Always Define Deliverables and Acceptance Process
Have you ever had a supplier send you an invoice based on a payment schedule and a statement of work, but had no way of knowing if that work was ever completed - or if the deliverables were to the satisfaction of your business unit?
If your statement of work didn’t have clearly defined deliverables or an acceptance process for those deliverables, then the chances are there isn’t much you could about it – except pay the invoice and hope they did a good job.
But it should never be that way with professional services.
Any time you negotiate a statement of work with a professional services provider - whether it’s for a fixed-cost engagement or time and materials - you should always have clearly defined deliverables with milestones, an acceptance process for each deliverable, and payment terms tied to the acceptance of those deliverables.
Excuses Suppliers Will Make
Most suppliers will argue that they can’t tie payment terms to deliverables on a time and materials engagement, because they’re billing their contractors’ time on a bi-weekly or monthly basis, and the deliverable (such as software) could take months to be finished.
Don’t let them use that as an excuse. Those contractors are still working on stuff every week: they have to attend meetings, provide updates and status reports and show an overall progress towards an interim or final deliverable.
What Deliverables to Ask For in a Time and Materials Engagement
All of the above things that contractors have to work on every week are the deliverables that I write into my time and materials statements of work.
On top of that, I want my internal IT project manager to sign off on those things before an invoice gets paid. It’s not an unreasonable ask on your part and it puts the onus on the supplier to make sure that they’re tracking progress.
But more importantly, it forces the IT group that hired the contractors in the first place to make sure that their project gets completed on time and under budget.
Why IT Projects Often Go Late and Over Budget
IT guys reading this might hate on me for the next part, but that’s OK. I’m a procurement guy, so I’m used to it.
Most IT projects suffer from scope creep and go over budget. That’s not due to supplier incompetence. Rather, it’s because the project manager didn’t ensure that those interim deliverables were delivered on time and on budget.
And, obviously, if a customer is willing to pay a supplier to sit around for 40 hours a week and keep invoicing with no end in sight, then that’s exactly what the supplier is going to do.
To avoid this problem, force your suppliers to provide deliverables for each payment and have a clearly defined acceptance process for each of those deliverables.
How to write acceptance language into your contracts
An important note: Try to get that language written into your Master Service Agreement (MSA) rather than the statement of work.
A lot of suppliers want language like “Payment will be made upon acceptance of deliverables to be defined in a statement of work.” The problem is, that puts the onus on the your business to make sure that every SoW has acceptance language in it.
I’ve even seen suppliers put a one-liner in an SoW that says, “deliverable is deemed accepted upon payment of the invoice.” That’s a huge red flag in an engagement.
Fixed-cost or time-and-materials?
I’m often asked: how do you choose between a fixed-cost and a time-and-materials engagement?
Here’s what I ask my clients: How good is your project manager? And how critical is your go-live date? If you have good PMs, they can usually manage a time-and-materials engagement to make sure that you get to a final deliverable on-time and under budget. But if you have a critical go-live date, it may be worth considering a fixed-cost engagement.
The rule of thumb is that a fixed-cost engagement will cost you about 30% more than time-and-materials (there are a couple of tricks that you can use to make sure that your supplier is giving you an honest quote).
But more importantly, you should backload the payment terms in a fixed-cost engagement to make sure that the largest payment is tied to acceptance of the final deliverable.
This is the last piece in our series on how to navigate through the nuances of key contract terms in a negotiation. But these are just a few key points that we’ve touched on.
If you really want to get into the weeds of contract terms and conditions, there are some really good courses out there, like Harvard’s program on negotiations.
And if you think the topics we’ve covered over the last few weeks could be of benefit to your procurement team, reach out to us at oneviewnow.com/contact and we’ll set up a half-day workshop for your team.