A glossary of commercial terms for the switched on buyer

Acquisition The process of requirement setting, procure, support management and disposal, implying a whole-life approach to acquiring defence capability. (Also see Cost of Ownership.)

Agreement in Principle This is another qualifying comment. It means that it is not formally accepted, thus leaving the door open to the seller to withdraw the agreement in principle if something arises in discussions or negotiations that impact on the provisional agreement.

Alliance A procurement strategy in which a Buyer selects and contracts with a number of suppliers, the aim being to include those best placed to introduce innovation and mitigate recognised risks. The Buyer and the other Alliance partners share risks and benefits. The Buyer will typically appoint an Integrator to lead project management across the Alliance.

Anchor Milestones The characteristics of Anchor Milestones are that they should be associated with those activities that are on a project’s critical path and that their achievement should improve confidence that the intended project delivery will occur on time. Monitoring of Anchor Milestones will provide an early alert if the risk in delivering a programme within its approved time, cost and performance envelope increases.

At a price to be agreed This should not be accepted by the buyer. It leaves the buyer vulnerable to any price submitted by the seller. On the occasions when a price cannot be agreed prior to signing a contract an Instruction To Proceed may be placed with a financial cap attached to it, thus giving the buyer an opportunity to, later fix the price on a rational basis.

Breach This occurs when one party fails to perform one (or more) of its obligations under a contract.

Common Law Damages Common law damages are remedies available to any contracting party to compensate for the financial loss suffered as the result of a proven breach of contract. They require demonstration of the breach and, unlike Liquidated Damages (LDs), the loss incurred as a result of the breach. 

Consequential Loss Consequential loss is any loss that does not arise directly as a result of a breach of contract. Such losses are more ‘remote’ than those that were reasonably foreseeable by the parties to a contract and may not be recoverable.

Contingent Liability Contingent liability arises if The Buyer grants an indemnity to any other body, including a contractor, because it commits Parliament in advance to unpredictable expenditure. All contingent liabilities must be approved by the financial authority responsible for the acquisition requirement. Where the liability is substantial and/or cannot be categorised as ‘normal business’, Treasury should be consulted before proceeding further.

Contract Management Plan An important tool for ensuring that the client identifies and addresses all relevant issues through the life of the contract. It is a dynamic document which is created during the contract formation stage and modified throughout the life of the contract.

Contractual terms noted This is a qualification and is a meaningless statement. Noted in what regard? Do they have an objection? If so, what is it? What is the process to resolve any differences?  The buyer must not believe that the seller has accepted his contractual terms and conditions.

Copyright A form of statutory protection for original literary, musical, dramatic or artistic works, which terms include technical papers, drawings etc. and computer software. Copyright provides the right to protection against unauthorised copying, publication or performance of a protected work. Copyright comes into existence automatically when the work is created and therefore applies to unpublished as well as to published works.

Cost of Ownership An annualised representation of the resources consumed directly in the procurement, operation, training, support and maintenance of military equipment at all stages of its life. The Cost of Ownership statement is the costed element of the Through-Life Management Plan.

Direct Costs / Indirect Costs Costs that can be identified directly to a specific, contracted, task (e.g. labour and materials) including ‘bought out’ or sub-contract costs. Costs that are expended throughout the contractor’s business or cannot be attributed to a particular job are ‘overheads’ (e.g. the cost of running the contractor’s headquarters and buying utilities such as electricity, canteen staff, cleaning materials). These costs are usually expressed as a percentage of direct costs.

E&OE This means Errors and Omissions Excepted. This is a significant qualification and should not be accepted by the buyer. To accept the statement is leaving the door open to the seller to change any aspect of the quotation.

Estimate This is a price submitted by the seller but who may word it as subject to confirmation. The buyer needs to establish if it is a price capable of acceptance and whether it is ‘firm’ or ‘fixed.’ The danger of placing a contract on this basis is that the seller requires an uplift when he is in possession of further information.

Express Guarantee (or Express Warranty) An agreement whereby a Contractor agrees to repair or replace defective goods free of charge (or with certain limited fees – e.g. transport costs) where the defects are of a type covered by the guarantee and where they arise within the period specified within the guarantee. It normally excludes all other warranties and conditions implied by Common Law

Ex-Works A method of delivery. Goods are collected from the seller’s premises by the buyer or his agent or authorised representative at the time stated in the contract. Title to the goods delivered ex-works will usually pass at the time of collection.

Firm Price A contract price that is not subject to variation for a specific period of time.

Fixed Price A contract price that may be varied on an agreed basis to take account of inflationary and/or exchange rate movements

Force Majeure An unpredictable event or occurrence beyond the control of the contracting parties, and which is not attributable to any act or failure to take preventive action by the party concerned. A Force Majeure condition allows an extension to the contract duration or completion/delivery date should a Force Majeure event occur.

Gainsharing Where the Buyer encourages a supplier to propose cost or performance improvements that could be made providing the Buyer agrees to vary its specification and to share the gain with industry.

INCOTERMS A shorthand for the guidance on International Rules for the Interpretation of Trade Terms (‘Incoterms’). INCOTERMS describes the different methods by which delivery may be made.

Indemnity An arrangement where one party (the indemnifier) agrees to pay another (the indemnified) sums of money to compensate the indemnified for a loss in the circumstances described in the indemnity term.

Integrator Also referred to as a Physical or System Integrator. Typically used as part of an Alliance procurement strategy to build, manage and lead project management across the Alliance partners and is often a project management specialist. See also Alliance.

Interim Payments A generic term for payments made to a contractor before the work is completed. The preferred method is ‘stage’ or ‘milestone’ payments, which provide pre-determined advances of the contract price at predetermined stages or milestones of the work. The payments are made against achievement; if the stage or milestone is not achieved then the Buyer may take a view as to the amount to be paid. All these payments (advances) are recoverable in the event of non-performance of the contract.

Invitation to tender An invitation by the Buyer for suppliers or contractors to offer binding proposals to undertake work to a published specification; unconditional acceptance will lead to a contract.

KPI Key Performance Indicator. KPI’s are tools that help us to measure the performance of suppliers against their contractual obligations. KPI’s are normally detailed in the service specification

Letter of Intent When properly written this does not create legal relationships, it merely gives comfort to the other party that they may win a contract. In the USA they are called ‘comfort letters.’ For it to be a letter of intent it must not instruct the seller to take any actions, otherwise it becomes an Instruction to Proceed which does create legal relationships.

Limitation of liability An arrangement where a party to contract limits his liability to the other party; this may be for the value of a contract, or for damages in the event of breach of an obligation

Liquidated Damages A contractually pre-agreed sum payable by way of compensation in the event of a specific breach of contract (e.g. late delivery).

Maximum Price A term usually used in Target Cost Incentive Fee Price (TCIF) arrangements and is that price beyond which The Buyer is not required to pay. Costs incurred above the Maximum Price fall to the contractor alone. Exceptionally, a Maximum Price may be adopted until a Firm Price can be agreed

Objectives and Key Results Objectives and Key Results (“OKRs”) ensures discipline thinking (the major goals will surface), you communicate accurately (lets everyone know what is important), establishes indicators for measuring progress (shows how far along we are) and focuses effort (keeps your firm in step with each other).

Offer and Acceptance Offer and acceptance – with any requisite detail – are essential elements of contract, but it may be very difficult to tell whether or when they have come into existence.  They do not usually require formal declarations by the parties.  They may result informally e.g., from a course of dealings, or even from silence (but note the Unsolicited goods and Services Act 1971).  Use of the words “offer” and/or “acceptance” is not usually conclusive.

Parent Company Guarantee A parent company guarantee binds the guarantor (the ‘parent company’) to fulfil and complete a subsidiary company’s obligations and liabilities in the event of a failure by that subsidiary to fulfil and complete its obligations and liabilities under a contract

Partnering An open, co-operative and interactive relationship between The Buyer and a Supplier, aimed at achieving common goals notwithstanding complex and volatile environments

Patent A monopoly right granted to protect an invention which can be an apparatus, process, product or substance. A valid Patent gives its owner (the Patentee) a right to stop other people using the invention that is the subject of the Patent. Provided renewal fees are paid, a patent will last for up to 20 years.

Prime Contractor. A contractor having responsibility for co-ordinating and integrating the activities of a number of sub-systems contractors to meet the overall system specification efficiently, economically and to time

Procurement The process of acquiring goods, works and services, covering acquisition from third parties and from in-house providers. The process spans the whole life cycle from identification of needs, through to the end of a services contract or the end of the useful life of an asset.

 Quotation It must be established if the quotation is an offer to sell or an invitation to treat. Often the supplier will couch it in terms of ‘This quotation is not an offer.’ The buyer must read the quotation for any qualifying comments that seek to place risk with the buyer.

Request for Proposals A request by the Buyer for a contractor or contractors to supply non-binding proposals on how it or they would meet the requirement.

Reasonable price There is no such thing as a reasonable price! The price will be set according to many things including the market conditions; seller’s pricing strategy, risk profile of the contract, liabilities, etc. This term is best avoided by the buyer.

Risk The probability of an unwanted event occurring and its subsequent impact. See Procurisk

Specification A description of requirements and standards to which the goods, works or services should conform. Also known as a statement of needs, a statement of requirement, an operational requirement, or a brief. Its purpose is to present prospective suppliers with a clear, accurate and full description of the organisation’s needs, to enable them to propose a solution to meet them

Stakeholder An individual or organisation that has an active interest or a stake in a particular organisation or issue. For example, funders, members, contractors, purchasers, trustees, beneficiaries, volunteers and paid staff are all stakeholders in a voluntary organisation

Standard Forms The forms (of contract) may be drafted by the economically stronger party, or based on trade association rules, or the Incoterms published by the International Chamber of Commerce, codes approved by the Office of Fair Trading, or other such rules of practice.  Typically the forms seeks to limit liability for breach, allocate risk, provide for payments, settlement of disputes, etc.

Subject to Contract The use of these words is not a valid acceptance of a contract. An acceptance made subject to any variation is treated as a counter offer. The buyer must know the rules of offer and acceptance.

Subject to Negotiation This is a further qualification and cannot be treated as acceptance. Until the negotiations are complete and the outcomes documented and agreed by both sides there is not an offer that can be accepted by the buyer.

Target Cost Incentive Fee A method of pricing used when there is insufficient confidence to agree a Firm or Fixed Price. A ‘target cost’ is agreed (i.e. the cost at which both parties believe the work can be done). If the contractor’s costs are below the target cost he will share the underrun with the Buyer in line with a pre-determined ratio. If his costs are greater than the target cost the Buyer will share the overrun also in line with a pre-determined ratio. It is usual for the Buyer to include in a TCIF arrangement a cost ceiling figure (i.e. Maximum Price) above which the contractor will take full responsibility for any overrun.

Through-Life Management Plan The Through-Life Management Plan should bring together key themes of Integrated Project Teams, Systems Engineering and improved commercial practices. An outline Through-Life Management Plan should be produced in the concept stage and maintained throughout the procurement cycle. It will show the full resources needed to meet the objectives of the project and is recognised by all stakeholders.

Trade Mark Trade marks consist of words or symbols that distinguish one set of goods from another or the services provided by A from those provided by B. Even colours or sounds (i.e. jingles) can act as Trade Marks. Trade Marks can be registered or unregistered; wider rights of action being granted to the owner by registration.

TUPE Transfer of Undertakings (Protection of Employment) Regulations 1981. The aim of TUPE is to protect employee rights (in particular terms and conditions) on the transfer of the business in which they work (the ‘undertaking’) from one employer to another. Government policy on Public Sector transfers is that TUPE will apply to contracting out except in genuinely exceptional circumstances

Unregistered Design Unregistered design rights are automatic and apply to any original design excluding those features of a design applied to an Article that are made to ensure that it fits or matches with another part. Protection for an unregistered design lasts for 10 years from first commercialisation of the design

Valuable Consideration English law (but not Scots law) sees a contract as involving enforcement of a bargain rather than enforcement of a promise by one party only.  As a rule, one side’s promise cannot be enforced by the other unless he has “bought” it.  This requirement of mutuality or reciprocity, the quid pro quo, is called “valuable consideration”.  It means that the promise must give or do or promise to give or do something of economic value (not necessarily equivalent to the promise) in return for the other’s promise before he can enforce it.  Alternatively the promise may show the promisor has received a benefit as a result of his promise.  A promise given in return for an act or promise which was undertaken without contractual intent is given for past consideration, which is of no legal effect.  A promise to accept part payment in full settlement is also generally unenforceable.

Value for Money The provision of the right goods and services from the right source, of the right quality, at the right time, delivered to the right place and at the right price (judged on whole life costs and not simply initial costs).

Variation of Price A mechanism by which the risk of inflation in a contract price is reduced (or removed) through the application of a formula which provides for a periodic adjustment of the Fixed Price in the contract

Whole-Life Costs The aggregation of the annual Cost of Ownership statements covering the total resource required to assemble, equip, sustain, operate, and dispose of a specified military capability at agreed levels of readiness, performance and safety.

Without prejudice This is a phrase used to enable parties to negotiate settlement of a claim without implying any admission of liability. Letters and other documents headed ‘without prejudice’ cannot be adduced as evidence in any court action without the consent of both parties.

That’s it!

A glossary of commercial terms for the switched on buyer. What have we missed? Please drop me a note, with your suggestions and additions it would be great to grow this into a really useful resource – and as always your help and support is appreciated.

Why Brian Farrington?

There are three themes that clients tell us over and over again.

First, they tell us they believe they are making a smarter investment working with Brian Farrington Ltd — bringing a thorough understanding of their procurement and supply chain issues and a proven track record of enabling excellent returns on their investment.

Second, our clients are confident that they are working with specialists that bring experience, expertise and stay focused on client success; not on our next income target.

Finally, people –people just like you – tell us they actually like working with us. They find us easy to work with and collaborative in solving issues that inevitably arise in procurement.

Brian Farrington solutions and services are formed through consultancy, training & development and coaching – all underpinned by proprietary technology. Our four core areas of procurement capability are:

•Strategic review and commercial governance

•Performance delivery and transition

•Major project support including contract negotiations

•Learning & development in support of organisational aims.

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Thanks

– Ray