Kevin McCafferty offers his advice on procuring information technology. His article is in two parts. Below, he considers the contents of an IT contract. In part 2, he will give his views on managing the contract.

Introduction
IN recent months a number of high profile IT contract disputes have hit the headlines. Disputes such as those between EDS and the National Air Traffic Services and W.H. Smith and Siemens/Fujitsu-Siemens, reported in the last few months are examples that the IT industry is moving in a more litigious direction. IT clients and providers are no longer prepared to sit back and accept the failings of the other party and, more and more, are looking to their contracts to recover some of the additional costs or losses that they have incurred. Statements such as “IT Projects are always late”, “IT Projects always cost more than you bargained for” or “Don’t worry, it’ll be in Release 2” will soon be in the past. IT clients now expect to get what they asked for, when they asked for it and for it to do what they want it to do. On the other hand, IT providers should not be expected to accept changes to requirements or specifications without the cost and time impact of the changes being incorporated into the contract.

So what can be done to avoid getting into a contractual dispute? Many IT contractual disputes are around System Development / System Integration type Contracts such as those in the aforementioned reported disputes. Kevin McCafferty, who heads up the IT Services Division of Trett Consulting, has this advice for companies considering placing or currently involved in similar type contracts:

Contract Strategy and Drafting
Before agreeing a Contract it is important that you understand what it is you want the supplier to provide. Your specification of requirements is a critical document, as this defines what the supplier will provide. It also drives the type of Contract that you should enter into and who is responsible for the contractual risks. You should have a clear contract strategy addressing these points before going out to tender or seeking proposals.

Contract Types
1. Fixed Price Contract – this contract type is most appropriate where you have a very detailed specification
of requirements.
2. Time and Materials Contract – this contract type is most appropriate where you only have a high level understanding of your requirements, and you have very little in the way of time or cost constraints.
3. Risk and Reward Sharing contract – this contract type is most appropriate where you only have a high level of understanding of your requirements, and you are constrained by time and by cost.
Unlike the Construction Industry, there are very few industry wide model forms of Contract for the provision of IT services. The Terms and Conditions for IT Services therefore tend to be based around those of IT suppliers which, inevitably, will be biased more toward protecting the supplier than the customer.

Contract Risks
The main risks that these type projects run are:
1. The delivery dates over-running;
2. The contract costing you more than has been agreed, and
3. The system not doing what it is that you want it to do.
4. The terms and conditions providing inadequate protection and remedy.
 
The Contract type you enter into will determine who is responsible for these risks within the project and commercially.

In a Fixed Price Contract, unless expressly stated, this risk should lie with your supplier. Your supplier will have protection within the Contract for extensions to the delivery dates and additional costs where you change or increase your requirements or where you have caused delays within the Contract.

In a Time and Materials Contract the risk for additional costs and time delay lies solely with the customer, except where the Contract expressly states otherwise, or where it can be proven that the supplier has been negligent in performing the Contract.

In a Risk and Reward Sharing Contract the risks are shared, based upon the levels agreed as part of the Contract.

It is possible to have a contracting strategy that combines the Contract Types, for example, the Design work carried out under a Time and Materials Contract, with the Development, Testing and Implementation work carried out under a Fixed Price Contract. The important issue here is that you ensure that the risk of errors and omissions under the Design contract are transferred into the Development, Testing and Implementation Contract.

Having determined your Contract Strategy the key is to produce a Contract document that reflects that strategy. There are a large number of issues that need to be considered and included in your contract document. As a guide, these should include, but are not necessarily limited to:

• Scope of Contract
• Business requirements should prevail over supplier solution proposal
• Supply of Products and Services
• What products and services are included
• What products and services are optional
• How do you deal with Additional Products and Services
• Supply of System
• staged or single delivery
• Contract Charges
• Fixed price / Time and Materials
• Additional Services
• Expenses
• Payment Profile
• The System
• Design
• Development
• Testing
• Delivery and Installation
• Acceptance
• Training
• Maintenance
• Pre completion
• Post completion
• Ownership and licenses
• Hardware
• Software
• Documentation
• Data
• Warranties
• Performance of services
• Fitness for purpose
• Performance of system
• Warranty period
• IPR indemnity
• Contract Administration
• Variations
• Assignation
• Time
• Delay
• Force Majeure
• Remedies
• Liquidated damages
• Adjudication/Arbitration/Alternative Dispute Resolution
• Limitation of Liability
• Termination
• Rights to terminate
• Survival of obligations
• Return of money and property
• Miscellaneous
• Personnel
• Security
• Protection of personal data
• Confidentiality
• Publicity
• Insurance
• Contingency
• Governing Law

Contract Management
A Contract should not be something that is professionally written and agreed, then stuck in a drawer and forgotten about until something goes horribly wrong and everyone has started shouting at each other, pointing fingers and waving invoices in the air. Unfortunately, in IT, this appears to be the case more often than not.

The Contract is the most critical document in the project and defines the roles and the responsibilities of each of the parties involved. Every time a decision is reached on the project, the impact of that decision should be considered in terms of the effect that this has on the Contract. It may change the scope, it may move the end date, it may change the price, it may do all three and more. And if it does any of these, then a variation to the Contract needs to be produced.

In Part 2 the management of an IT Contract will be addressed, with tips and advice on how the successful manaement of a Contract can lead to the successful completion of a project. It also addresses the touchy subject of contractual disputes and how to deal with these if you find yourself in one.

If you would like further information on our IT Services please visit our IT website at www.trett.net contact Kevin McCafferty on 01786 449779.