Issues to consider in a contract

Has it ever happened to you that you have to hire a supplier but you don’t know how to do it?

A good contract is a fundamental tool because it allows documenting the obligations and responsibilities of the parties involved.

In this article we will guide you step by step in the creation of a contract that allows you to execute your project successfully:

1. Preparation and signing of the contract.

 Below I describe the main elements that, in my experience, a contract should have.

1. Objective: This should describe as clearly and succinctly as possible the objectives that are intended to be achieved with the project
2. Contracting modality: This depends on several factors and the type of services to be contracted. In general, if the objectives of the project have been clearly defined and the requirements and deliverables clearly documented [1], I recommend contracting at a fixed cost.
3. Deliverables: The deliverables to be produced by the contractor and their acceptance criteria must be clearly documented as an annex to the contract
4. Contractor’s obligations: Described as clearly as possible.
5. The contracting party obligations: Described as clearly as possible.
6. Contract value: It is the value to be paid for the products and services that the contractor will supply.
7. Payment method: I recommend that the payments should be constrained by the production and acceptance of deliverables and that there should be a final payment that depends on the achievement of the project objectives.
8. Term of the contract: It is the time of the contract validity and is associated with the needed time to execute the project. I recommend adding a few months to the time stipulated in the schedule to cover variations and the guarantee time.
9. Warranty: Includes a warranty period in which project deliverables that show defects will be repaired at no cost.
10. Support on project deliverables: A support period must be included after the project starts. This must be already paid in the proposal, otherwise, hidden costs may appear.
11. Labor independence of the contractor: This is to avoid possible lawsuits from the contractor’s employees in the situation that the contractor cannot answer for his obligations to them.
12. Affiliation of the contractor’s employees to social security: This must be stipulated in the contract, otherwise, you run the risk of a lawsuit.
13. Confidentiality: All the information and documents that you provide to the contractor within the project must be treated within a confidentiality framework.
14. Property of the deliverables: The contract must be explicit that all the deliverables of the project are property of the contracting party.
15. Termination of the contract: The causes of early and normal termination of the contract must be clearly defined.
16. Force majeure and fortuitous event: Define force majeure or fortuitous events that may prevent the continuation or determine the completion of the project without consequences for the parties.
17. Fines: This is a supremely important clause since it allows the contractor to charge fines in case of non-compliance with his obligations. These penalties must be supported by an insurance policy that you can enforce in the event of repeated default by the contractor.
18. Policies: Among others, policies should be requested for the The Bid Security, Advance Payment Bond / Good management of the advance (if any), Compliance with the contract / Performance Bond, Payment of social benefits, etc.
19. Data Protection: This clause refers to the compliance of the specific data protection regulations of each country.
20. Prevention of risk of money laundering and financing of terrorism: This clause allows the termination of the contract in the event that the contractor company is included in restrictive lists.
21. Notifications and contractual address of the parties.

Once the contract has been prepared, it must be signed by the parties.

2. Termination of the contract.

Once the objective of the contract has been fulfilled and the project has been closed, a certificate of completion of the contract must be drawn up.

[1] See section 5 of the document 10 steps for your project to be successful.

Author: Juan David Castañeda Sánchez

About the Author:

Mr. Castañeda is an Electrical Engineer from the National University of Colombia and a Business Specialist from the ICESI University. He has more than twenty years of experience in structuring, selecting suppliers, contracting and managing projects in public sector entities and private companies in Colombia, Bolivia, Brazil, Ecuador, Panama, Peru and Venezuela.

For more information please email: info@gprycon.com