., and Christoph Bode. “Supplier relationship-specific investments and the role of safeguards for supplier innovation sharing.” Journal of Operations Management 32, no. 3 (2014): 65-78.

Ruigrok, Winfried, and Rob Van Tulder. The logic of international restructuring: The management of dependencies in rival industrial complexes. Routledge, 2013.

Kim, Minkyun, Nallan C. Suresh, and Canan Kocabasoglu-Hillmer. “A contextual analysis of the impact of strategic sourcing and E-procurement on performance.” Journal of Business & Industrial Marketing 30, no. 1 (2015): 1-16.

[12] Uyarra, Elvira, Jakob Edler, Javier Garcia-Estevez, Luke Georghiou, and Jillian Yeow. “Barriers to innovation through public procurement: A supplier perspective.” Technovation 34, no. 10 (2014): 631-645.

Gelderman, Cees J., Janjaap Semeijn, and Niels Plugge. “The role of critical incidents in the development of global sourcing-results of an in-depth case study.” Journal of Purchasing and Supply Management 22, no. 3 (2016): 214-224.

Steven, Adams B., Yan Dong, and Thomas Corsi. “Global sourcing and quality recalls: An empirical study of outsourcing-supplier concentration-product recalls linkages.” Journal of Operations Management 32, no. 5 (2014): 241-253.

Fort, Teresa C. “Technology and production fragmentation: Domestic versus foreign sourcing.” The Review of Economic Studies 84, no. 2 (2017): 650-687.

Mitra, Amitava. Fundamentals of quality control and improvement. John Wiley & Sons, 2016

Jacobs, F. Robert, Richard B. Chase, and Rhonda R. Lummus. Operations and supply chain management. New York, NY: McGraw-Hill/Irwin, 2014.

Thomas, Stephanie P., Rodney W. Thomas, Karl B. Manrodt, and Stephen M. Rutner. “An experimental test of negotiation strategy effects on knowledge sharing intentions in buyer–supplier relationships.” Journal of Supply Chain Management 49, no. 2 (2013): 96-113

Haapio, Helena, and George J. Siedel. A short guide to contract risk. Routledge, 2017

Neiman, Paul. “A social contract for international business ethics.” Journal of Business Ethics 114, no. 1 (2013): 75-90.

Adabi, Sepideh, Ali Movaghar, Amir Masoud Rahmani, and Hamid Beigy. “Negotiation strategies considering market, time and behavior functions for resource allocation in computational grid.” The Journal of Supercomputing 66, no. 3 (2013): 1350-1389.

Brewer, Barry, Cynthia Wallin, and Bryan Ashenbaum. “Outsourcing the procurement function: Do actions and results align with theory?.” Journal of purchasing and Supply Management 20, no. 3 (2014): 186-194.

Subramanian, Nachiappan, Shams Rahman, and Muhammad D. Abdulrahman. “Sourcing complexity in the Chinese manufacturing sector: an assessment of intangible factors and contractual relationship strategies.” International Journal of Production Economics 166 (2015): 269-284.

Feng, Qi, and Lauren Xiaoyuan Lu. “The role of contract negotiation and industry structure in production outsourcing.” Production and Operations Management 22, no. 5 (2013): 1299-1319.