Contract preparation

Following top management's decision to invest in CAD/CAM/CAE, the next step will be to prepare the purchase order, procurement contract, and accompanying documents. This will be the responsibility of the CAD/CAM/CAE Manager, who however is not expected to carry out all the tasks since many of them are clearly the responsibility of Purchasing and Finance. However, the CAD/CAM/CAE Manager is responsible for the detailed technical aspects and for making sure that the overall requirements of management are respected.

The contract must also be acceptable to the management of the system vendor or reseller. When the two sets of management are in agreement, the contract can be signed. It will probably take some time to get to this stage. One of the main reasons for the holdup is that the company realizes again that it about to enter into purchase of a system from a perhaps unknown vendor with which close relations will be necessary for several 5 years. The company will want to double check that it is making the right decision, and in doing so may decide to modify its requirements slightly. The company is purchasing the system for the long term, so is not unreasonable to spend a few weeks making sure that the right system is being purchased, that it really will do what it is expected to do, that it is purchased for as low a cost as is reasonably possible, and that the foundations of a good long-term relationship with the vendor are being put in place.

Development of the detailed documentation accompanying the purchase order will make it clear to the company what it really wants and will also show the vendor what is really required. It is better that misunderstandings appear and are resolved at this stage, rather than after system installation. From the point of view of purchase, the company should make it clear just what it wants to buy in the way of hardware and software. The vendor may see some of these as part of a standard package; some may be thought of as extras. The company must specify in detail on which sites the system will be used since different vendors have different attitudes to multi-site installations. Similarly, the company should make clear its intentions to purchase interfaces, training, and documentation. Again, some of these items may be included in the standard price; others may not.

The expected delivery date, acceptance procedures, and any associated penalties should also be included. Conversions (for example, of NC postprocessors) and their ownership should be clearly defined, along with the corresponding responsibilities for their development and testing. The amount of support that the vendor or reseller will supply under the standard terms of purchase should be stated. The amount and cost of additional support should be described separately. During the long process of system selection, there may have been mention of volume discounts, trade allowances, discounts for being part of a major corporation, discounts for agreeing to carry out joint developments, and so on. Now is the time to define reality on a piece of paper.

The maintenance and service part of the contract should be looked at in detail. There is a wide range of options. At one end are time and materials contracts in which the vendor or reseller is only paid for service provided when requested. At the other end are 24-hour full-service contracts for which the vendor will make a flat-rate monthly charge that is independent of the amount of service given. The annual cost of such service may well be over 10 percent of the total purchase price.

In between the two extremes are all sorts of possibilities that allow the company to pay the price that it wants or to have the service that it wants; unfortunately, the two rarely coincide. It may be possible for the company to do some of its own maintenance, particularly preventive maintenance. If this is to be the case, it should be mentioned in the contract. Other subjects to be covered include the maximum downtime and a contingency plan in case this is exceeded. Details should be given of the services that are included in the maintenance contract, as well as the cost of those that are excluded.

There will be some eventualities that will not be covered by the maintenance contract, and they may need to be covered by a separate insurance contract. Some of the eventualities may be covered under existing insurance of computer equipment, but it is wise to check the situation with regard to hardware theft and damage, fire, power outages, software corruption of data, and so on.

To make sure that unintentional loopholes do not remain in the contract, a lawyer who understands the legal aspects of IS contracts should be asked to check it over. Similarly, the Purchasing and Finance people will want to look in detail at the purchase and maintenance conditions to see if it would not be to the company's cash flow and/or tax advantage to rent, lease, or otherwise obtain the system.

So far, it has been assumed that there is only one vendor or reseller involved. If there is more than one, then the situation will probably be more complicated. It may be possible to get one of them to take a leading role, with the others being subcontractors. Alternatively, it may be necessary to deal with several vendors separately. In this case it is important to make sure that each one is made responsible for providing hardware and software that works with the rest of the system. Again, this must be clearly defined in the contract.

The intention is not to avoid paying vendors, but to put in place the rules by which they will be paid provided that they do what they have promised to do. In all cases it is preferable to make a series of payments, rather than a single lump-sum payment. The first payment will probably be made at the time of contract signature and another at installation time. The final payment should be made after the system has been working as promised for 2 months. Again, this is not meant to penalize the vendor, but to act as a reminder that a long-term commitment has been entered into and must be taken seriously by both sides.

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Page last modified on February 11, 2000
Copyright 1999, 2000 by John Stark