Chapter 4

CONTRACT ADMINISTRATION
Contract Essentials
(a) CONTRACT ESSENTIALS
(i) Written Contract
(ii) Oral Contract
(b) CONTRACT REQUIREMENTS
(c) CONTRACT TYPES
(i) Purchase Orders (Pos)
(ii) Requirements or Indefinite Delivery Contracts
(iii) Definite Quantity Contracts
(iv) Fixed-Price Contracts
(v) Cost-Reimbursable Contract
(vi) Cost Plus Fixed Fee
(vii) Cost Plus Incentive Fee
(viii) Cost Plus Award Fee
(ix) Cost Sharing
(x) Cost Only
(xi) Time and Materials Contracts
(d) LETTERS OF INTENT
i. Consigned Goods Contract
ii. Other Contract Types
(e) METHODS OF EXCHANGE
i. Battle of the Forms
ii. Mirror Image Rule
iii. Acceptance of an Oral Agreement
(f) OTHER CONTRACT ELEMENTS
i. Revocation
ii. Change Order
iii. Dispute Resolution
(g) LEGAL AUTHORITY AND THE BUYERS’ RESPONSIBILITIES
i. Agency
ii. Authority
iii. Ratification
iv. Financial Responsibility
(a) CONTRACT ESSENTIALS
Contracts cover the purchase of both goods and services. Services are
generally covered by state laws (known as common law or case law),
which establish precedents that can help resolve disputes.
(i) Written Contracts
In broad terms, contracts can use either written or oral formats. While from
a procurement point of view, written contracts pose the least amount of risk,
it is important to understand that oral contracts can be equally enforceable if
they meet a common set of conditions.
However, the Statute of Frauds—laws designed to prevent fraud—requires
certain types of contracts to be validated in written form:
• Contracts for goods sold under the UCC exceeding $500 that are not
specifically manufactured for the user. (This amount will likely increase to
$5,000 under pending proposals).
• Contracts for the sale or transfer of real estate.
• Contracts to assume the debt or duty of another.
• Contracts that cannot be completed within one year, either by their own
terms or because they are objectively impossible to complete.
Agreements required to be evidenced in writing (such as those just
listed) do not have to take a specific contractual form. However, at the
least, the writing must contain:
• Identification of the other party as the individual responsible for the
contract.
• Some form of signature of the above.
• A clearly identified subject of the contract.
• Specific terms and conditions.
• Identification of the consideration (as an exchange of value).
• There are a number of exceptions to the written requirements of the
Statute of Frauds under which an oral contract will be enforced,
including the partial completion of an oral contract up to the point of
performance. If, for example, a contract to buy $10,000 worth of
parts has not yet been committed to writing and is canceled by the
buyer after $2,000 worth of parts has been received and accepted,
will the seller be able to force the buyer to honor the entire contract?
The answer is no. Since the value of the remaining portion of the
contract exceeds $500 and there is no evidence in writing of any
contract, the buyer is under no obligation to honor the original
agreement.
ii) Oral Contracts
• The fact that the promise relies on the oral promise to its detriment is
generally not considered sufficient reason to entitle it to enforce an oral
contract. However, when customized products are made for a buying
organization under an oral agreement and cannot be sold to any others,
the contract is enforceable by the seller.
• If an oral contract not required to be in writing (e.g., for goods under $500)
is modified to the extent that it falls within the statute of fraud, then the
contract must be in writing to be enforceable.
• For example, if $200 worth of goods is added to an oral contract already
totaling $450, it’s required that the entire contract be put in writing since
the total amount ($650) exceeds the limit of $500 for an oral contract.
(b) CONTRACT REQUIREMENTS
• In order for a contract to be legally enforceable, it is commonly agreed that
four key elements need to be demonstrated: mutual agreement, legality,
consideration, and capacity.
1. Mutual agreement. As evidence of a “meeting of the minds,” mutual
agreement includes an offer and its acceptance.
• When a buyer places a PO, for example, it is considered an offer to buy, and
the seller’s acknowledgment is generally considered an acceptance. An
acceptance can also be demonstrated by actual performance, such as a
shipment of materials or some constructive action of service that indicates
such acceptance. This is called a unilateral contract, whereas a contract
containing both an offer to sell and an agreement to buy is considered a
bilateral contract.
• If a seller extends an offer in the form of a quotation but the buyer
requests modification to some of the terms, it is considered a
counteroffer rather than an acceptance.
2.Legality. A contract requires a legal purpose. Contracts that violate a
legal statute or are against public policy are invalid.
3.Consideration. Consideration means an exchange of anything of
value. To be valid, a contract has to show evidence that an exchange of
some value for a promise is part of the agreement. Consideration does
not necessarily have to be exchanged in the form of money. It can also
be in the form of various types of services rendered.
4.Capacity. Parties to a contract need to be legally competent to enter
into it and perform its obligations. Minors, for example, are not
considered legally competent. A person who is legally insane cannot be
a valid party to a contract.
(c) CONTRACT TYPES
Typically, a Procurement Department will use a wide variety of
contractual documents during the normal course of business. The exact
document you choose will largely depend on the business needs of
your organization and the type of purchase being made.
(i) Purchase Orders (POs). In almost all environments, the PO is the
most common procurement document available and is, in effect, a
contract. As a standard form, it is the easiest way to order purchased
materials and services and provides the most commonly required audit
trail.
• A standard PO can be used for recurring or repetitive purchases as
well as one-time purchase.
• In addition to stating the specific requirements for the purchase, the
PO usually conveys your organization’s standard terms and
conditions, sometimes termed a “boilerplate”.
• In addition to standard terms and conditions covering remedies,
warranties, liabilities, rights of inspection and rejection, ability to
cancel, and other typical clauses (usually transmitted by the fine print
on the reverse side of the PO).
• Blanket POs, also known as indefinite delivery contracts, are used
when the buyer wishes to establish set pricing and terms but does
not yet wish to place orders for specific quantities or delivery times.
(ii) Requirements or Indefinite Delivery Contracts
Requirements contracts or indefinite delivery contracts are used when
the buyer wishes to lock in pricing or lead time in exchange for a
commitment to purchase all of the organization’s requirements (or at
least some described minimum and/or maximum amount) but specific
quantities and delivery dates are not yet known.
An example of an Indefinite Delivery Contract (IDC) could be a contract
between a government agency and a construction company for the
provision of construction services over a period of time.
(iii) Definite Quantity Contracts
A definite quantity contract specifies the amount being purchased
during a given time frame but not the specific delivery dates. This type
of contract is also known as a take-or-pay contract because the buying
organization cannot cancel it and must pay for it at the end of the
contractual period even if it is not used.
(iv) Fixed-Price Contracts
Fixed-price contracts are the most commonly used contracts in typical
business environments. Most fixed-price contract types are defined in
the Federal Acquisitions Regulations (FAR) as they apply to government
purchases; however, they are commonly adapted for commercial use
by procurement departments. Essentially, they are contracts where
prices are agreed to in advance of performance.
There are five types of fixed-price contracts that we will discuss in more
detail here.
• FIRM FIXED PRICE A firm-fixed-price contract is exactly what its title
states: The price is not subject to adjustment. The buyer and seller
agree to performance at the stated price, and the risk of profit and
loss passes solely to the supplier.
• FIXED PRICE WITH INCENTIVE For the fixed-price-with-incentive
contract, a profit formula is established based on target cost and
target profit within an agreed-upon maximum price. The final price is
established by adjusting the actual profit the supplier receives based
on the difference between the final cost agreed to by the parties and
the original target cost. Typically, the amount saved by reducing the
cost is shared by both parties.
• FIXED PRICE WITH ECONOMIC PRICE ADJUSTMENT The fixed-price-with-
economic-price-adjustment contract allows pricing to be adjusted upward
or downward based on established contingencies such as escalating labor
and material rates.
• FIXED PRICE WITH PRICE REDETERMINATION Similar to the economic price
adjustment contract, the fixed-price-with-price redetermination contract is
used when prices are anticipated to change over time but the extent of
those changes cannot be predicted, such as during startup operations.
Generally, the specific time for redetermination will be included.
• FIXED PRICE,LEVEL OF EFFORT The fixed-price, level-of-effort method of
pricing, although relatively uncommon, is usually used in situations when
the precise amount of labor or materials is unknown but the parties can
agree on a standard level of effort (such as the type and quantity of tools to
be used or the rated proficiency of the employees) and a given price.
(v) Cost-Reimbursable Contracts. Cost-reimbursable contracts are
primarily used by government organizations and large corporations as
an inducement for supplier participation in situations where the initial
research and development engineering or capital investment may be
very high and the financial risk great.
(vi) Cost Plus Fixed Fee. The cost-plus-fixed-fee contract is a cost-
reimbursement contract that allows the supplier to recover actual costs
plus a fee negotiated prior to the contract’s inception.
(vii) Cost Plus Incentive Fee. The cost-plus-incentive-fee contract is
another reimbursable contract that, like the fixed-price-plus-incentive
contract outlined previously, provides an initially negotiated fee with a
formula-based adjustment that reflects the relationship of total
allowable cost to total target cost.
(viii) Cost Plus Award Fee. The cost-plus-award-fee contract provides
additional incentive for the supplier to produce excellent results by
enabling the buyer to make a financial award in addition to the cost
and negotiated fee.
(ix) Cost Sharing. A cost-sharing contract is generally used in a
partnering relationship where all parties share the cost and the
accruing benefits according to a negotiated formula. The costs are
typically limited to a specific amount or an in-kind exchange that is
defined at the contract’s formation. In many ways, this type of contract
is similar to a joint venture, where all parties own a portion of the
operation.
(x) Cost Only. Used primarily between universities and other nonprofit
and research organizations, the cost-only contract, as its name implies,
covers reimbursement only for actual costs, without including a fee.
This contract typically supplements one organization’s capabilities and
enables full utilization of the other’s resources that might otherwise
remain idle.
(xi) Time and Materials Contracts. Time and materials (T&M) contracts
are used when there are no acceptable ways to determine what a fair
and reasonable price may be for a particular project, such as a well-
digging contract where the exact depth of the water and the
composition of the soil may be unknown.
not-to-exceed (NTE) amount, specified as a limit. In most ways, T&M
contracts are similar to cost-reimbursable contracts
(d) LETTERS OF INTENT.
• A letter of intent (LOI) can be useful when parties are seriously working
toward a final contract and wish to proceed with some of their preliminary
efforts under a formal agreement. Letters of intent can outline the broad
intent of the contract regarding some terms that have not yet been
specified or agreed upon.
Some of the most common elements of an LOI include:
• Price and terms. May include projected costs and how they will be
determined. It may also broadly outline the terms and conditions that will
apply under a given set of assumptions.
• Obligations. A section covering obligations is also typically included. This
section generally outlines what each party must do prior to proceeding with
a contract and which party will pay for what activities.
• Confidentiality. Generally, an LOI binds the parties to the same level of
confidentiality as a standard contract. This enables the free exchange of
proprietary information so that certain elements of the contract can be
predefined.
• Exclusivity. This section outlines the length of time the parties are
bound to an exclusive relationship. Following this period, the parties
may enter into agreements with others under pre established
confidentiality conditions and protection of any intellectual property
developed.
• Structure. Often, the nature of the relationship needs to be stated
prior to beginning even basic aspects of the work. This includes
defining the nature of the final agreement—for example, the type of
contract or the disposition of intellectual property (IP)—and what the
nature of the relationship will be subsequent to a contract.
• Time and conditions. The elements related to time and specific
conditions express the parties’ intent to form a final agreement by a
specific date and under described conditions.
• Binding or nonbinding clauses. Included in most LOI documents are
statements indicating which portions of the agreement shall be binding and
which shall not. For example, the parties may agree to be bound by an IP
clause granting the rights to any IP developed to one or the other of the
parties.
• Licensing agreements. When another party has secured ownership rights
to specific IP—such as an invention or a software program—through a patent
or copyright, your organization will need to obtain permission to use it.
Usually, this permission is given in the form of a licensing agreement, a
contract for which the licensee will pay either a fixed fee or a royalty based
on usage.
• Exclusive license. Grants usage rights to only one party so that no others
may be so licensed.
• Nonexclusive license. Grants usage rights to a party but does not limit the
number of others that may be similarly licensed by the owner.
• Partially exclusive license. Grants exclusive rights to use the patent within
a geographical area or for specific products.
• End-user license agreement (EULA). A three-way contract among the
manufacturer, the author, and the end user written to cover
proprietary software. It is often attached to a program that requires
you to check a box indicating acceptance of the terms prior to being
able to use it.
(i) Consigned Goods Contracts. It is becoming increasingly common
for organizations to require suppliers to stock inventory at the
buyers’ sites in order to support rapid delivery. These arrangements
are called supplier-managed inventory (SMI) and are included in a
contract covering specific conditions.
(ii) Other Contract Types. A wide variety of contracts are employed in
special circumstances that broadly outline the terms and conditions of
ongoing relationships outside of any specific statement of work.
• Master purchase agreement. Covers special terms and conditions for the
purchase of critical materials. You may also find this listed under master
supply agreement in directories of legal agreements.
• Master services agreement. Addresses terms and conditions related to the
purchase of nontangible goods.
• Construction contract. Used for significant building and facilities
improvement contracts where special risks of performance and liability exist.
• Nondisclosure agreement (NDA). An NDA or confidentiality agreement
protects sensitive information from disclosure to third parties or the general
public.
• Commercial lease agreement. Forms a contract for equipment owned by
one party and used by another for a fee. Terms generally state which party is
responsible for maintenance and upkeep as well as the conditions for use
and warranties.
(e) METHODS OF EXCHANGE
• A contract requires both an offer and acceptance in order to be legally
enforceable.
• Questions often arise regarding how to handle disparities between the
form of the contract and the form of its acceptance, one issued by the
supplier and the other by the buyer.
• This brings up the topic referred to as the “battle of the forms.
(i) Battle of the Forms. Typically, for low-value goods orders, the buyer will
issue a simple PO containing the organization’s standard terms and
conditions in the form of a boilerplate on the reverse side.
The supplier acknowledges the order, issuing its own form with a
corresponding boilerplate on its side. In common practice, neither party
reads the other’s boilerplate. But what happens when the two sets differ.
• For example, Company A may send a purchase order to Company B
with its own terms and conditions, while Company B may respond
with an acknowledgment or acceptance of the purchase order that
includes its own terms and conditions. If the terms and conditions of
the two parties conflict, a "battle of the forms" arises.
• Additional terms included by the seller in its acknowledgment
become part of the contract unless the buyer’s contract expressly
prohibits such additions or if they materially alter the original
contract. If not, the added terms become part of the contract unless
the buyer specifically objects within a reasonable time frame.
(ii) Mirror Image Rule. Because the UCC does not expressly apply to
services, the battle of the forms does not arise when services are
contracted. Instead, the mirror image rule applies under the Statute of
Frauds. This requires that offer and acceptance match exactly, that is,
be mirror images of each other, before a contract can be enforced.
(iii) Acceptance of an Oral Agreement. Under the terms of the UCC,
oral agreements require written confirmation if they are for material
goods with values greater than $500. If they are and the confirmation
has been offered, the party receiving the written confirmation has 10
days from the receipt of such confirmation to object. Otherwise, the
contract is considered accepted.
(f) OTHER CONTRACT ELEMENTS
As you may imagine, numerous important legal elements are included
in every contract. Each of these varies with the nature of the particular
situation for which the contract is being written. Let’s discuss some of
the more common ones.
(i) Revocation. In most cases, an offer may be revoked by the party
making it any time before it is accepted. The revocation can take any
form that expressly or implicitly indicates that the party making the
offer is no longer willing or able to enter into a contract. A clear
example of this would be the incapacity of the seller to perform as a
result of a fire that destroys its facility or the sale of the item being
offered to another party.
(ii) Change Orders. Common in construction projects and other
services, change orders present another issue. Having established a
contract with your organization, is the supplier required to accept
changes to the SOW? Most service contracts include appropriate
criteria for making unilateral changes, including the method of pricing
them. Without such protection, the supplier is under little obligation to
accept changes or to price them in relation to its initial contract pricing.
(iii) Dispute Resolution. Most contracts, including POs, contain legal
remedies should a dispute arise. Many contain mediation or arbitration
clauses or some other method for resolving them, such as a formal
appeals process. In commercial transactions, disputes may ultimately
come to a court for resolution.
(g) LEGAL AUTHORITY AND THE BUYERS’
RESPONSIBILITIES
In dealing with contracts, there are some specific principles you will
need to keep in mind so that you fully understand your role and
responsibilities, as well as the limits of your authority
(i) Agency. An agent is an individual with the authority to act on behalf
of a principal, in most cases an employer. This means that your
organization may be legally bound by the terms of any contract you
have signed. The law of agency covers the legal principles governing
this relationship and the buyer’s relationship to the supplier.
(ii) Authority. As an agent, the buyer is required to perform certain
duties. Within the scope of these duties the buyer is given certain
authority, both by role and by specific designation.
• APPARENT AUTHORITY Apparent authority comes with the role of
buyer. It differs from actual authority insofar as no specific charter is
given to perform designated duties other than those typically
associated with buyers’ duties through common business practice.
• LIMITED AUTHORITY Limited authority means that the agency may be
limited within the scope of an individual’s responsibility. Most
commonly, in commercial environments, the agency of a salesperson
is specifically limited. Sales representatives are hired to solicit
business and coordinate activities between the respective
organizations and thus have limited authority.
(iii) Ratification. When an agent acts beyond the designated scope of its
responsibility, the contracting organization may nevertheless choose to ratify
the action. This ratification thus binds the obligations created by the contract
and releases the agent from personal liability.
(iv) Financial Responsibility. At all times, the buyer, as an agent, holds a
position of fiduciary trust, as well as business responsibility, toward the
principal. Thus, the buyer is expected to act prudently and in the best
interest of the organization, especially in carrying out financial duties.
• SARBANES-OXLEY Corporate financial malfeasance has resulted in several
scandals in recent years and, as a reaction, Congress enacted the Sarbanes-
Oxley Act (or SOX, as it is called). This law, passed in 2002, affects only
publicly traded corporations for now but will likely expand to include all
corporate entities that have dealings with them, whether public or private.
• The firm’s financial reports must include disclosure of all financial
obligations, including procurement contracts that could create a
liability for the shareholders.
• For example, any high-dollar “take or pay” contract requiring payment
regardless of whether or not the products or services are needed
(often used as an inducement to the supplier to invest in capital
equipment or engineering) will need to be disclosed.
Reviewing Contracts for Legal Requirements
Legal counsel provides assurance that the contract conforms to applicable law and regulations and
that your organization’s liability is minimized
1. Intellectual property rights
2. Legal venue
3. Assignability
4. Insurance
5. Reviews and claim
6. Parol evidence
7. Reservation of rights
8. Liability limitations
9. Liquidated damage
10. Regulated materials
11. Force majeure.
1. Intellectual property rights
• As just discussed, you need to be certain that your organization does not
infringe on any IP rights legally granted to others and that you have
properly protected its own IP rights through proper disclosure processes.
2. Legal venue
• Your legal counsel will require language in the contract to determine which
state’s laws will be considered and in which state’s court action will be
taken should litigation be required.
• This can be quite difficult when dealing with international supplier.
3. Assignability
• Legal review may also be required to ensure that the contract will be
transferable to any future business interests your organization may acquire
(such as through acquisition, merger, or the creation of a subsidiary) and,
at the same time, limit the supplier’s ability to transfer the contract
without prior approval.
4. Insurance
For some contracts, you will want to be certain that the supplier carries
the proper insurance, such as worker’s compensation, so that
additional liability does not accrue to your organization.
In an insurance contract, the insured pays a premium to the insurer in
exchange for coverage against a specific risk or set of risks.
5. Reviews and claims
Under certain circumstances, you may wish to include a process for
review should there be a dispute regarding the contract. This benefits
both parties
Reviews are generally a form of mediation and often simply refer
questions and decisions to more senior management or to
corresponding company counsel.
6. Parol evidence
• The rule of parol evidence prevents the use of oral testimony to alter a
written contract. This means that any oral promises made by the supplier
during the contracting process must be put in writing or they will not apply.
• Ad hoc changes refer to changes that are made to a plan, agreement, or
situation on a temporary or as-needed basis, without prior planning or
forethought. These changes are made in response to an unexpected or
unforeseen situation, and are intended to be temporary until a more
permanent solution can be developed.
7. Reservation of rights
• Your legal counsel will also want to similarly review any clauses that
specifically limit your organization’s rights to the full performance of the
contract. This will include a requirement that no changes can be made in
the contract without the express consent of the buyer.
8. Liability limitations
• Suppliers typically want to limit liability to replacement of a product
or service under the terms of the warranty.
• Depending on the circumstances, however, this may limit your
organization’s rights to claim incidental damages such as
transportation or special handling cost.
• In some cases, consequential damages—including lost revenue or
profit, damage to property, or injury to persons—may be in order.
9. Liquidated damages
• It will often be impossible to calculate the actual monetary damage or
loss suffered under certain circumstances. In such situations, the
parties will agree to a predetermined amount—known as liquidated
damages—to be paid in the event of default.
10. Regulated materials.
• Regulated materials refer to substances or products that are subject
to specific regulations and controls under local, national, or
international laws. These regulations are usually in place to protect
public health and safety, and to prevent environmental damage or
other harmful effects.
• For example drugs or narcotics, radioactive materials, and biological
agents
11. Force majeure
• Force majeure identifies acts or events that are outside the control of
human beings, such as wars, natural disasters, fires, floods.
• Typically, either or both parties to a contract are relieved of
performance when such uncontrollable actions occur and are not
held liable for damage.
Aligning Contracts and Practices with Policy
• Most organizations maintain a set of documents governing the
practices conducted by the Procurement Department.
• These usually take the form of written policies or operating
procedures.
• They are designed to provide effective guidance in the conduct of
activities so that employees understand their obligations to the
organization.
• In scope, these policies and procedures vary, but they typically cover
elements such as procurement authority, supplier management,
quality standards, records retention, conformance to law, and good
business and ethical practices.
1. Conformance to Law
• At the minimum, organizations are required to conform to antitrust,
environmental, and health and safety law.
• As a procurement professional, you will be required to have a working
knowledge of all of these laws and regulation.
• In addition, you should become familiar with the activities and
regulations of certain governmental agencies that are empowered to
protect the rights and welfare of the general population.
• Environmental Protection Agency (EPA).
• The Occupational Safety and Health Act gives rise to a variety of rules
and regulations governing safety in the workplace.
2. Ethical Principles
The Institute for Supply Management (ISM) maintains a set of ethical
standards for the supply management profession entitled “Principles
and Standards of Ethical Supply Management Conduct.” These are
excellent guidelines to use as a basis for your organization’s business
ethics policy and as individual guidelines for the staff.
Following are some areas that should be of particular concern:
a) Conflict of interest
b) Bribery
c) Personal purchases
d) Proprietary information
a) Conflict of interest
• Occurs when procurement employees conduct the organization’s
business in such manner as to further their own personal gain or that
of their families and friends
• For example: Buying and selling from relative
b) Bribery
• It is illegal to accept bribes and gratuities in the form of money or any
other valuable goods or services with the intent to influence
decisions.
• This includes accepting frequent meals and entertainment from
suppliers or any gifts that could be considered to have even nominal
value.
c) Personal purchases
• Be certain that any purchases you make for your personal use from a
supplier conforms to the organization’s policy and that it is fair to the
supplier and others in your organization.
d) Proprietary information
• You will be expected to maintain confidentiality at all times and to
protect the proprietary information in the possession of your
organization, regardless of its ultimate ownership. This includes
maintaining the confidentiality of plans and intention.
Maintaining Procurement Documents and
Records
Examples of the kind of records generated and maintained by the
Procurement Department include the following
1. POs and contracts
2. Supplier qualification records and periodic reviews
3. Catalogs
4. Inventory records
5. Project files
1. POs and contracts
• POs and contracts are typically filed by open orders (those that are still
active) and closed orders (those that have been fully received or have
expired).
• Today, of course, many of these records are being maintained electronically
and require no filing space
• POs are kept for a six-year period.
• The UCC, it should be noted, requires that POs for goods be kept for only a
four-year period.
2. Supplier qualification records and periodic reviews
• Historical records containing the original qualification data and supplier
ratings and reviews.
• They are typically maintained as long as the supplier is active.
3. Catalogs
Generally maintained in a central library, although it is becoming less
common for organizations to keep printed catalogs because so many
are available online or in electronic format.
4. Inventory records
• Inventory records are documents or electronic files that contain
information about a company's inventory, including details on the
quantity, location, and status of each item. These records are used to
help businesses track their inventory levels and make informed
decisions about purchasing, production, and sales.
• These are kept for a relatively short period of time and only as
required by organizational policy.
5. Project files
Kept when appropriate and when they are for projects led by the
Procurement Department, such as cost reduction or quality
improvement programs. These are also kept for a relatively short
period of time and only as required by organizational policy.