5 Elements That Characterize a “Quality Contract” in Procurement

In our previous edition of the Procurement Leaders Playbook, we discussed the Learning Curve in Procurement. This week, we’re diving into something more practical in nature—being 5 characteristics of a “Quality Contract”.??

A “Quality Contract” as they say in procurement, is one that balances clarity, comprehensiveness, flexibility, enforceability, and alignment with organizational goals.?

Here are 5 elements that characterize a “Quality Contract” in procurement:??

Element #1- Meticulous Scope of Work (SOW)?

The highlight of any “Quality Contract” is a meticulously defined scope of work (SOW).?

A contract must define the exact deliverables, specifications, and acceptance criteria for the goods or services being procured.?

It's vital to ensure the SOW includes:

• Every aspect of the project, from milestones to deliverables, leaving room for ambiguity can lead to disputes later.

• Clear and objective criteria to assess whether the deliverables meet expectations to avoid subjective interpretations during acceptance.

• Realistic expectations for both parties that can be ambitious, but also not clearly unfeasible that can lead to frustration.

Read More: 9 Tips to Writing a Statement of Work Effectively

Element #2- Clear Payment Terms

Clear and defined payment terms are crucial for smooth cash flow management and building trust between parties.?

Your contract should address:

• Payment Milestones that link payments to specific project stages, ensuring suppliers deliver value before receiving full compensation.

• Acceptable payment methods (e.g., electronic transfer, letter of credit) and timelines for processing invoices.

• Clauses that adjust prices based on pre-defined factors (e.g: commodity price fluctuations), particularly dealing with long-term contracts or volatile markets.?

Element #3- Appropriate Allocation of Risk Management

Every contract involves certain degrees of risk, from supplier defaults to project delays and unforeseen economic changes.

A “Quality Contract” allocates these risks appropriately between the involved parties.?

It’s 3 key components are:

1. Identification of potential risks for each party

1. Allocation of responsibilities concerning risk management

1. Insurance requirements and indemnities

Read More: Core & Complex Contract Management Solution Capabilities

Element #4- Mutual Dispute Resolution Mechanisms

No matter the rigor in planning and drafting, disputes can always arise in procurement contracts.?

Thus, a “Quality Contract” must include mechanisms for dispute resolution that are fair and efficient, aimed at minimizing disruption and maintaining the business relationship.?

Here are 3 elements to make you develop quality dispute resolution mechanisms:

1. Clear procedures for issue notification and resolution timelines

1. Options for mediation or arbitration before resorting to litigation

1. Specified governing law and jurisdiction for handling disputes

These provisions help to swiftly resolve conflicts without damaging business relations and often save both time and resources compared to court proceedings.

Element #5- Articulate Termination Clauses and Exit Strategies

Finally, a “Quality Contract” should clearly outline the conditions under which the contract can be terminated.?

This might be due to poor performance, mutual agreement, or external circumstances that make the fulfillment of the contract untenable.?

In your contract, include these 3 essential stipulation:

1. Conditions and procedures for early termination

1. Responsibilities and penalties in case of breach of contract

1. Transition services and obligations post-termination to ensure business continuity

These clauses provide a clear exit strategy for both parties, safeguarding your interests and investments in the face of contractual breakdown.

Check Out Our Training Catalog!?

If you’re looking to improve your contract management, and receive top quality procurement training, check out this catalog of Practical & Real-Life Procurement Training Courses.?

Alongside learning how to develop a “Quality Contract”, this guide includes 30 Plus Procurement Training Programs that cover over 95% of procurement skills and competences.?

A “Quality Contract” in procurement, when crafted with attention and detail mitigates risks, enhances cooperation, and ultimately contributes to the successful realization of projects.?

Remember, the devil is always in the details, and nowhere is this truer than in the development of contracts in procurement.?

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