The following article was prepared by Mike Taylor,
C.P.M. for use in affiliate education programs
Is it Written?
O.K., so I know and you know… but do we have a piece of paper that says so?
It's a typical auditor kind of question. The kind that hurts because you know in
the long run the auditor is right.. Here's how it goes.
- The seller says delivery is going to be a few days late and the buyer
agrees that it would be O.K.
- The seller says it will take just a week longer to finish painting, and the
- The seller asks for an extra month to finish the inspections, and the buyer
objects, but doesn't issue a show-cause notice and lets the seller finish the
- The seller's invoice covers an extra day beyond the end of the contract to do
the cleanup work requested by the plant manager.
So far that's all just S.O.P... Now the important question; did you modify the
contract and get a signed acknowledgement? In most cases, I know what the answer
is (not). Been there, done that myself.
That presents some problems for us and, our friends, the auditors:
- It's going to end up looking like you paid a seller for something that
wasn't bargained for. In a SOX audit, it could look like we just tossed a bundle
of money out the door.
- It could end up looking like you failed to enforce you contract rights and
request reasonable compensation for the seller's failure to perform. That could
make some or all of the cost unallowable.
- It could end up looking like you are playing favorites or have a personal
conflict of interest.
- If there is an accident, your insurance company could argue that the seller
had no contractual right to be on your property.
- If the shipment gets lost, ownership, title and responsibility could be
questioned because there is no enforceable contract .
- If the seller adds an additional delay later (seems like they always do) then
you have not previously established a new baseline to argue from. Each delay is
only "just a little" longer.
- The seller could argue that the scope is outside the original agreement
(obviously) and request a higher price for the additional work.
- The seller's management, bonding company or bank could argue that the delay
was made at the buyer's request and demand compensation.
- Once you acquiesce to a change in terms, it's going to be hard to claim in
the future that time is of the essence and/or that any of the other contract
terms are important.
- If something should happen so that the contract needs to be taken over by a
new buyer, the new buyer will not have the benefit of a written agreement, the
seller will claim all sorts of other unwritten agreements and the new buyer will
think you are flakey (at the least).
Sound far fetched? Just talk to buyers who have been around a while, and I'll
bet they've seen many of these same circumstances at one time or another.
Bottom line: Document all post-award agreements with the seller. When
something happens that changes, extends, modifies, alters or adjusts the contract, make sure
that you clearly document the change and the new baseline. I'd
even add words to the effect that just because we agreed to this change doesn't
mean we are waiving any of the other terms and/or might agree to anything again
in the future.
On a more subtle note:
- Be sure that correspondence identifies the source, cause and reason for
making the change so there is no room for creative interpretation later.
- DO NOT include unnecessary adjectives and adverbs in your correspondence.
Assume that anything you say, can and probably, will be used against you.
example: "… Since we really don't need these parts yet…" "
… the extension will be fine and we appreciate the really nice way you are
working with us…"
I always like to consider what it would sound like under cross examination
during the law suit. "… did you say this seller was working well with
you?" or " ..did you say that you really did not need the parts
Of course all this is just theory. In the vast majority of buyer-seller
agreements, both parties work out the problems as best they can. However,
auditors are not interested in the odds, to them the world looks much better in
black & white. And you know what they say about what 'can' happen in
contracting - someday it will.
Read more articles about negotiation and creative
contract solutions in the Purchasing Toolbox at http://www.mltweb.com/prof/tools.htm
and in the BuyTrain news article archive at http://www.mltweb.com/tools/buytrain/index.htm
is assembled and maintained by Michael L. Taylor, C.P.M.
||Materials and articles
prepared by Mike may be shared for purchasing education provided that this
source is cited and no fee is charged. The rights for any other use are
||Copyright; Michael L.
||Last Updated: 05/23/2006