Current contract management practices are ill-equipped to deal with the ‘new normal’. It’s time contract management matured and helped rather than hindered the way we do business. Agile Contract Management is now a necessity.
To say that your contracts have never been more important is an understatement. As we all find our feet in the ‘new normal,’ contracts are worth a premium in business power-plays. But many organizations are discovering that their force majeure and related obligation clauses are only functional to a point.
The problem, as we see it, is that most contracts are written boiler-plate style – they use generic clauses that attempt to transfer all commercial risk to their counterparts. This type of zero-sum contracting enlists a stock response – ill will, confusion, and even more money spent with law firms to do the same thing, which invariably elicits the same results. And then the cycle repeats itself.
There is little in the way of actual risk mitigation or healthy recovery. Traditional contract management is just risk transference, which, when we are all weathering the same storm (albeit not necessarily in the same boat), doesn’t actually help anyone at all.
It’s time that contract management grew up.
Clever contract management works hand in glove with risk management processes and policies. Contracts should be organic in that they have to be commercially focused to become supportive pillars (and not stumbling blocks) when external business, societal, or economic factors change (like they have in the current pandemic). Those contracts can be used to help both parties mitigate the shared risks of doing business with clauses that deliver support options for a joint approach to risk.
Agile Contract Management is something we’ve long been championing, and now it’s more relevant than ever.
The Agile project management methodology was developed originally for software engineers to help them produce software more quickly. Work is achieved in small ‘sprints’ and constant feedback is received with ongoing collaboration to achieve an end goal.
For contract management, Agile is about maximum flexibility and collaboration. Parties work together on the understanding that changes are inevitable and business risk is managed in a way that is not punitive to either party.
Instead of a take-it-or-leave-it approach that most organizations currently take with their contracting (which the boiler-plate drafting approach is a symptom of), Agile contract management is a positive method of ensuring a business-appropriate response to change is achieved, instead of the zero-sum reality.
There are three main types of Agile contracts:
This type of contract is aligned most closely with the Agile project management methodology. Long projects are broken down into many smaller mini-projects allowing the customer to evaluate the project at specific review times. This gives the customer peace of mind that the project is on schedule and that the work is being done as required. For the supplier or manufacturer, it ensures no work is completed without the customer’s assurance they are on the right track. The customer can either choose to continue, revaluate, or terminate the contract altogether.
Usually, the most valuable areas of the product or system are completed first, so the supplier can be compensated, and the customer can see the quick benefit of the product. Exact review points and compensation cadence are usually negotiated into the contract. An incremental delivery contract ensures both parties are satisfied with the ongoing development of the product and has the flexibility without the rigid timelines of traditional contracts.
This is a grown-up contract where both parties share the risk and rewards of doing business. Both parties agree on the final cost of the product or service, considering the supplier’s costs and overheads and taking into account any risk involved for the supplier. The goal for this type of contract is for the supplier to fulfill their product or service at less than this target cost – then both parties share in this saving. Conversely, if the cost is higher than expected then both parties pay a share of this additional cost.
This shares the risk and aligns both parties to achieve the shared goal of making sure the project’s actual cost remains below the initial estimate.
Capped Time & Materials (‘T&M’)
Traditionally suppliers are guaranteed compensation on the time and materials used to complete a service or product if they change. But there is little protection under this traditional T&M contract in place for the customer, who takes on all the risk and has little say if these costs increase.
As the name suggests, with a capped T&M contract there is an upper limit on what additional costs the customers have to pay. It’s in the interest of the supplier to keep this upper limit as low as possible to ensure the longevity of the relationship, while for the customer there is the benefit of knowing that costs cannot be increased above this threshold.
Considering the current pandemic, isn’t it time we all developed a more mature outlook to contract management? Agile contract management delivers the flexibility to contractually share risk, enabling frictionless business, and developing a better standard of the customer-supplier relationship.
Given the state of the global markets, the struggle for all businesses – not just the small ‘mom and pop’ shops, but also the multinational oil giants, airlines, and retailers – ensuring the survival of everyone in our supply chains and ecosystems is vital.
Traditional, boiler-plate contracts position one party over another. Surely now is the time to use more suitable Agile contract management to stabilize business and boost our economy as we look forward to planning for the post-COVID-19 future.
If your business is ready to adopt a more mature outlook in contract management contact us now to find out how we can help.