CIPS L4M3 STUDY MATERIALS

Commercial contracting

Use these summarized notes and other CIPS L4M3 online resources to help with your studies!

CIPS L4M3 REVISION NOTES | A guide to developing SPECIFICATIONS

Specifications can be defined as a statement of requirements to be satisfied in the supply of a product or service

Why specification matters in value addition

In the quest for value addition the purpose of an effective specification will be to:

  • Ensure requirements are properly defined – this is why you need to have relevant stakeholders on board so that you know what is really needed
  • Communicate the requirements clearly to the suppliers this way they can, depending on the type of procurement, conform to the plan or innovate cost effective solutions
  • Minimize risk associated with miscommunication and doubt
  • Provide a means of evaluating the quality of good supplied or the extent to which the suppliers have conformed to what was ordered
  • Support standardization and consistency, in situations where you are likely to procure items from various sources

Here is a quick guide to developing SPECIFICATIONS

The main Types of specifications

Generally, there are two main types of specification, conformance and performance

  1. Conformance specification

In this case the buyer details exactly what the product must have, as in what they want the product to be like!

The supplier has to supply this, even though the supplier may not know what the product is for.

Examples of conformance specification;

  • Engineering drawing
  • A chemical formula
  • Model name, number or brand etc
  1. Performance or functional specification

In this case the buyer describes to the supplier what they as the buyer expects the product or part of it to be able to do.

The supplier’s job is to create the product with the functions given by the buyer in mind.

This approach gives the supplier some room for creativity since all the buyer cares for is for the product to do what they want it to do and may not really care for how it is created.

Examples of what typical specifications may be like;

  • Required quality levels
  • Required safety levels and controls

Advantages of performance specification

Compared to conformance specification, performance specification has a number of advantages such as;

  1. The specifications are easier to draft
  2. The efficacy of specifications does not depend on technical knowledge of the buyer
  3. Supplier can use their creativity to develop the products
  4. Greater share of specification risk is borne by the supplier.

When to use performance specification

  1. When the supplier has more technical or relevant skills than that of the buyer
  2. When technology is constantly changing in the supplier’s industries in which case it will be hard to specify methodologies
  3. When there is a clear criterion for evaluating alternative solutions suggested by the suppliers competing for the contract
  4. When there is enough time to assess the functionality of the product as proposed

10 key things to consider when developing SPECIFICATIONS

  • The purpose – you must find out what you intend to achieve. This can be based on your current needs, future needs or just trying to find a solution to the make or buy decisions
  • Stakeholders needs– remember there are other persons who may affect or be affect by the organisation’s decisions. So, you have to identify them, consider what influence they may have, what their needs are etc
  • The scope of specification – you are going to have to make a choice about what to include and exclude from the specification. How you do this will depend on how you answer the following questions; will the scope change during the contract, and if so, how? Are there any user training needs required, is there any internal input needed?
  • Improvement and Innovation– do not just recycle specifications. Before you use an older specification template you need to ask yourself; is that anything that has changed since the specification template was designed, what might change while the contract is in place?
  • Regulatory compliance and quality ­– you need to know what standards are to be met for instance national and international quality standards such as ISO, Data protection and data security
  • The type of specification ­– is it going to be conformance or performance based
  • The relevance – before you include or exclude things in the specification you have to ask yourself how relevant such will be to your organization. Conduct some cost benefit analysis
  • How will the performance be measured?- ensure that you have a way to actually monitor and evaluate performance of the specification you have in place, this can be achieved by setting KPIs and Targets
  • Clarity – specification must be clear and unambiguous
  • Service conditions – you have to take account of any impact that could be made by the point of delivery itself including things like: operating and storage conditions, availability of energy, safety considerations etc

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COMMERCIAL CONTRACTING RESOURCES OUTLINE

1.1 Analyse the documentation that can comprise a commercial agreement for the supply of goods or services

  • Invitation to tender or request for quotation
  • Specification
  • Key performance indicators (KPIs)
  • Contractual terms
  • Pricing and other schedules (such as for health and safety records, details of supplier’s staff, use of sub-contractors, non-disclosure/confidentiality agreements)

1.2 Analyse the legal issues that relate to the creation of commercial agreements with customers or suppliers

  • Invitations to treat or invitations to negotiate
  • Rules relating to offer and acceptance, consideration, intention to create legal relations and capacity to contract
  • The battle of the forms and precedence of contract terms
  • Risks presented by contracting on supplier’s terms or through oral contracts
  • The Vienna Convention on the International Sales of Goods
  • Misrepresentations made pre-contract award

1.3 Compare types of contractual agreements made between customers and suppliers

  • One off purchases
  • Framework arrangements and agreements
  • The use of mini-competitions
  • Call offs
  • Services contracts
  • Contracts for the hire and leasing of assets

2.1 Analyse the content of specifications for procurements

  • Drafting specifications and developing market dialogue with suppliers
  • The use of standards in specifications
  • Typical sections of a specification
  • Standardisation of requirements versus increasing the range of products
  • Including social and environmental criteria in specifications
  • The role of Information Assurance in developing specifications

2.2 Appraise examples of key performance indicators (KPIs) in contractual agreements

  • Defining contractual performance measures or key performance indicators (KPI)
  • The use of service level agreements
  • Typical KPI measures to assess quality performance, timeliness, cost management, resources and delivery

3.1 Analyse contractual terms for contracts that are created with external organisations

  • The use of express terms
  • The use of standard terms of business by both purchasers and suppliers
  • The use of model form contracts such as NEC, FIDIC, IMechIEE

3.2 Recognise examples of contractual terms typically incorporated into contracts that are created with external organisations

  • Key terms in contracts for indemnities and liabilities, sub-contracting, insurances, guarantees and liquidated damages
  • Terms that apply to labour standards and ethical Sourcing

3.3 Recognise types of pricing arrangements in commercial agreements

  • The use of pricing schedules
  • The use of fixed pricing arrangements
  • Cost plus and cost reimbursable pricing arrangements
  • The use of indexation and price adjustment formulae
  • The use of incentivised contracts
  • Payment terms
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