If you were to design an Introduction to Procurement course for undergraduates enrolled in a Business College of a University, during the first or second class you would introduce basic general concepts, and some customs, traditions, and tendencies that have historically formed the environment for procurements in our culture, and that still form that environment. The American concept of “fairness” as perceived and applied in the realm of business and more specifically in the context of procurements would be one of the important general cultural concepts introduced and would likely generate lively discussion. The American “can do” mindset, particularly among vendors, would be another cultural discussion point. This traditional attitude is so deeply ingrained within us that often we are not aware of its influences. The tradition of the American work ethic would also be mentioned in class, and some enjoyable debate might arise over which parts of the country exhibited the greatest degree of this work ethic of our forefathers. Along with many other customs you would go on to mention the typical responsibilities of the parties at a high level of abstraction—at the “50,000 foot level”. For example, you might explain that customers usually have two major responsibilities at the 50,000 foot level: (a) to define what the customer wants; and (b) to pay for it.
The customer’s first responsibility is to (i) define its required product or service deliverables, results, research, engineering, efforts, or other commitments from the vendor in advance of entering into a contract; or (ii) hire a consultant or a vendor to help specify them in advance; or (iii) require samples or a prototype that must be approved before the customer fully commits; or (iv) provide safe harbors for the vendor; or (v) specify some other requirements. A safe harbor in this general procurement context might include a commitment and a set of required conditions that, if completed or satisfied by the vendor, trigger payment, or earn other consideration, and protect the vendor against unreasonable rejection, termination, and/or liability. The set of conditions might include a vendor’s certification on certain ISO standards, a customer’s pre-contract inspections of required operations, or a customer’s acceptance criteria that are clear and comprehensive.
Since our hypothetical course is a basic introduction to procurement, a young student might ask: “Why must the customer define requirements for the vendor in advance of entering into a contract?” One answer is because the vendor is not a mind reader. Another answer is that fairly often the vendor needs to know the customer’s requirements in order to set a price including any applicable discounts or premiums. Still another answer is that customers often have only a poorly defined notion of what they want, and if they do not improve that notion and also clearly communicate what they want, it is not the vendor’s fault.
Without a comprehensive notion of what they want that is clearly and timely communicated to their bidders or vendor, customers may very well not be happy with what they receive, and they may reject, terminate, litigate, or pay more to get what they decide they really want. In fact, this situation of customers not knowing what they want, or having only a vague notion about it, and often not clearly or timely communicating their poorly-thought-out requirements, is a reality in both commercial and government procurements, and is a major cause of cost overruns. If customers could better define what they wanted—comprehensively, clearly, and in a timely manner, then some noticeable excess expenditures could be avoided.
Further, if a customer poorly defines its requirements, or delays in defining them, and attempts to shift to its vendor the risk of resulting cost-overruns and performance glitches or delays, the situation quickly becomes unfair, and it justifies the vendor, among other reactions, in requiring a premium for accepting a high-risk procurement. One of the traditions surrounding procurements in our culture is that with higher than normal risk goes greater than normal reward. If the customer refuses to pay a premium in a higher-than-normal-risk context and still imposes these risks, the customer encourages the vendor to (i) hide extra profit; or (ii) ignore non-standard requirements, especially if they are communicated after contract commencement; or (iii) take other steps intended to balance reward with risks. Under no circumstances will the vendor want to accept a penalty due to the customer’s poorly defined requirements or delays in defining them.
The second customer responsibility—to pay for its requirements--includes making payments to vendors on schedule and without unreasonable or capricious payment lateness, withholding or denial. Denying payments earned, and, in the alternative, lengthy withholding periods for payments earned through performance, are each a very serious matter. Each situation has the tendency to at least diminish business relationships, and often generates disputes. Small, and even mid-sized, vendors have been known to go out of business fairly quickly if the size of the payment denied or withheld is noticeable.
As our final academic point, near the beginning of our hypothetical basic procurement course you might also explain that, considering all procurements in the country at any given point in time, more often than not neither party to a typical contract may unilaterally change its terms or conditions in any significant way during its life. Of course, customers with unusual leverage, such as government customers, may make such demands. However, even in the face of considerable leverage, absent additional discussion and accord, and absent mutually-acceptable change mechanisms built into the contract in advance and reasonably implemented, disputes will often arise as a result of significant unilateral changes in contracts during their term. Such disputes commonly give rise to procurement delays, unforeseen costs, and sometimes other unforeseen consequences.
This is a general academic review, and these are all basic procurement concepts, customs, traditions, tendencies, and commonplace results. In the United States, everyone with any measurable experience in procurement should be very aware of them. They are not advanced course or graduate course material. Yet earlier this year our federal government appears to have forgotten some of them.
Coming soon: Part 2: Introduction to the Proposed Mandatory Withholding DFAR
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