Under contract

Negotiating a solid contract means more than just signing on the dotted line.

by Marcia Jedd

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The article is based on material in the white paper “An Ounce of Prevention … Contracting for Project Success and Problem Prevention,” presented by Helena Haapio at the PMI Global Congress 2007—EMEA in Budapest, Hungary.

FOR MANY PEOPLE,

contracts are best left to a crack team of lawyers and specialists. But in today's highly regulated project environment, negotiating contracts is no longer just about hammering out legal minutiae. The process can cover everything from project terms to scope definition to technical specifications and deliverables. And it's up to the main project players to take a more active role in determining how those elements are incorporated into contracts.

Contracts are really about clarifying what's going to be done on the project, says Helena Haapio, contract coach at Lexpert Ltd., Helsinki, Finland. “Contracts don't make things happen, people do,” she says.

Only about 20 percent of contracts involve issues of legal concern—the rest is devoted to defining “the business terms, financial terms and project and technical descriptions,” she adds.

A good contract also helps prevent and solve problems so you do not end up in a dispute.”

The focus should be on producing contracts that match the parties' business needs. “The supplied solution will meet the customer's requirements, while the project will satisfy the supplier's needs in respect to profitability and risk management. The parts of the puzzle fit together and create a successful business deal and relationship,” Ms. Haapio says.

“Contract risks need to be assessed together with the technical, financial and operational risks of the project,” she says. “This requires collaboration between all members of the organization who have a stake in the implementation of the contract.”

And the stakes are high.

“Contracts impact future rights, cash flows, costs, earnings and risks,” Ms. Haapio says. “A company's contract portfolio may be subject to greater losses than one realizes.”

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It's not for the law that the contract exists, it's for the people who have these goals and want to work together. The contract is the guide helping the organizations reach their goals.

—Helena Haapio, Lexpert Ltd., Helsinki, Finland

People get bogged down in setting terms relating to liabilities and remedies. Rather than spending a lot of time on negotiating such points, Ms. Haapio says, concentrate on setting clear common goals and steps for successful projects. “It's not for the law that the contract exists, it's for the people who have these goals and want to work together,” she says. “The contract is the guide helping the organizations reach their goals.

A Dose of Preventive Medicine

Creating a solid contract that's understood by all parties is the best way to avoid problems and disputes. And that doesn't always mean some detailed paper document. “In many countries and situations, no writing is required in order for a legally binding contract to exist,” Ms. Haapio says. “Correspondence, bids, purchase or change orders, even e-mail messages can create or change contracts.”

CONTRACTS GONE BAD

Helena Haapio of Lexpert Ltd. says organizations should pay attention to these commonly overlooked areas of contracts:

Silence, tacit assumptions, lack of words, or missing language.

Clearly define all project terms. Don't leave room for other parties to fill in the gaps with laws and principles you may be unaware of. Also avoid ambiguous terms. When negotiating payment, for example, bimonthly has two meanings. Does the contract stipulate whether the parties mean twice a month or once every second month? Does it clarify whether “delivery” means shipment, arrival or something else?

Mandatory legal requirements.

In international contracts, data-protection laws or those protecting consumers or employees may dictate the contract and change the organization's intended rights and responsibilities. Organizations may encounter unexpected tax implications or even fines. In some instances, the entire contract or part of it may be declared invalid or unenforceable.

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Companies dealing with consumers in Europe are not always aware of consumer protection and contract terms laws harmonized at the European Union level. For example, a consumer organization in France took AOL's French subsidiary to court in 2004, alleging that 36 clauses in the company's standard contract with its online subscribers were illegal. The court found that 21 clauses were abusive and 11 illegal. As a result of the decision, disclaimers and limitations of liability as well as other clauses became unenforceable. In addition to having to pay fines, AOL France was ordered to remove the offending clauses from its contracts within one month and to publish the substantive parts of the court's judgment on its website and in three national daily newspapers.

Points where default rules should not apply.

For example, if the parties haven't agreed on the method of dispute resolution, litigation is, by default, the system of choice. A dispute-resolution system that seeks to prevent problems in the first place is a more effective and less costly way to control and resolve disputes, but the parties must remember to agree to it in advance.

CONTRACTS GONE BAD

Helena Haapio of Lexpert Ltd. says organizations should pay attention to these commonly overlooked areas of contracts:

Silence, tacit assumptions, lack of words, or missing language.

Clearly define all project terms. Don't leave room for other parties to fill in the gaps with laws and principles you may be unaware of. Also avoid ambiguous terms. When negotiating payment, for example, bimonthly has two meanings. Does the contract stipulate whether the parties mean twice a month or once every second month? Does it clarify whether “delivery” means shipment, arrival or something else?

Mandatory legal requirements.

In international contracts, data-protection laws or those protecting consumers or employees may dictate the contract and change the organization's intended rights and responsibilities. Organizations may encounter unexpected tax implications or even fines. In some instances, the entire contract or part of it may be declared invalid or unenforceable.

Companies dealing with consumers in Europe are not always aware of consumer protection and contract terms laws harmonized at the European Union level. For example, a consumer organization in France took AOL's French subsidiary to court in 2004, alleging that 36 clauses in the company's standard contract with its online subscribers were illegal. The court found that 21 clauses were abusive and 11 illegal. As a result of the decision, disclaimers and limitations of liability as well as other clauses became unenforceable. In addition to having to pay fines, AOL France was ordered to remove the offending clauses from its contracts within one month and to publish the substantive parts of the court's judgment on its website and in three national daily newspapers.

Points where default rules should not apply.

For example, if the parties haven't agreed on the method of dispute resolution, litigation is, by default, the system of choice. A dispute-resolution system that seeks to prevent problems in the first place is a more effective and less costly way to control and resolve disputes, but the parties must remember to agree to it in advance.

She advocates a proactive and preventive approach to encourage “legal well-being” by embedding legal knowledge and skills in project and company culture, strategy and actions.

At Media Genesis Inc., all parties—including the company's project managers—are steeped in the finer points of contract negotiation.

“We focus on everyone having a clear understanding of what the contracts do,” says Antoine Dubeauclard, president of the Madison Heights, Michigan, USA-based web development consultancy. “So, regardless if it's an employment contract where we explain confidentiality, disclosure, etc., or a client contract, we almost always walk through contracts verbally.”

At any given time, approximately 100 initiatives—from small website projects to ongoing large-scale application development efforts—are in progress at Media Genesis.

“Our client contracts don't have a lot of caveats as far as legal language, but they do spell out the work and expectations very precisely,” he says. “There are a few statements we include in contracts to make sure clients understand that creative parts of a project are subjective and that we'll work with them to achieve their goals, even in a fixed-bid situation.”

On the Record

Among the 50 employees at Media Genesis, about half work as project managers. Project staffers use three-ring binders to house key project records, including contracts, sign-offs and approvals. “Everything throughout a project becomes a living part of a contract. E-mail communications and proposed ideas all become part of the client record,” Mr. Dubeauclard says.

“Project managers know they need to keep the binders well-organized and clear,” he says. “The project manager is also responsible for managing a similar binder at the client with their counterpart.”

And when there's a problem, the team goes back to the binders. “That resolves 75 percent of the issues,” Mr. Dubeauclard says.

Review Time

Ms. Haapio advises organizations to conduct regular reviews of their proposals and contracts with applicable parties, including project owners and project managers. “Don't just do a contract review after signature. Rather, sit down and look at the risk and issues that may be of concern before submitting a proposal or making a commitment. Pre-bid and planning meetings are great venues for this,” she says.

And organizations should keep that dialogue going throughout the project.

At Media Genesis, every Monday staff meeting covers contracts. “We review all contract performance, actual work and actual budget,” Mr. Dubeauclard says. “Every employee should know issues and how we're doing, how they scoped contracts correctly or incorrectly and the impact it has.”

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Everything throughout a project becomes a living part of a contract. E-mail communications and proposed ideas all become part of the client record.

—Antoine Dubeauclard, Media Genesis, Madison Heights, Michigan, USA

Additionally, all of the company's project managers are required to attend another weekly forum to share anecdotes and issues. “It's about sharing best practices and lessons learned, but also about practical discoveries and project protocol such as becoming aware that we can't turn over source code to a client until the billing is done,” he says.

Media Genesis also mandates all new employees undergo an extensive orientation process that includes a discussion of contracts illustrated by case studies. Topics may include whether an employee or contractor can give out work samples such as logos and unreleased designs without client or firm approval.

They Learned It the Hard Way

For Media Genesis, one of the toughest lessons learned was that going above and beyond the call can wreak havoc on contracts. The company found delivering beyond the scope of agreements tends to create a situation where the client expects freebies. So now, when a team performs work outside of scope—whether it's billed for or not—clients are required to sign off on any change controls. “This forces recognition and awareness that the project did deviate from scope,” Mr. Dubeauclard says.

He also recommends all aspects of the work be clearly outlined—no matter how basic it may seem. “Spell out assumptions. Clients like it. It shows you listened, and they'll tell you if you didn't get it right,” Mr. Dubeauclard says. “Make sure people understand the agreement through and through. We've discovered communication and documentation are some of the best things we can do. The legal documents are there to support the communication, not the other way around.”

The effort is clearly paying off. “We have very few contract problems,” Mr. Dubeauclard says. “We have less than 2 percent uncollectible signed business or change controls. We attribute that to the contract review and discussion process with clients and project managers.”

Project satisfaction—signed, sealed, delivered. PM

 

Marcia Jedd is a Minneapolis, Minnesota, USA-based business writer.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM NETWORK | DECEMBER 2007 | WWW.PMI.ORG

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