Typical Provisions in a Services Contract

Typical provisions in a Services Contract


The specific provisions in a service contract vary depending on whether the service is strategic or nonstrategic and repetitive and nonrepetitive spend, and whether it is a short- or long- term agreement, and with nature and location of the service provided.



Terms and Conditions of Services Contracts


The terms and conditions of a services contract, like that of a contract for goods, is designed to clearly and unambiguously describe the quality, quantity, delivery, price/ cost, and service agreed to by both parties. It should specifically address the price, changes to price, actions if the market prices fluctuate or how price will be determined as well as bonus or incentive arrangements, the payment schedule including discounts or interest for late payment, delivery time (may be start and stop time, frequency, etc.), and location of service delivery. Quality is often addressed in service level agreements discussed later in this section.

        A detailed discussion of each provision is outside the scope of this book. However, several provisions that are typically addressed in service contracts for all types of services are discussed in detail in the following sections.


Request for Renegotiation


A renegotiation clause may require both parties to agree to renegotiate in good faith if any party believes that compensation or other requirements of the agreement no longer meet the essential purpose of the contract. In a long-term agreement, if business conditions change of if one party might be taking advantage of the other party, this clause might be useful. Rights under this provision should be mutual. The provision only requires that the parties come to the bargaining table and negotiate in good faith.


Dispute Resolution


Alternative dispute resolution clauses may help parties in a dispute reach resolution without resorting to the courts. These methods are discussed later in this chapter.


Termination for Cause


This provision defines what constitutes sufficient cause for the buyer to terminate the contract. It may also describe the rights the supplier has under the contract to correct the cause. Service level agreements may be used to specifically identify events that will trigger termination with cause. A Service Level Termination Event clause might read, “A Service Level Termination Event will occur if Seller fails to meet any Service Level Termination Event will be considered as a termination under the Termination for Cause provision of this Agreement.”


Termination for Convenience


A Termination for Convenience clause is common in government contracts and increasingly in private contracts. If a prime contract contains the clause, so should any related subcontracts. Also, there should be complimentary payout amounts under both the prime and subcontract provisions.

        Determining if a termination was improper has typically rested on determining if it was made in bad faith or constituted a clear abuse of discretion. If the termination for convenience clause is exercised in a bad faith, the termination may be a breach of contract. For example, if an owner chooses to exercise the termination for convenience clause when work was 90 percent complete to avoid paying the balance of the profit on the remaining contract work, the termination could be held to be a bad faith termination and constitute a breach of contract.

          However, it is difficult to prove bad faith or clear abuse of discretion. Court rulings have restricted the use of the bad faith or secretion test starting with a 1982 case in which it was ruled that the clause could not be used to avoid paying anticipated profits unless there was a change of circumstances that warranted the use of the clause.


Clauses Related to On-Premise Service Delivery


Several clauses may be needed to address issues that might arise if the service occurs on the purchaser’s premises. For example, in construction or installation services, clauses may cover security, access, nature of dress, hours of work, applicable, and what equipment and materials are to be provided by whom.


Clauses Related to Professional Services


More organizations are outsourcing (and offshoring) professional services, including legal, engineering, software development, medical and so on. Certain clauses are typically included in these professional services contracts.

       For example, when contracting for consulting services, the contract might include a key personnel clause, warranty clause, an independent contractor clause, a work product clause, and a non disclosure clause.


 Key Personnel. This is included if the success of the service depends on specific individuals. This provision (1) allows the customer to approve of key personnel assigned to the project, (2) requires that the supplier keep the specified key personnel assigned as needed (e.g., full time) to the project, and (3) get the customer’s approval before transferring key personnel.

 Warranty Clause. Depending on the clarity of functional requirements and the availability of objective criteria for assessing performance, the buyer may be able to negotiate a warranty for the service provider’s work. If the work is unacceptable, the clause may require the consultant to redo it at no additional charge until it is acceptable. If the functional requirements are vague, the service provider probably will not agree to this clause.

 Independent Contractor Clause. To protect the buying organization, it is important to meet the IRS requirements for hiring an independent contractor and to include a clause stating that the contractor is independent and therefore responsible for filing his or her own taxes.

Work Product Clause. This assigns the ownership of the work product to the bullying organization. While large service providers may not be willing to agree to this, many smaller ones will. Even if ownerships does not pass to the buying organization, the contract should require documentation of the work product to avoid future problems.

Indemnification. To indemnify means to secure against future loss, damage, or liability. An indemnification clause is used to protect the buyer against all claims, cost, and expenses that arise from the supplier’s breach of it obligations. This includes claims of patent, copyright, or trademark infringement against the supplier.

Nondisclosure Clause, The contractor should be contractually obligated to keep the buying organization’s information confidential.  For example, consultants sell their services to many companies, some of whom may be competitors, and this cluse can provide a remedy short of going to court.

Subcontractor Clause, The clause either allows or disallows the use of subcontractors.  If allowed, the buyer may retain approval before subcontractors are selected.  As more services are offshored, the buyer may wish to expand or restrict the supplier’s use of offshore subcontractors.


Errors When Drafting Services Contracts


            The most common error when drafting services contracts in vagueness. This follows somewhat naturally form the intangible nature of many services and the difficulty in clearly and unambiguously describing some service requirements.

            Vagueness may apply to any area listed.  Because most of the quality and cost are driven in during the need recognition and description stages of the acquisition process, these are the areas to focus on in services acquisition.  The buying team should develop a clear and unambiguous scope of work, measurable performance specifications (included in service level agreements), and clear accountability for buyer and supplier.

            Improving the ability to draft effective statements of work and services contracts may be one of the greatest opportunity areas for supply management.