Ensuring that you have a simple way out of a business contract sadly requires more real-life effort than clicking your heels and wishing very hard. It requires planning from the start.
Thinking about how a crucial supplier arrangement will conclude before it’s even begun can feel like planning how to get home from a party that’s not yet started. Why dwell on the dregs of the night when you’ve been looking forward to the evening out? The trouble is, if you don’t plan for it – if you don’t book that taxi cab, or work out who’s driving – the lack of forethought could spoil the whole experience.
Good contracts should have provisions for the end game, but all too often the details are neglected. This, say experts, can lead to long and expensive denouements. “It’s an area often overlooked by organisations, especially when contracts are first awarded,” says Jamie Gardner, senior manager at global procurement consultancy Efficio.
“Contract award is the best time to ensure appropriate exit provisions and handover mechanisms are documented, and that the obligations of both parties are embedded into the contract.”
And, he adds, if some of the requirements are viewed as onerous by suppliers, you will have a greater chance of reaching an agreement while there’s still a competitive element to contract negotiations.
As ever, absolute clarity is essential. Commercial contracts consultant Glenn Duffy explains: “In my 30 years of contracting, I’ve found the biggest mistakes come through a lack of definition of the scope of work, services or products to be supplied. Purchasers could be giving away up to 90% control of their project to someone else, so they hold the greater risk. You’re caught in the middle, so be alert and aware. Whichever side you’re on – purchaser or supplier – don’t put the contract in a drawer and forget about it.”
Failing to resolve grey areas can lead to years of expensive wrangling over issues and expenses at the end of the agreement. “You have to negotiate just as much as you close out a contract,” Duffy adds. “But by then there’s been a lot of history, which may have been good or may have been painful.”
According to Rufus Boyd, director of Transport Juice, stronger focus on partnering-style contracts, and contracting for outcomes rather than traditional adversarial forms, is now leading many businesses in long-term deals to apply the Collaborative Business Relationship Standard ISO 44001 (formerly BS11000). This includes considering the so-called eighth stage of collaboration – Exit Strategy Implementation.
It is always vital to know if the relationship is ending, or if it is just an existing contract winding up. Should you need this supplier on future projects, think about how you will maintain knowledge of capabilities and people, and risks and issues, during the fallow period.
While some contracts end abruptly as a result of supplier failure or a falling out, many have a scheduled completion point. Think of London’s Crossrail, Dubailand or China’s Beijing Daxing International Airport. These massive infrastructure projects may span years and cost millions, but all have an end in sight.
It is essential to compile a checklist that clarifies boundaries and responsibilities; one that sets standards and can be referred to throughout the entire deal.
Jim Vincent is another senior manager at Efficio. He suggests setting up a clearly defined monthly reporting and exit plan process to ensure the obligations of both parties are understood. “Make provision for a collaborative panel to determine the level of evidence required to resolve disputes prior to any third-party involvement,” he says. “Failure to meet this should trigger well-defined escalation and dispute resolution procedures outlined in the contract.”
According to Duffy, ensuring standards are met and certifications are sought for every stage of satisfactory completion can help limit issues later on. He says that, in order for contract checklists to be successful, you want lawyers, technical staff and contract, procurement and project managers to produce them jointly.
Eirian Lewis, director of TEAL Consulting, believes a joint exit strategy should consider the activities that need to be addressed before a collaborative contract can be declared complete, but it should also give the parties a clear roadmap to the point where they can “put the flags out”. This maximises the prospect of a contract ending with both parties satisfied and ready to move on to new opportunities while retaining the prospect of future work.
On large deals it can be important to ensure there is also some contracting synergy between the main contractor and any sub-contractors to prevent details falling between the cracks. Purchasers also need to be aware of how a main contractor may have structured any sub-contracts, adds Duffy.
“The supplier may not be off the hook until the main contractor satisfies the flowed-down risks to the end user. So, as part of the close-out process, the main contractor may be holding back on some points, including payments to the supplier, until they themselves have been cleared by the end user.”
Working towards the end
Some standard contract forms have limited contract closure periods of around three months, but for many large-scale deals, it is more likely to be a year-long process. David Kemp, supply chain director at the Aircraft Carrier Alliance, is responsible for the supply chain for the aircraft carrier construction programme across the UK – now in its final year.
He is learning how to close out contractual matters with each and every supplier, to the satisfaction of the alliance participants, including the UK’s Ministry of Defence. As the role of the alliance dissolves in around 12 months’ time, following delivery of the carriers, it puts a hard stop on completing and closing supplier relationships.
Kemp says that regardless of what type of project, relationship or contract you’re dealing with, there are three key aspects to consider: “What are the rights you have as customer that you wish to secure? What are the obligations and rights of the supplier? And is there anything that needs to be done to secure the interests of the end customer for your business, and any requirements that flow down from it?”
He says it is usual that there are surviving rights: warranty, non-disclosure, insurances, intellectual property, obligations under law, and so on. “All need to be understood, secured and possibly reinforced.”
It is essential to keep good records throughout the
course of a contract, including everything from meeting notes to manuals, and to ensure that they are stored in one place by the end.
While many companies operate an electronic document management system, not all are properly maintained, says Duffy. “All documents, communications with the supplier, as well as copies of the initial enquiry, the supplier’s tender and offer, technical documents and so on should be maintained throughout the duration of the contract and for a number of years beyond. Say six to 10 years minimum.”
He also suggests project teams should be required to keep up-to-date records of events, communications, discussions and meetings, and enter them into project management databases. “Records are everything; facts, facts, facts,” he says. Records should also include any quality assurance or compliance documents – for example, anti-slavery assurances and certificates to prove products have been properly tested. There may also be warranties to be provided and a spare parts delivery programme to be set.
Kemp points out that some long-term contracts, or ones with technical or safety considerations and long product life cycles, may need to be kept for decades, which means the media on which they are stored should be considered carefully: “Think of the past 25 years, with the change from paper to floppy discs to CDs
and now cloud storage.”
Good record keeping can be the difference between smooth or bumpy contract closures, says Gardner: “Effective contract management on data, updated programmes, financial forecasts and change control is key to reaching the end of the project and being able to resolve complex issues when things have gone wrong.”
If mistakes are made or disputes become deeply entrenched, it often requires input from individuals not emotionally invested who can take a holistic and pragmatic view, adds Vincent. But this could prove costly if legal mediation or even litigation becomes necessary.
Alongside the paper trail, there are the physical logistics to be wound up. There could be consignment stocks to be returned; perhaps the supplier has materials, tools, equipment or intellectual property that has to be given back. “The supplier may have to produce documents assigning intellectual property rights to the customer,” says Duffy. “This is not usual in construction projects but is more likely to be found in software development, and in the petrochemical, biochemical or the IT spheres.”
Understand if you are taking full, clean title of the goods, or if a third party has any potential claim. This could be on intellectual property, proprietary licences or potential claims such as a bank loan or goods bought from someone else. “All of these should be on the checklist and all of them need to be closed before you make your final payment to the supplier,” Duffy adds.
“It’s all a question of timing.”
For example, he says, check on bank guarantees or performance bonds – and if you are returning the latter to a supplier, make sure that you have warranties or other paperwork from them before you lose your leverage.
It is a good idea to have a list of things that are given to the supplier, and vice versa, with deadlines attached, so that there is a list of instructions to follow.
Kemp adds that with in-service contracts, where a supplier is being replaced, there might be transfer-of-employment rights to consider; purchasers need to be aware of any disputed matters that may be boiling in the background. “Watch out for surprises at the end,” he says. “This is not the time to invite disputes, but finding a place for a mature conversation to ensure the supplier’s situation is well understood is a recommended step.”
Equally important (although less dramatic) is the need to consider systems access and data. Kemp says enterprise resource planning and accounting systems need to be professionally cleansed. The supplier should complete any residual purchase orders or you must cancel them, make your outstanding payments and resolve invoice discrepancies. “In large and complex organisations, error messages can be unresolved for long periods during ongoing business, but the end is the end, and it’s time to clean them out.”
Lessons for the future
When everything is done, it is time to review the contract from start to finish, adds Kemp. “Try to involve as many of the stakeholders as possible. Involve the supplier. Learn what went well and what could have been done better, thereby embedding improvement into your business for the future.”
He points out how procurement teams are often busiest at the start and then at the end of business relationships: “Managed successfully, and with great supplier relationships, the middle can be fairly low maintenance. But look out for what can be a busy
time at the end.”
In short, don’t forget that all relationships must come to an end, and that endings that are planned in advance have a higher chance of running smoothly – even if you don’t have Dorothy ruby slippers.
Efficio senior managers Jamie Gardner and Jim Vincent say any exit plan checklist should include the following:
- Correct and rectify defects and all outstanding works.
- Return all documentation, including intellectual property rights, asset data, maintenance records/service requirements, inventory records, operating manuals.
- Transfer health, safety and environment (HSE) plans.
- Assign warranties, leases and service agreements.
- Employment regulations.
- Demobilise resources and close workplaces.
- Security of sites/facilities/assets owned by the buyer.
- Provide costs data.
- Confidentiality and non-disclosure agreements.
- Commitment to co-operate with incoming contractors and service providers.
- Revoke access to buyers’ IT systems and data-sharing platforms.
- Equipment and specialist training manuals.
- Specialist training requirements.