The following article was prepared by Mike Taylor, C.P.M. for use in affiliate education programs
February 2005

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 buyer agrees.
• 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 work.
• 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:

1. 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.
2. 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.
3. It could end up looking like you are playing favorites or have a personal conflict of interest.
4. If there is an accident, your insurance company could argue that the seller had no contractual right to be on your property.
5. If the shipment gets lost, ownership, title and responsibility could be questioned because there is no enforceable contract .
6. 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.
7. The seller could argue that the scope is outside the original agreement (obviously) and request a higher price for the additional work.
8. The seller's management, bonding company or bank could argue that the delay was made at the buyer's request and demand compensation.
9. 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.
10. 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:

1. Be sure that correspondence identifies the source, cause and reason for making the change so there is no room for creative interpretation later.
2. 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 anyhow?"

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.

Mt

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