Contracting Excellence

Question 1: Terms and conditions of government contracts

14 March 2008: Our CFO would appreciate any information that helps him streamline a basic response to the issue that Ts & Cs of Government contracts are non negotiable. He has particular interest in respect of the Limitation of Liabilities clause

Charles Rumbaugh A very broad question — for example, all government contract clauses have a policy associated with the use/non-use/modification of same by a contracting officer — the FAR, DFARS etc all have that. Several clauses have a requirement that specifics may be added in the special terms and conditions. Then there are provisions that an offeror can propose for negotiation — especially in a sole source situation. Then there are the situations when the Government modifies a FAR ‘required’ clause and a properly issued deviation under FAR Part 1 is required. And, perhaps terms within a clause need to be further defined based upon the specifics of an individual procurement.:

1. In very large projects in government sourcing in Europe there is some negotiation, particularly when the ‘negotiated procedure’ is used. Negotiation is perhaps a different concept than used in the private sector; a better concept would be discussion and interaction between suppliers and government.

4. LofL is a particularly sensitive issue because the potential exposure in public sector can be so great. I am bound to say though that real exposure in government is often very low — for example, they effectively cannot incur consequential and economic loss and they don't tend to incur additional costs if things don't work out. Also whilst the LofL might not be what one would like, in general terms most public sector bodies now accept the need to cap liability. I would therefore strongly counsel our member not to look at this in principle but look realistically whether liability is to be incurred. (Also the propensity of public sector to claim is I think much lower than private sector.

5. One tactic I have often used is to appeal to the public sector mandate to get best value for money and/or buy cheap! Often if they are told that an unrealistic LofL is costing a lot (with evidence) they are willing to think about lowering it. Of course a practical problem is that very few suppliers can ever substantiate that the increased ‘risk’ has any financial implication or, at least, that it costs more. I am bound to say that I really do wonder in those circumstances why people get so agitated — particularly if they are within their insurance limits!

Associate General Counsel at a US-Based corporation: Our experience is that depending on the government entity, federal, state or local, and the bid or RFP instructions, that you can negotiate certain terms. We often provide a letter of clarification or exception to T’s and C's we cannot manage to and are often successful in negotiating with the government entity. It all depends on the situation, the person in charge and, I would also presume, what is being procured. There may be products or services that create more of a risk so the government is less inclined to negotiate. In our space, MRO supplies, we find that we can often negotiate T's and C's.

Mark Hope: My advice in respect of the UK is ‘know your market and know your customer’. Start by identifying the rules in the relevant government organisation for procuring different types of goods and services using different contracting models. Essentially, you will be able to achieve normal negotiation conditions in some scenarios, for example, big IT procurement, but you won't in others, for example, building works for local government. Ideally, you need to be able to produce a patchwork quilt where you know whether negotiation is possible or not for certain types of products/services to particular organisations using various contracting models. Also, a simple point to consider will be whether the government organisation has some standard terms for the transaction in question, as if they haven't then they are more likely to consider using supplier terms as a base in the absence of a standard set. A good tip is to go and see the procurement team and commercial contracts teams/lawyers to establish the rules.

As an example of the range of scenarios in the UK government market — with local government there will be invitations to tender for products and services where the cheapest fully compliant bid will almost certainly win and non fully compliant bids are discarded and negotiation is not going to be possible — this practically is how ‘Best Value’ is often implemented. Responding requesting negotiation will not work in these circumstances and you are wasting your time. It is better in these circumstances either not to pursue the sale, or accept that if you do want to win this business an alternative approach is required that will contravene your normal business model, for example, unlimited liability. Essentially, you have to decide whether you want to play in that market. Other contributor comments about whether this is real additional risk are valid in my view.

Conversely, an IT deal with local government may well be negotiable, and indeed you may be able to use your own terms as a base. This seems to arise because few IT companies will agree non-negotiable approaches and also because the terms don't exist as a standard set. Outsourcing operates similarly.

Looking from the other side of the fence, it needs to be borne in mind that local government departments with a relatively small budget, compared to say blue chip companies, have a huge number of transactions and hard deadlines for such things as building work, children and adult services, patient care etc, so it would be very difficult for them to negotiate numerous deals.

I do think that it is incumbent upon members of associations such as ours to work from within for the benefit of both government procurers and the sellers. I do not believe that government is not open to persuasion that Best Value could be interpreted in a different way, such that full compliance and cheapest price doesn't always equal Best Value. Nor do I believe that government departments are not prepared to listen to input about the appropriateness of terms and approaches. It may therefore be possible to develop and update terms and tendering procedures. I don't actually think government believes that unlimited liability is necessary. Of course unlimited liability can't really be insured against and can't be of any use unless the supplier has a bottomless pit of cash, and I question whether, for instance, local building companies in breach could pay and also whether such a term is really fair in those circumstances. I think a lot of government organisations would welcome an update of their standard terms and tendering and procurement processes and I suspect many are very old indeed and our input would be invaluable and welcomed. I am sure some of our members are doing exactly that now.

My last point is that things change very slowly in government, so I can't emphasise enough that you need to know your markets. Strategic decisions need to be taken as to what you bid for and the need for a special unit with a different approach to the approach you adopt in the private sector.

It has been experienced that the Ts & Cs of Government Contracts are non negotiable, especially in the AsiaPac Region when RFQ process is through public bidding. In this case government customer floats same Ts & Cs to all the bidders. In the case deviations are accepted by the customer, it is applicable to all the bidders (equal treatment). However, in the case RFQ process is not through public bidding, government customer may be open to negotiate a LOL (limitation of liability) clause. The government clauses can be modified by its legal department and, generally speaking, they are not involved in the purchasing processes. The purchasing /contracting officer escalates a customer’s clause/deviations only if the majority of bidders raise an issue. In the case [where the] competition accepts customers’ LOL clause or do not ask for a LOL clause and have no issue, it becomes difficult for that particular bidder who would like to pursue his LOL clause to the government. The better way is that if one can act proactively with the government and the LOL clause is added to ‘Special Ts & Cs’, the ‘Special Ts & Cs’ supersedes ‘General Ts & Cs’.

The basic question here seems to be the non-negotiable behavior of the government buyer. It is true that LOL is a very important issue in this dynamic word and the organizations across the world like to cap their liabilities. Although one can control or mitigate most of the risks, it will be at a cost. And all the costs are added to the price of the opportunity. If this cost is huge, then the price may be greater then the market price. and eventually the proposal becomes uncompetitive. But we must appreciate that the real exposure to additional liabilities in government organizations is on the lower side. Government customers cannot expense public money as per their wish and they have various systems in place. If they would like to incur any additional expenses, there is a very robust process, which is always subject to strict vigilance and audit. It has been seen that Government employees in AsiaPac region generally do not like to take these personnel risks and do not go for incurring additional costs when things go wrong. They tend to send notice after notice and the bottom-line is that they go for drawings against bonds and bank guarantees, if the differences are not resolved. The bonds and bank guarantees value differs from 5 percent to 20 percent from case to case. So, it is better try to negotiate on bonds and bank guarantees — perhaps this could be another idea to reduce the risk in practical terms.

A realistic approach is that one needs to see whether the liability is to be incurred or not. What is the tendency or habits of the government customer to claim unlimited liabilities or damages in that specific country? It is true that, contractually, any compromise in the LOL clause makes the bidder weaker in case of any eventuality but, at the same time, one can really analyze the quantum of the opportunity lost. And perhaps the amount of this loss may be greater then the loss on account of LOL.

If the Ts & Cs are not negotiable and the best lowest price (L-1) is going to win, then the alternative is either to take a business decision and form a different business model for such government customer or to decide whether you can loose business for the LOL clause ( policy decision to be taken).

John McGowan, Director of Risk Management at a Financial Services company, based in US: I can offer perspective on eight years as US Government Contracts Manager for HP, and 10+ years as WW Contracts Manager for HP Test Business and Agilent Tech. We found that 99 percent of those non-negotiable liability clauses were in fact non-negotiable. We took legal advice in many places and concluded that the only strategic risk to enterprise was in US, where court and jury damages could be staggering. In most other countries, liabilities are limited by reason, short of truly high risk ventures, like nuclear power or mining or weapons manufacturing and sales.

Where a clause was truly unacceptable (benefits and profits not in balance with potential losses) we’d propose to use reseller, and often small or small disadvantaged reseller. They would accept the clause, and we would not accept the clause as a flow-down. If the customer sought to enforce a substantial liability, they’d be going after someone with shallow pockets, and often decline to pursue. Governments might complain, but they were no worse than if they’d awarded to a small under-capitalized competitor who enthusiastically agreed to a ridiculous clause in lieu of going out of business anyway if hey didn’t win contract. Occasionally, the status of the reseller provided competitive advantage. Similar approaches outside of US, although care must be taken to limit roles and risks of using local suppliers or bidding agents for government deals. If not careful, you might avoid liability for fault, and be exposed to liability under FCPA or local laws around irregular bidding.

I have seen individual deals (like San Diego County) where there were terms and conditions that were ‘fundamental’ to the deal — and may have been viewed as non-negotiable. For example, Terms that require the service provider to continue to deliver services even if the parties are in dispute. This term is fundamental relating to continuance of the government provided services.

Senior Government employee in the UK: The question does not make it clear what form of procurement is taking place — the commercial staff's position will vary depending. However, government will always reserve the right to select on the basis of suppliers; willingness to comply with stated terms and conditions. If, however, a supplier feels that a certain term or condition will create a poor contract, there is no reason why they shouldn't express their views and set out the impact it will have on their bid. My advice in such circumstances is always to offer a fully compliant bid, but if the impact, say on price, is significant then offer a parallel non-compliant bid which sets out the advantages. It is then for the commercial team responsible for the competition to decide how it would wish to play the proposition

Javier Carrasco: I think that, for historical reasons, government procurement systems of developed nations have traditionally adopted certain terms and conditions that reduce a government’s obligations or expand a government’s powers by deviating from the principles and rules of private contract law (for example, special government’s prerogatives to handle disputes or to invoke contract termination under unusual circumstances, inexistence of a breach materiality threshold, and possibility of termination for government’s convenience). However, in the question of indemnification and limitation of liability, I believe there is still some room for negotiation. I agree with other colleagues about the variability of governments' responses with respect to this issue. It really depends on what legal system the government agency operates under (example, common law versus civil law), the procurement method (open competition versus sole source), the nature of the relationship and the contract envisioned (arms-length versus partnership; cost versus fixed price), the nature of the goods and services to be delivered, and the peculiarities of the government agency concerned. From a practical standpoint, the ability of the contractor to substantiate the cap in a reasonable manner and to prove the existence of relevant precedent is usually very effective for the acceptance of liability caps by government officials.

Tim Cummins Further input from the UK's Office of Government Commerce: Naturally, if the opportunity existed, it would be helpful for the procuring team to invest time with potential suppliers before the competition is launched to discuss the requirement and programme — including risk allocation — to reduce the time required for the competition itself and de-risk the delivery phase.

There will be some issues around liabilities that are set by government policy. The particular one I have in mind is the creation of contingent liabilities which have particular rules associated with them — requiring Treasury and potentially Parliamentary involvement. Otherwise the answer will depend, as indicated in previous input, on the form of procurement. OGC Service Desk number/e-mail - 0845 000 4999, ServiceDesk@ogc.gsi.gov.uk

Rene Franz Henschel, Aarhus School of Business: If the non-negotiable nature rests on parliament decisions and statutes, I guess there is nothing to do. However, my experience is that most countries somehow try to divide the contracts into negotiable and non-negotiable contracts; an example can be found in Australia, see: http://www.treasury.sa.gov.au/public/download.jsp?id=2614.

In general, there is nothing else to do than to calculate and present the risk/loss scenario for the government partner, explain that the risk incurred therefore is unreasonable or that insurance is impossible, and then to explain that you are not able to form any contract with the government partner for this reason if the T´s and C´s are not changed. But whether this ‘take or leave it’ approach will work everywhere, I cannot predict.

9 February 2008: Bruce Horowitz: Extortion for bribes at Customs Offices around the world is one of the most repeated and most difficult anti-bribery compliance situations faced by companies doing business across borders. I am looking for both face-to-face techniques and longer-term strategies that you have used to get major pieces of equipment (not your luggage) out of customs without submitting to extortion, that is, without paying a bribe.

Alexandra was certainly sympathetic to the problem, but could not offer any silver bullet. She did observe, however, that companies that simply say ‘no’ are meeting with increased success. She explained that smart business people are citing the major fines, penalties and even jail terms now being imposed on those found guilty of corruption — and that, while foreign officials may not like this removal of their source of funds, they do understand that there really is no choice.

So the stock answer seems to be to make sure that you and your staff have the facts in front of you and treat this like any other negotiation — explain why you will not and cannot accede to their demands. And if you want to find evidence to support this, the TRACE website is a great place to start.

Our conversation moved on to cover some of the contractual methods open to companies with regard to anti-bribery measures. This is where things remain tricky. Many companies are today focusing on contract terms that require their suppliers to adhere to regulatory and other ethical standards — bribery, environmental, child labor all being examples. Increasingly, they insist that such provisions are passed through to sub-contractors and service providers. The problem is, how is this validated?

Self-certification is one choice; but some companies go further and insist on a right of audit (which is what the US Department of Justice recommends). This is potentially a double-edged sword, because if you have the right of audit and an exposure then arises, you may be judged negligent if you were not active in pursuing your audit rights.

Realistically, most companies simply cannot afford the overhead of conducting regular audits of their global supply base. So perhaps self-certification, with extensive consequences for any non-compliance, may be the best answer right now. And maybe it also means that companies need to consider avoiding smaller, local suppliers who may find it harder to push back against corruption. By working with larger multi-nationals, the transaction price may be higher, but the business cost will be lower. And perhaps the loss of trade will be an added incentive to foreign governments to act against corrupt practices.