We're often asked how to make a supplier contract work in practice - and specifically how to avoid the firm simply buying hours for an hourly rate. That would be too much like employment.
The tenet is payment of a fee in return for a deliverable. But for what? Below is a diagram that shows how a supply contract should run.
Activity with that supplier starts with setting them up as an approved supplier. So, the firm finds them and decides to enter a supplier agreement with them.
Within the supplier’s competence, the firm asks for a quote for a piece of work. If the supplier is a marketer, it might be to set up a website, or to set up and manage a conference. The parties will have been talking lots beforehand and so none of what’s wanted will be any surprise.
The supplier then quotes.
Perhaps they did the same conference for the same firm last year, and so know exactly what’s needed. If the supplier is able, a fixed price can be quoted. If the firm finds the price good, it will raise a purchase order. More on that below.
It’s around here that the negotiation happens.
The price and what’s done for the money are variables that need to be established. It might be easy, and a single fixed price can be given. Or it might be that there are fixed price elements and elements where the price is variable (because the effort is in turn variable). It might even be that the whole price and deliverables are variable – though that’s not desirable.
Ultimately a purchase order is raised for something, and the supplier works to meet the specification – what they agreed in the quotation to do and supply.
As deliverables are delivered, the firm must elect if those meet its needs agreed in the specification and set out in the purchase order. The firm must carry out such checks as it deems necessary to confirm that the supplier has done what it agreed.
If the deliverables are as agreed – the website is live, or the conference was a huge success – the supplier levies its invoice and gets paid. If not, there’s discussion about remedial action.
All agreements should have some means by which price is varied. This is particularly true when the supplier is quoting for something they are competent in but have not done before in that environment. It could be that it’s a new conference. A means of price (and effort) variation will be essential to allow the supplier to manage its risk.
And finally, a word about the purchase order and the deliverables that it defines.
As we noted, the process starts with the request for quotation. Here’s an example of a simple email to a business modelling or software engineering supplier kicking this off.
Please quote for the delivery of:
- a summary report ‘widget’ for the business-wide view of incidents, issues, controls and remediations with the risk assessment tool;
- an administrative management module for the metrics dashboard to cover user entitlements and thresholds;
- a remediated metrics dashboard to include the ‘high’ priority book of work items.
The delivery date required for these items is 31st January 2019.
You should include your supplier quotation reference within the response.
I look forward to receiving your quotation.
The quotation is then as rich as the firm needs. At the light end of the spectrum, it could just be the three-line specification shown here. Most managers would want a better specification such that the deliverables can be evaluated, and acceptance determined. But many managers will just want to make a headline statement and the variation mechanism will be used to control the deliverables towards de-facto compliance.
If the quotation is acceptable to the firm, a purchase order will be raised. Here’s a simple example based in the above request.
- A summary report ‘widget’ for the business-wide view of incidents, issues, controls and remediations with the risk assessment tool;
Your quotation reference A6789 applies.
Price £3,750. Fixed price.
Project Manager: Anna Simms.
Delivery date: 31st January.
Please quote PO 1234/1 in your invoice.
- An administrative management module for the metrics dashboard to cover user entitlements and thresholds;
Your quotation reference A4545 applies.
Total estimated price £5,500 made up as follows: Concept demonstrator – variable price based on 35 days of effort. Fixed price of £2,500 for realisation.
Project Manager: Alastair Burnett.
Delivery date: 1st March.
Please quote PO 1234/2 in your invoice.
- A remediated metrics dashboard to include the ‘high’ priority book of work items.
Your quotation reference A9876 applies.
Price £2,750. Fixed price.
Project Manager: Ash Subramanian.
Delivery date: 31st January.
Please quote PO 1234/3 in your invoice.
All work is governed by the supplier agreement signed on 3rd October with your firm.
These are examples. The detail set out in the various documents and the purchase order(s) is that needed by the parties to make the relationship work. This element of the supplier agreement is the most important – exactly what is it that the supplier is going to do and how much are they going to get paid for it.
Negotiation centres around what’s to be done (the specification) and for how much (the payment). The supplier agreement sets out all the legalities, so many purchase orders can be used within one supplier agreement spanning a relationship over a number of years.
Now, many firms don’t use purchase orders. Hence many managers find the prospect of controlling a supplier contract like this quite daunting. It’s not. Simply, get started and it’ll all trog along like clockwork.