06 - IIFT Managing Contracts & Negotiations PDF

By Rana Goswami
Date: November 2, 2019
2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 1

TOPICS
What is Contract & its’ brief history
Managing Contracts in Global Sourcing
Role of Negotiations in in Global Sourcing
Case Study

WHAT IS CONTRAT
A “Contract” is another name for a business relationship.
It is an agreement between two parties.
Contracts are consensual. It is the parties which set their

terms. These could range from time & place of making of
the contract, jurisdiction of courts, modality of
communication between parties and damages.
With each such dispute, world of business became wiser.

It provided on that aspect explicitly in the contract to
avoid confusion and dispute.
CONTRAT THEMES
Ownership Quality of
of Goods Goods
CONTRACT
Transfer of
Ownership
Transfer of
Risk

BRIEF HISTOR OF CONTRAT
Started with dispute mitigation in king’s court
Judges decided cases on basis of usage, custom of
community and prevailing notions of equality & justice.
Prevailing judgments were referred.
English Sale of Goods Act, 1893 : based on rules &
principles which court formulated in relation of sale of
goods.
Law of sale of goods in India is contained in the Sale of
Goods Act, 1930 which was copied from English Act
during British India.
Same was taken to America and other commonwealth
countries like Australia and Canada.
CONTRAT of SALE : CASE STUDY
Sl. No. Contract Identification
1. Mr. X contracts to give his scooter to Mr. Y for Mr. Y’s Barter / exchange
washing machine
2. Mr. X contracts to give Mr. Y his scooter for a price of Sale
Rs. 10,000 by Mr. Y
3. Mr. X contracts to give Mr. Y his scooter for a payment Leasing
of Rs. 2000 by Mr. Y on condition that scooter will
have to be returned to Mr. X after an Year
4. Mr. X contracts to give Mr. Y his scooter for a payment Pledge
of Rs. 7000 by Mr. Y. Mr. X is required to return the
scooter whenever Mr. Y repays Rs. 7000 with interest
• Distinguishing factor : nature of consideration

• In contract of sale, buyers consideration is transfer of ownership & right quality of goods
but sellers consideration is Price in cash.
• Important concern of buyer – Undisturbed ownership & right quality goods

Types of Contracts
Types of Contracts Description Buyer’s Seller’s
Risk Risk
Fixed Price Contract Price stated in the agreement does not change, regardless of any type of
environmental change LOW HIGH
Fixed price with Base prices can increase or decrease based on specific identifiable changes in
escalation/ de-escalation material prices
Firm Fixed price with Initial target price based on best guess estimates of labor and materials, then
Price redetermination renegotiated once a specific level or volume of production is reached. Then re-
Contract determine a revised fixed price.
Fixed price with Similar like previous one. Then cost savings due to supplier initiatives are shared
incentives between supplier & purchaser at a predetermined rate for a designated time
period. Applicable for high unit cost & long lead time products.
Cost plus incentive fee Base price is based on allowable supplier costs and any cost savings are shared
between the buyer and supplier based on a predetermined rate for a designated
time period. Used when target cost estimate is relatively certain.
Cost Cost sharing Actual allowable costs are shared between parties on a predetermined
Based percentage basis and may include cost productivity improvement goals.
Contract Applicable when raw material cost is increasing.
Time and materials Supplier is paid for all labor and materials according to a specified labor,
contract overhead, profit and material rate. Used in plant & equipment maintenance
agreement.
Cost plus fixed fee Supplier receives reimbursement for all allowable costs up to a predetermined
amount, plus a fixed fee, which is a percentage of the targeted cost of the good
or service. HIGH LOW

Advantages of Cost Based Contracts
Appropriate for situations where there is risk of large
contingency fee included in a fixed-price contract.
Lower level of risk of economic loss for suppliers
Generally applicable when the goods or services procured are

expensive, complex, and important to the purchasing party
Applicable when there is high degree of uncertainty

regarding labor and material costs.
These are generally less favorable to the purchaser because

the threat of financial risk is transferred from the seller to the
buyer

Desirability of Contracts under Different Conditions
Environmental Conditions Degree Fixed Price Cost Based

of effect Contract Contract
Component market uncertainty HIGH LOW HIGH
Tenure of agreement (long term) HIGH LOW HIGH
Degree of trust between buyer & seller HIGH LOW HIGH
Process technology uncertainty HIGH LOW HIGH
Supplier’s ability to affect cost HIGH LOW HIGH
Value of purchase HIGH LOW HIGH

Pros & Cons of Long Term Contracts
Advantages: Disadvantages:
Assurance of supply Supplier opportunism – in
Access to supplier’ technology terms of performance
Access to cost / price
detoriation in price, delivery,
information quality, technology
Leveraging volume
Selecting wrong supplier
Supplier receives better
Supplier’ volume uncertainty
information for planning Supplier forgoes other
opportunities – i.e. supplier
also caters to buyers
competitors & hence loose
other business opportunities
Buyer is unreasonable
IIFT_Managing Contracts & Negotiations_Rana

2 November 2019 Goswami 10
Contingencies of Long Term Contracts
Concept of Initial Price: becomes base price for further
considerations
Price Adjustment Mechanism: by means of outside

index or price of related products
Supplier’s Performance Improvement: based on

improvements, to decide on whether to go in for long
term or evergreen contract
Evergreen, Penalty & Escape Clauses: every year

renewable contract based on meeting buyer’s
expectations

General Price Escalation Formula
P1 = P0 (0.10
(W1 ++W2
0.25
x Cf/C0
Cf/C0 ++ W3
0.35x Sf/S0
Sf/S0 ++ 0.30
W4 xL1/L0)
L1/L0)
P1 = Final Price
P0 = Initial Price If
W1 = Margin Factor W1 = 10% i.e. 0.10
Cf = Index No. of Wholesale Price as given in RBI bulletin under heading ”Cement” as W2 = 25% i.e. 0.25
prevailing upto the supply of cement within the procurement period i.e. upto 1(one) W3 = 35% i.e. 0.35
month prior to contractual delivery period including extensions thereof. The date of
supply may be reckoned as 15(fifteen) days after the offer of the work for inspection or W4 = 30% i.e. 0.30
the date of invoice etc. whichever is earlier.
C0 = Index No. of wholesale price prevailing as on Base Date.
W2 = Weightage factor for Civil Part
Sf = Index No. of Wholesale Price as given in RBI bulletin under heading ”Steel”
S0 = Index No. of wholesale price as prevailing as on Base Date.
W3 = Weightage factor for Steel
L1 = All India Consumer Price Index for industrial workers of RBI Bulletin prevailing on
the date of completion.
L0 = The above index prevailing on Base Data
W4 = Weightage factor for Consumables

Non Traditional Contracts
IT Systems contract
Facility management services
Research & Development
Logistics & distribution
Accounting & audit services
Minority & Women-Owned business enterprise
contract
Consulting contract
Construction contract

IT Systems Contracts
IT Systems contracts is an systems outsourcing contract
Companies are unable to design and maintain expensive computer networks
and software and hence outsource. Eg. : SAP, Oracle, IBM, etc.
Contract should safeguard from company’s growth or downsizing, service
provider defaults or contract amendments, data security, control of
outsourcing costs, and control of information systems operations.
Systems Contract must include following:
Contracting Risks to be covered : Contract should include from any deviation from
dramatic shifts in user demand patterns and quantum leaps in software and
hardware technology.
Level of Service : Generally there are three basic levels of service:
1. Turnkey – 100% outsourced
2. Modular - service provider takes on only two or three small functions from
the client
3. Shared - service provider and the client company share resources and
operational control over the outsourced service
Purchaser negotiations should focus on price, performance and procedures.

Consulting Contracts
Consultant should be an agent and not an employee of the buying firm
“Residuals” i.e. Intellectual properties developed during consulting should
remain as a property of the buying company
Copyright ownership remains with the buying company
Consultant will try to have following clauses:
Avoidance of misunderstanding
Maintenance of working independence and freedom
Assurance of work
Assurance of payment
Avoidance of liability
Prevention of litigation
Arbitration for dispute resolving
Payment Terms :
Generally high amount of advance payment (1/3rd of total contract value)
Balance payment based on milestones on deliverables
Late payment penalties are generally asked for

Construction Contracts
Delivery / Project completion is the essence
Pre bid meeting is generally conducted
Systematic bid evaluation
Advance Bank Guarantee / Security Deposit and Performance Bank
Guarantee is mandatory
Strict LD clause. LD against late delivery and non achievement of
performance
Arbitration is specified
Payment Terms :
Generally small amount of advance payment (5% to 10% of contract value)
against equivalent amount of BG
Balance payment based on milestones on deliverables
Final payment is generally released against PBG

GENERAL TERMS & CONDITIONS in Contract
T&Cs of a contract are consensual.
General Contents of Contract:
Scope & Specification: complete detail technical specification, parameters, brand, number
of pieces are listed. The buyer / parent or outsourcing company would like to be assured of the
performance and quality of the product.
Warranty: Manufacturer or outsourced companies give warranty for a limited period. Such
details are to be listed under this clause.
Delivery, Transit & Transportation: Apart from delivery time, transfer of ownership of
goods or services are most important factors while drafting T&Cs to be agreed upon. This
clause is to clearly state the time & place when the ownership passes. Also it clearly defines
who will insure and bear the risk of damage or loss in transit.
Terms of Payment: Parties are interested in the modality of payment. Will the payment be
made before or after delivery? Will it be made in one installment or multiple installments?
Will there be any security involved while releasing payment? For international transactions
will there be any cap for exchange rate and import duty fluctuations? All these are listed under
this clause.

GENERAL TERMS & CONDITIONS in Contract (Cont…)
Price & Price Variation: What will be price of goods or services? Would it be allowed to vary
between the time of making of the contract and actual delivery? In a contract where the same goods
have to be supplied every year, there may be provision for annual increase in price.
Taxes & Duties: An issue associated with price is taxes & duties. The parties must be clear whether
the prices are inclusive or exclusive of tax elements and who would bear the taxes, outsourced or
outsourcing / parent company.
Force Majeure: Contracts that are impossible to perform can be declared to be void by the courts.
The contracting parties have learnt to limit the application of the principle, by explicitly limiting
events which can be allowed under this clause.
Liquidated Damages: A contract would mention damages under the heading of this clause. This
can be either for performance or for delay in delivery or sometimes both.
Arbitration: Disputes may arise between parties during pendency of contract. As courts take a long
time to give decisions, parties prefer to go for arbitration.
Assignment & Sub-letting: What if the contracting / outsourced party assigns a right job to another
person or a company? What if a party sub-lets a part of the job to another person? In some contracts,
it may be intended. In other cases, a party may have intended performance specifically by the
contracting party.
General Contents of Contract (Continued …):
Termination: Sometimes outsourced party turns out to be not

trustworthy and supplies old re-conditioned goods. Or at time
government changes the law which attracts high tax rates from that
particular goods being outsourced to that country/ state which
increases the landed cost of that goods too much and turns out to be
not viable. Hence termination clause plays it role.
Amendments: At times, the context demands change but not a

termination. This rout is also kept open by including clauses on
Amendment, which provide for parties to change the terms of contract.
For different types of purchase/ contracting, all terms of agreements

would be identical excepting terms specific to that particular purchase/
contract manufacturing.

GCC lists terms common to all contracts.
SCC lists only special terms of particular contracts.
The contract could say that GCC & SCC have to be read together for the
terms of agreement.
SCC should be skeletal, reducing administrative cost of contract.
GCC can also be adopted from standard set of bodies like FIDDIC,
UNCITRAL or World Bank.

CONDITION & WARRANTY
Condition: Warranty:
Core part of the Contract Secondary part of the
If core part were not Contract
performed, Contract is In case of breach of
Breached Warranty, contract has
In case of violation of been mostly fulfilled
Condition, contract can be and hence contract need
repudiated not be repudiated
In a given situation, whether a stipulation is a condition or a warranty,

would depend on the construction of the contract.

Negotiation
Many areas where buyer and seller differ in their opinion like interpreting
specifications, rationalizing quantity and delivery requirements with production or
capacity constraints, notions of what constitutes fair and reasonable supplier
pricing.
These differences cannot always be resolved by the competitive process alone, so

negotiation must be employed to complement that process
It is a process of reaching agreement through discussion, analysis, and bargaining.
It is not an event, not a game, not a sport . It is a process.
It has an easily identified methodology, with clearly defined planning steps that,
when followed, produce the final results we want, or get us as close to the results as
we can possibly come.

Negotiation Strategy
Cooperative / Collaborative aspects
focusing on issues that can be easily agreed on.
Competitive aspect
issues that are in disagreement; issues that are unclear, ambiguous, in dispute, or subject
to different interpretation or opinion.
What to Negotiate Concessions by supplier in any of these or

• Price similar elements will always increase the
• Payment tern value of the acquisition
• Deliverables
• Service levels
• Quality
• Support
Value
• Warranties Total perceived worth, importance or
• Risk assumption usefulness of the items bargained for,
• Business continuity/disaster recovery often measure in terms of what we
• Liquidated damages
• Insurance / bonding agree to exchange for them
• Freight allowances (for product)
• Consignment inventory

Negotiation Planning
Proper homework or degree of planning is most important
It is used to develop comprehensive course of action
Actions are linked to a well-defined set of objectives
Basic purpose of the process is to reach mutual agreement
Three phases of negotiation process:
Analysis
Method used to evaluate the supplier’s strength and weakness and how supplier is likely
to respond to your requests.
Check supplier's past history, market conditions, and potential motivating factors
attributable to its current business situation.
Analysis helps to discover the gaps in the information you need for planning and what
areas you may need a to investigate further
Discussion
Builds an amicable and cooperative climate so that agreement can be reached more easily.
Skillful communication and motivation are key.
Creates a win-win situation for both parties.
It helps in filling the gaps discovered during initial analysis.
Bargaining
“Something for something” - medium for exchange in the negotiation process
More we get of what we want and the less we concede to get it, the greater is our objective
benefit. The less we get and the more we give up, the less is our objective benefit.

Developing Negotiation Plan
Planning can be extensive or very short based on the case as it may be
Identify a logical, sequential set of steps :
Selecting a Team:
Cross functional team
Not all members to be present during negotiation
Developing Objectives:
It can be developed either by comparing RFP responses of one supplier with other
suppliers
Or by comparing user’s requirement to the proposals (point by point)
SMART concept - Specific, Measurable, Attainable, Relevant and Time bound
Negotiation Objective Matrix:
Objectives Opening Target Walk Away Concessions
Price reduction 14% 10% 7% 1. Offer an immediate contract

2. Offer an option to extend contract for an
additional year
Completion / Delivery 4 weeks 6 weeks 8 weeks Reduction in element x of the quality requirement
Other objectives……

Developing Negotiation Plan (Continued…)
Prioritizing Objectives to Match Concessions
Ration your concessions and use them very judiciously.
How to use concessions is the heart of your negotiation plan.
Supplier's Objectives
This is mainly the gain through an exchange of concessions.
Try to find out what the supplier hopes to achieve during initial discussions and
through analysis.
At times supplier will be completely up front in describing his objectives so there will
generally be less speculation.
Sometimes misstating objectives is actually a planned tactic used to generate a bit of
confusion in order to obtain greater concessions from the buyer.
SWOT Analysis
Typically conducted just after establishing objectives.
Supplier’s weaknesses might be the need to obtain a contract right away to avoid a
layoff.
Market conditions that see prices rising may turn out to be a treat to your ability to
negotiate reductions
At times particular strength of one is a weakness for the other or, a threat to one may
turn out to be an opportunity for the other.

Developing Negotiation Plan (Continued…)
Agenda / Order of Discussion

This is one of the most powerful tools, often overlooked.
Controlling the order of bargaining during a negotiation gives much
better chance of staying on track during negotiation plan concessions.
Staying Organized
All negotiation members needs to be clear on the order of discussion
and the agreed on objectives.
Use a matrix.
Tactics
In negotiation, there are three situations - win/win, lose/lose or
win/lose.
Use of tactics by a negotiator is both personal to an individual’s style and
specific to the circumstances.

Exception Conditions of Negotiation
Negotiating in a Single-/Sole-Source Situation:
Primarily, be prepared to more fully justify your demands and to link them
to very specific concessions that you know the supplier will want to accept.
Be prepared with a table with well-documented facts. Eg: provide third-
party analysis for deteriorating sales in the particular market segment or
provide articles that establish that there is a consensus of industry analysts
that the pricing trends are pointed downward.
Cross Cultural Negotiation:
Negotiation plan varies based on cross culture
Role of the individual, how each individual views issues, and how each
communicates in a business environment plays vital role
Important points to consider :
Strategy: The choice of a strategy is going to be affected by cultural orientation. Some
cultures avoid confrontation at all costs and much prefer a less aggressive approach. This will,
in turn, lead to a more collaborative environment. On the other hand, you might find so-
called power negotiators who do not oppose using confrontational tactics if doing so leads to
striking a better bargain for themselves.

Exception Conditions of Negotiation
Leadership: Culture will likely determine who will be the lead negotiator. In some
cultures, leadership is in the hands of senior management; in others, it may be conducted
by junior members but will require approval according to the chain of command. Some
cultures will not allow women to play a leading role (or any role at all) within the
negotiation process.
Team size: Countries where teams are consensus driven rather than individualistic are
likely to favor larger teams. Team size is likely to impact the amount of time it will take to
reach agreement.
Conducting negotiations: Includes the amount of information the supplier is willing to
divulge as well as the amount of engaged communication likely to take place. Culture may
also determine how tough the supplier's team might be in granting concessions.
Communication: Team-oriented, consensus-driven cultures will rely heavily on
communications whereas individualistic cultures may value very little communication.
Relationships: Many cultures are relationship driven. Individuals need the opportunity to
get to know one another and socializing is one way of doing so. In this situation,
attempting to rush the process will be counterproductive. Doing so will simply confuse and
upset those you are going to negotiate with.
Other Considerations in Cross Cultural Negotiation:
1. The negotiating environment 2. Cultural and sub-cultural differences
3. Foreign bureaucracy 4. Foreign laws and governments
5. Financial insecurity 6. Political instability and economic changes

CASE STUDY on Negotiation
CASE STUDY on one recent case on purchase of main

production equipment of a processing plant. A Global
Tender was floated. Purchaser has selected two
companies technically. Now commercial discussion is
going on.
See the progress of commercial Negotiation …..

Price Basis - Negotiation
Tender Clause Vendor’s Buyer’s Vendor’s
Proposal comment Comments
The Price shall be for all contractual obligations to be Pleaes delete "Ex- To consider FOR Will consider delivery
performed by the Vendor under this Purchase Agreement Works/F.O.T/". destination Price, on FOR site basis.
for the Work which shall have the validity till the Defect Our price is on FOR including Packing & Taxes and duties are
Liability Period for ensuring successful handing over of the site basis excluding forwarding on client’s scope. It is
Plant & Equipment executed by the Vendor to the taxes & duties prudent that
Purchaser. The Price also includes drawings, documents, purchaser bears
erection and operation & maintenance manual submission taxes & duties at
in requisite sets, packing & forwarding charges including actuals.
proper transportation, ensuring supply of commissioning
spares as required for successful commissioning, special
tools and tackles, initial fills, as mentioned in the PR. The
delivery of supply items by the Vendor shall be on Ex-
Works/F.O.T/ F.O.R Site basis.
Supplier to
specify his
basis of supply

Price Basis – Negotiation (Continued…)
The Price shall be firm, and shall not be subject to any Please do consider Not acceptable Noted & Agreed
adjustments on account of variation in materials and/or Price Escalation as
labor costs, rates of exchange, or any other causes per the formula given
whatsoever unless otherwise clearly specified in the in our commercial
Purchase Agreement and Purchase Enquiry Specification. T&Cs of our
The Price shall be valid and binding for the entire scope of commercial offer.
Work till the completion in all respects. No request for
revision of Basic Price whatsoever on any account will be
entertained unless there is definite change in Scope of
Supply duly confirmed in written form by the Purchaser.

Price Basis – Negotiation (Continued…)
The Vendor undertakes that it has entered into this Please delete text Accepted CLOSED
Purchase Agreement on the basis of a proper examination "The Vendor shall
of the data relating to the Project and the Site. The Vendor satisfy itself
also acknowledges that any failure to acquaint itself with all regarding the
such data and information shall not relieve its responsibility accessibility to the
for properly estimating the time and cost implications for Site, feasibility of
successful implementation of the Project. The Vendor shall taking materials/
satisfy itself regarding the accessibility to the Site, equipment to the
feasibility of taking materials/equipment to the Site , Site, storing, handling
storing, handling at Site and availability of resources and at Site and availability
local conditions for successful implementation of the of resources and
Project without any additional time and cost implications local conditions for
thereto. successful
implementation of the
This is just Project without any
equipment supply. additional time and
Not a Project cost implications
thereto".
order

Contract Performance Bank Guarantee – Negotiation
The Vendor shall submit a Contract Performance Bank We would prefer to Noted. However, We would prefer to
Guarantee (CPBG) as per Purchaser’s prescribed format discuss this clause CPBG is to be understand the
(attached herewith as Annexure-I) amounting 10% of the across the table as to accepted. reason of CPBG in
Purchase Agreement Price within 15 days from the date of why it is necessary place of PBG during
Purchase Agreement. This CPBG shall remain valid till our price discussion.
Final Acceptance. The aforesaid CPBG should be
accompanied with Banker’s confirmation, addressed
directly to the Purchaser and to be submitted in a sealed
envelope.
If the CPBG is not submitted within the stipulated period,

the Purchaser shall have the right to cancel the Purchase
Agreement without any implications thereto, whatsoever
nature.
Why? Too Buyer’s Revised We will discuss this clause

much load & comment during price negotiation
risk!

Payment Terms – Negotiation
Tender Clause
Eighty five (85)% of the Price shall be made progressively in conformity with the requirement of
the Site and corresponding approved Billing cum Shipping Schedule within ninety (90) days from
the date of receipt of materials at Site in good condition and on submission of the complete set
documents. If there is any tax implications due to delay in submission of correct documents, the
same shall be borne by the Vendor.
Five (5) % of the Price shall be released after successful Commissioning of the Plant &
Equipment. The submission of all As-Built drawings to the Purchaser in AutoCAD version is
mandatory for processing of this payment.
Five (5) % of the Price shall be released on successful demonstration of Performance Guarantee
Test.
Five (5) % of the Price shall be released after the issuance of Final Acceptance Certificate from
the Client, to be issued under the Main Contract.

Payment Terms – Negotiation (Continued…)
Vendor’s Proposal
We find that there is no provision of making of advance payment and secondly last 5% payment is not related with us as our
responsibility ceases on successful demonstration of performance guarantee test. Keeping your proposed terms of payment
and our terms of payment already quoted to you we propose following payment terms:
1. 10% advance payment shall be paid within ten (10) days against submission of Advance Bank Guarantee (ABG) of
equivalent amount valid till completion of supply and invoice.
2. 80% payment along with 100% taxes and duties shall be paid progressively in conformity with the requirement of the site and
corresponding approved billing schedule within thirty (30) days from the date of receipt of material at site and on submission of
the invoice.
3. 5% payment shall be paid after successful commissioning of the equipment within three (3) days against submission of the
invoice. In case this commissioning gets delayed beyond thirty (30) days from the date of receipt of last equipment at site due
to no fault of the vendor, this payment shall be released by the purchaser within thirty (30) days against submission of
Performance Bank Guarantee (PBG) of equivalent amount valid till warranty period.
4. Balance 5% payment shall be paid on successful demonstration of performance guarantee test within seven (7) days against
submission of invoice. In case this performance guarantee test gets delayed beyond thirty (30) days from the date of receipt of
last equipment at site due to no fault of the vendor, this payment shall be released by the purchaser within thirty (30) days
against submission of Performance Bank Guarantee (PBG) of equivalent amount valid till warranty period.

Payment Terms – Negotiation (Continued…)
Buyer’s Proposal
No advance payment..
90 days credit terms.
Vendor’s Comments
We request you to consider our payment terms as reproduced below with some minor alteration from the earlier one:
1. 5% against submission of GA drawing shall be paid within thirty (30) days against submission of our invoice.
2. 5% against approval of GA drawing shall be paid within thirty (30) days against submission of our invoice.
3. 75% payment shall be paid progressively as per mutually agreed billing schedule, within thirty (30) days from the date of
receipt of material at site and on submission of the invoice.
4. 5% payment shall be paid after commissioning of the equipment within thirty (30) days against submission of the invoice. In
case this commissioning gets delayed due to no fault of vendor beyond ninety (90) days from the date of receipt of last supply
at site, this payment shall be released by the purchaser within ninety (90) days.
5. Balance 10% payment shall be paid on successful demonstration of performance guarantee test within thirty (30) days
against submission of invoice. In case this performance guarantee test gets delayed due to no fault of vendor beyond one
hundred twenty (120) days from the date of receipt of last supply at site, this payment shall be released by the purchaser within
one hundred twenty (120) days.

Billing and Dispatch Schedule – Negotiation
The Vendor, within fifteen (15) days of receipt of LOI / Please reduce 15 Replace 15 days by 7 First point, 7 days
Purchase Agreement, shall submit detailed Billing cum days to 7 days. days noted & agreed –
Dispatch Schedule (break-up of the price) to the Purchaser CLOSED
for placement of Purchase Agreement. Please incorporate Delete advance
However, the subject Billing and Dispatch Schedule is “advance payment” payment. Rest of the clause as
subject to change to suit the requirement at Site as after text “receipt of” commented by us
deemed fit by the Purchaser. Accordingly, the Billing and and delete “LOI/ shall remain
Dispatch Schedule shall be revised by the Purchaser. In no Rest all clause as per
Purchase Agreement” Tender remains the unaltered.
case the Vendor shall dispatch any equipment/item which is
not required as per the provision of revised Billing cum same
Dispatch Schedule, approved by the Purchaser. In the Further, please delete
event, the Vendor dispatches the equipment/items which the portion "However,
is/are not in conformity with the revised Billing and Dispatch the subject billing …..
Schedule to suit the Site requirement of the Purchaser, the Any remedy/ claim of
entire expense of storing in warehouse, damages, vendor".
statutory cost, repair/replacement if any, of whatsoever
nature including the warranty obligations thereto, shall be
at the sole risks and liabilities of the Vendor. In this event,
the Purchaser shall in no way be liable and responsible for
any remedy /claim of Vendor.

Dispatch Clearance and Dispatch Instruction – Negotiation
Tender Clause Vendor’s Buyer’s Vendor’s Buyer’s Final
Proposal comment Comments comment Decision
Dispatch Clearance and Dispatch Please add Not A time limit has Maximum time Both finally
Instruction shall be given to the Vendor "within 3 days" acceptable to be consideration agreed for 5
after receipt of inspection clearance after text "… to mentioned. is 10 days working days
from the Purchaser/ Client / Client’s the Vendor"
Consultant or from designated
authorized inspection agency.
The material will be dispatched as Please add "which Not If there is a Maximum time Both finally
per the terms of the Purchase shall not be acceptable failure in giving consideration agreed for 10
Agreement. Under any circumstances delayed beyond 3 formal dispatch is 10 days working days
no dispatches shall be effected by the days from the date clearance
of receipt of witihin a
Vendor in absence of formal dispatch specified time
inspection
clearance. limit, then we
clearance, failing
which we shall be shall be free to
free to dispatch the dispatch. So
equipment." after this time limit
text "… formal has to be
dispatch clearance" provided.

Suspension Clause – Negotiation
If, by virtue of a suspension order given by the Purchaser, Please add "failing Not Acceptable Our comments shall
other than by reason of the Vendor’s default or breach of which the purchaser remain unaltered.
the contractual obligations of the Purchase Agreement, shall bear all costs
the Vendor’s performance of any of its obligations is related to such
suspended for an aggregate period of more than one suspension incurred
hundred twenty (120) days, then at any time thereafter and by the vendor." after
provided that at that time such performance is still the sentence ending
suspended, the Vendor may give a notice to the Purchaser with "… order the
requiring that the Purchaser shall, within thirty (30) days resumption of such
of receipt of the notice, order the resumption of such performance“
performance.
Further, please
change the period of
"one hundred twenty
(120) days" by "thirty
(30) days".
Who bears
the cost ?

Liquidated Damage Clause – Negotiation
Tender Clause
1. Liquidated Damage for Delay in submission of Drawings and Documents:
In case of delay in submission of drawings/documents beyond the agreed schedule of the Purchase Agreement due to the
reasons attributable to the Vendor, the Purchaser shall recover Liquidated Damages, but not by the way of penalty, by making
deductions from the Vendor’s invoices or by encashment of Vendor’s bank guarantees @ 0.25% of Purchase Agreement Price
including taxes & duties per complete week of delay or part thereof up to a maximum of 2.5 % of the Purchase Agreement
Price including taxes & duties.
Of the total
Contract Value ?
2. Liquidated Damage for Delay in Supply/delivery
In case of delay in delivery of the Equipment / items at Site / completion of scope of Work beyond the delivery schedule of the
Purchase Agreement due to the reasons attributable to the Vendor, the Purchaser shall recover Liquidated Damages, but not by
the way of penalty, by making deductions from the Vendor’s invoices or by encashment of Vendor’s bank guarantees @ 0.5%
of Purchase Agreement Price including taxes & duties per complete week of delay or part thereof up to a maximum of 5 % of
the Purchase Agreement Price including taxes & duties.
Vendor’s Proposal
Point 2 : Please delete “items at Site / completion of scope of Work” after text “Equipment”.
Please delete “or by encashment of Vendor’s bank guarantees” after “invoices”.
Please add “of the value of undelivered complete equipment” after “@0.5%”.
Please change “including taxes & duties” to read as “excluding taxes & duties”.
Total combined LD on account of delay w.r.t. clause nos. 1 & 2 shall be limited to 5% of the total order value excluding taxes &
duties.

Liquidated Damage Clause – Negotiation
Buyer’s Vendor’s Buyer’s Revised Vendor’s Revised Buyer’s Re-
comment Comments comment Comments Revised comment
Deleted “items at Site Noted. CLOSED CLOSED CLOSED CLOSED
/ completion of scope
of Work” after text
“Equipment”.
Rest all points, Not Not Agreed. Our “Encashment of Bank “Encashment of Bang Open points are to be
Acceptable comments remain Guarantee” is Guarantee” – CLOSED discussed during price
unchanged. This is to withdrawn. Combined LD 5% - negotiation
be agreed upon. Combined LD 5% CLOSED
Please reconsider acceptable. However, LD is to be
Rest all points, Not imposed on undelivered
Acceptable portion and it has to be
excluding taxes &
duties

IIFT_Managing Contracts & Negotiations_Rana
2 November 2019 Goswami 43

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By Rana Goswami

Date: November 2, 2019

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 1

Managing Contracts in Global Sourcing

Role of Negotiations in in Global Sourcing

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 2

Contracts are consensual. It is the parties which set their

With each such dispute, world of business became wiser.

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 4

• Distinguishing factor : nature of consideration

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 6

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 7

Lower level of risk of economic loss for suppliers

Generally applicable when the goods or services procured are

Applicable when there is high degree of uncertainty

These are generally less favorable to the purchaser because

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 8

Environmental Conditions Degree Fixed Price Cost Based

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 9

IIFT_Managing Contracts & Negotiations_Rana

Price Adjustment Mechanism: by means of outside

Supplier’s Performance Improvement: based on

Evergreen, Penalty & Escape Clauses: every year

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 11

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 12

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 13

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 14

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 15

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 16

General Contents of Contract:

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 17

Termination: Sometimes outsourced party turns out to be not

Amendments: At times, the context demands change but not a

For different types of purchase/ contracting, all terms of agreements

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 19

SCC lists only special terms of particular contracts.

SCC should be skeletal, reducing administrative cost of contract.

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 20

In a given situation, whether a stipulation is a condition or a warranty,

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 21

These differences cannot always be resolved by the competitive process alone, so

It is a process of reaching agreement through discussion, analysis, and bargaining.

It is not an event, not a game, not a sport . It is a process.

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 22

What to Negotiate Concessions by supplier in any of these or

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 23

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 24

Objectives Opening Target Walk Away Concessions

Price reduction 14% 10% 7% 1. Offer an immediate contract

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 25

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 26

Agenda / Order of Discussion

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 27

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 28

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 29

CASE STUDY on one recent case on purchase of main

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 30

2 November 2019 IIFT_Managing Contracts & Negotiations_Rana Goswami 31