Project Management

7 Contract Terms You Should Know

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Categories: contracts

Project procurement is full of jargon – it can seem like a totally different language at times. Here are 7 contract terms that you should know.

1. Waiver

A waiver is where you voluntarily surrender an option under the contract. It’s a concession. You ‘let the supplier off’ the term because it suits neither of you to carry it out. This could be, for example, in the situation where enforcing a contract clause or requirement would turn out to be prohibitively expensive for both parties, or is no longer needed.

2. Warranty

This is another way of explaining a guarantee. It’s where you need assurance from your supplier that the terms of the contract are going to happen. Warranties tend to be limited by time, so it would be unusual to get one that lasted a lifetime. Just like with your dishwasher at home, your supplier will probably provide a warranty period.

Warranties are contractual – it’s not a best-endeavours guarantee. As a result, if the contract isn’t delivered as you expect you can call on the warranty and get compensation.

Warranties are a good negotiating point for developing the contract. You could work with both parties to get an extended warranty added into the contract if you felt it would be worth it.

3. Claim

A claim is a request for compensation. It has to take place according to the terms of the contract, so your contract should specify how you can make a claim and what sorts of claims are going to be appropriate under this agreement. In other words, it’s a type of dispute that you can resolve through negotiation together.

Claims administration is the process of reviewing and agreeing on claims. You’re discussing whether you (or the supplier) has a valid point. If you do, you’ll use the change control process to potentially amend the contract as necessary to allow the claim to be met.

4. Breach

You might also hear this referred to as a default. When there’s a contract breach it means that a requirement of the contract has not been met.

In severe cases (a material breach), the party who didn’t do the breach can be released from the contract. This often relates to non-payment of fees or if the party can be shown to have broken some kind of significant contractual term. If that applies to you, the other party can walk away. You have no further hold over them and the contract is broken.

Typically this results in some kind of financial compensation and if your business was the one who caused the material breach, the other party could apply for punitive damages or fines. These can cover loss of earnings from the contract or other losses.

5. Performance Bond

Performance bonds are a way to ensure your business doesn’t suffer if your supplier doesn’t do what they promised. These can be appropriate if your project is at significant risks from the vendor failing to deliver.

They work like this: a pot of money is put aside to compensate you in case the vendor fails to achieve the terms of the contract. If they can’t deliver, you get the cash instead.

These can be hard to set up because they are particularly valuable when working with small or volatile organisations which probably don’t have the cash to lock away until the contract is completed.

6. Force Majeure

This is a contract clause you will see all over the place, from your household insurance policy to software contracts.

It simply means that if things happen that are beyond the control of the contracting parties (in particular, the party supplying the services or goods) then they don’t have to compensate you – they can be released from their contractual obligations.

Examples of things that are beyond their reasonable control are extreme weather like floods, wars, terrorist attacks, hijacking and crime.

7. Change Control

OK, you’re probably very familiar with change control systems. They apply to contracts too.

Any changes to the contract need to be managed professionally and with input from both sides. Everything is normally documented within the contract, at least at high level. Sometimes the detailed change process or a change form is included as an appendix or schedule to the main contract.

Pay attention to what contract change terms apply to your contract as they can vary.

Contracts should have a glossary or definition of terms, and that can help you unpick all the unfamiliar language. Always get a lawyer to read over a contract before you sign it and make sure that everyone knows what they are getting into. Contracts support both parties, but only if you agree to terms that work for you both from the beginning!

Posted on: April 14, 2017 08:56 AM | Permalink

Comments (9)

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Very good summary, thanks

Thank you, Elizabeth. Appreciate the share!

Great summary, thank you!

Great Highlights Summary.
Simple and easy to understand.

Thanks! This was very useful.

Great overview,thanks!

A few of these I did not know before. Thank you!

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