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Nearly all IT projects require some sort of procurement, whether it is for hardware, software, or services. Therefore, IT project managers need to understand the major element of IT procurement contracts, as outlined in this post.
This Research Byte is a summary of our full report, How to Evaluate IT Procurement Contracts.
IT managers make two common mistakes in regards to contracts. First, they often treat contracts as legal matters only and delegate contract review to corporate legal counsel. Although legal review is essential, lawyers often do not have the technical or operational background to evaluate IT contracts from a business perspective. A lawyer may not anticipate what could go wrong in a software implementation, nor might he or she think to recommend a clause specifying, for example, the buyer's right to request a change in the vendor's personnel at no charge within an initial time period. Procurement contracts are too important to delegate to the legal department alone. Instead, read through every contract from a business perspective first, and then route the contract through the legal department for final review.
Second, IT managers are often too conservative in their approach to requesting changes to contract language. Vendors of IT products and services generally have their own boilerplate agreements, which they present to buyers as their "standard contract." Many project managers assume that such contracts are not easily modified. This is a mistake. Such boilerplate language almost always favors the seller, and any contract is an agreement between two parties. The buyer has as much right to suggest language for the agreement as the seller does. Never assume that contract language is cast in stone.
Please note that the information provided in this report is not to be construed as legal advice. Each procurement contract requires legal advice from a competent lawyer to ensure that it is appropriate for the buyer's situation.
Typical Contract Elements
Understanding procurement contracts begins with a knowledge of what such contracts have in common. The Uniform Commercial Code (UCC), created in 1951, established eleven articles that all U.S. states (except Louisiana) follow. (Since Louisiana's legal code is based on civil law and not common law, the state has elected to only follow some of the UCC articles.) All commercial procurements are subject to UCC code--except for government contracts, which fall under the Federal Acquisition Regulation (FAR) rules. Figure 1 shows the major sections that generally exist in all contracts. These sections may not appear in the same sequence in all contracts, or they may appear under different headings than those shown, but they generally appear in most procurement agreements.
Let us review each of these main sections.
The full version of this report provides an overview of the essential elements of IT procurement contracts, the main contract types, and recommendations for choosing the best contract for specific project procurements. It serves as a primer on IT procurement contracts. Our focus is primarily on contracts for IT services, though the principles apply to any type of IT procurement. (An explanation of software licensing agreements, however, is well beyond the scope of this article.) We explain the typical elements of an IT procurement contract and the major types of contracts, including various types of fixed-price and cost-reimbursable agreements. We then provide guidelines for choosing the right type of contract based on characteristics of the procurement or project. We conclude with a checklist that can be used to review proposed contracts.
Lynn Drury, senior project manager at our sister management consulting firm, Strativa, contributed to this report, in collaboration with Frank Scavo. Drury is a Project Management Professional (PMP) certified by the Project Management Institute (PMI). She is also an instructor in project management at the University of California, Irvine.
This Research Byte is a brief overview of our report on this subject, How to Evaluate IT Procurement Contracts. The full report is available at no charge for Computer Economics clients, or it may be purchased by non-clients directly from our website at https://www.computereconomics.com/article.cfm?id=1402 (click for pricing).