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WHAT EXACTLY DO WE MEAN BY "CONTRACT" AND "CONTRACTING?"

When hearing the word "contract,” most people have a tendency to think of formal, legal documents. Many tend to categorize contracts under "law” and think that contracts are best left for lawyers. Traditional project management literature seems to have a rather narrow and legalistic view of contracts also. For example, the Project Management Institute's (PMI) Guide to the Project Management Body of Knowledge, when discussing project procurement management, notes that a contract is "a legal relationship subject to remedy in the courts.”[1] No wonder many business and project managers have chosen not to get involved and delegate contracts to lawyers. We take a different view: as war is too important to be left to the generals alone, contracts are too important to be left to the lawyers alone.

So what do we mean by contracts? The word "contract” has two basic meanings: (1) an agreement (a bargain, a deal) and (2) the document representing the agreement (or attempting to represent it—documents are often not complete embodiments of an agreement). Contracts can take many forms and they can be created in many different ways. They may be signed documents, engagement letters, or a chain of letters or electronic messages. Contracts may be formed, for instance, through an offer (bid, quotation) followed by a purchase order, or through a purchase order followed by an order confirmation. As we will see later in this book, the basic requirements of contracts are not the same throughout the world or in all contexts. In some cases, to be valid, contracts need to be in writing; in others, they do not. In some countries and contexts, the formation of a valid contract requires that each side provides something of value, consideration; in others, it does not.

Not all contracts are documents with the word "contract” on top; in fact, contracts are not always easy to recognize. Still it is important to note that in every sale and purchase of goods or services and in every collaborative venture where two or more companies work together, a contract is present. It may be written or unwritten, formal or informal. its terms may be stated, for instance, in a customized document or a standard form, and it may contain appendices such as technical specifications, work scope definitions, and Standard Terms and Conditions (STCs; "the small print”). offers, purchase (or change) orders, confirmations, memoranda, letters of intent and the like, even email messages, can also change contracts. Their contractual aspects need to be recognized and properly addressed. In addition, contracts often contain important requirements for operational performance, milestones, invoices, reports, and notices that need to be captured and followed in daily business.

All of the above are relevant in the context of contracts and risk, and they need to be managed. Preparing, negotiating, and signing documents are important steps in the contracting process, but there is more. If contracts are forgotten in a drawer and not followed, businesses can open themselves to a multitude of risks and lose many of the benefits they have sought to secure.

In today's complex, multi-locational deals, contracting is rarely a craft activity conducted by an expert at a desk who produces a written document bearing the heading "contract.” Today's contracting is a process in which a wide range of people, functions and technologies are involved: a collaborative venture that requires a knowledgeable and well- connected team. The vertical dashed line in the center of Figure 2.1 depicts the moment when a contract is made and signed, often understood to be "contracting” in the narrow meaning of the word.

Contracting and business processes

Figure 2.1 Contracting and business processes4

The term "contracting” is used here to refer not only to preparing and making but also to managing and implementing contracts (or, as is often the case, a portfolio of contracts). For our purposes, it is useful to break down the contracting process into phases: (1) planning, solicitation and bidding (pre-award); (2) negotiation and signing (award); and (3) implementation, performance and administration (post-award). Figure 2.1 shows how the business and contracting processes of suppliers and buyers are intertwined and emphasizes the significance of implementation as part of the contracting process.

Contracting Capabilities in Industrial Life-Cycle and Service Business. Research

Report. A summarized version in English is available at http://www.uef.fi/oikeustieteet/ ccc. Reprinted with the permission of Professor Soili Nysten-Haarala, under whose leadership the multidisciplinary Corporate Contracting Capabilities research project was conducted in Finnish firms in 2006-2008.

  • [1] A Guide to the Project Management Body of Knowledge (PMBOK® Guide) (2000) Newtown Square, PA: Project Management Institute (PMI), p. 156. The same can befound in the more recent 2004 and 2008 editions of the Guide (2004, p. 289; 2008,p. 333). In the glossary of the Guide, a contract is defined as a "mutually bindingagreement that obligates the seller to provide the specified product or service or resultand obligates the buyer to pay for it” (2000, p. 199; 2004, p. 355; 2008, p. 429).
 
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