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Solution
Executive Summary
The report below entails developing contracts in procurement and supply to assess the application of the terms and conditions in managing the risks of increased costs, extension of time, poor quality, and unethical practice. This report finds that RCU has an effective set of terms and conditions for mitigating these risks. These include requiring the Second Party to re-perform the services in case they do not meet the required quality and imposing the fines for services not delivered in time. However, there are several areas that RCU needs to improve to promote risk management. Three recommendations to promote the contract management process include clear evaluation process and plan for the products and services, development and implementation of incentives for the suppliers, and benchmarking the leading companies to evaluate and implement some ideas from them on enhancing their contract management.
Table of Contents
2.0 Effective Risk Management Approaches. 5
2.3 Risk of Increased Costs. 10
2.4 Risks of Unethical Practice. 11
3.0 Significance of Terms and Conditions in Monitoring and Managing Performance Measures. 13
4.1 Ensuring That an Agreement Is Carried Out Under the Firm’s Own Terms and Conditions. 18
5.0 Conclusion and Recommendations. 19
Appendix 1: Summary of the Terms and Conditions. 22
Figure 1:Benefits of Terms and Conditions. 5
Figure 2:Principles of NEC Model 7
Figure 3:Article 3 of the Standard Service Contract 8
Figure 4:Article 12 on the Termination and Withdrawal of Work. 9
Figure 5:Events Resulting in Delays 10
Figure 6:Article 12 on Fines and Compensations after Delay. 11
Figure 8:Transparency in Accessing Information. 13
Figure 9:Beneficence and non-maleficence. Ethical Dimension. 13
Figure 10:Confidentiality Article. 14
Figure 11:Procurement and Supply Cycle (CIPS, n. d). 15
Figure 12:Performance Measures Metrics. 16
Figure 13:Laws and regulations guiding performance of contractors 16
Figure 14:Performance review teams under Article 3 section d. 17
Figure 15:Payments and fees 17
Figure 16:Withdrawals of the contract due to delays. 18
Figure 17:Skills and competencies of a contractor’s team.. 18
1.0 Introduction
Terms and conditions influence the nature of interaction between two or more parties engaging in a contractual agreement (Lysons and Farrington, 2020). The need to adhere to terms and conditions is enhanced by their nature of being legally binding between the involved parties (Štěrbová et al., 2020). The benefits of terms and conditions in contract management are summarised in figure 1 below. Concerning risk management, terms and conditions are important in achieving a profound relationship between the parties and ensuring that the First Party does not risk dump the risks to the Second Party. This is based on ensuring that the risk mitigation measures are suitable and favourable to all parties.
Figure 1:Benefits of Terms and Conditions
1.1 Objective of the Report
The focus of this report is explaining how contractual terms and conditions set by the Royal Commission for AI IA (RCU) help the firm effectively manage the risk of increased costs, poor quality, unethical practice, and time expansion. The ‘battle of the forms’ concept is also outlined and used to describe how contractual agreements can be carried out under the organisation’s terms and conditions.
1.2 About the Organisation
The Royal Commission for AI IA (RCU) came into existence in 2017 following a Royal Decree by his Majesty King Salman Bin Abdul-Aziz. RCU was specifically established as part of Saudi Vision 2020 projects whose primary functions were to enhance the Kingdom’s leading role as the heart of Islamic and Arab world and create a more sustainable and diverse economy using the Kingdom’s investment power. As a government entity, RCU activities occur because of combined efforts from various stakeholders comprising the Ministry of Finance, Ministry of Cultures, National Events Center, Contractors, and the Expenditure and Projects Efficiency Authority (EXPRO).
2.0 Effective Risk Management Approaches
2.1 Risks of Poor Quality
Quality focuses on enhancing efficiency and promoting satisfaction among stakeholders. As asserted by Bastas and Liyanage (2018), it is the closeness of organisational services or products to expected standards. To lower this risk, RCU uses specific clauses in its contract. Primarily, the contract is developed by the company’s legal department to ensure that it incorporates the needs of other departments and remains legally binding (see appendix 1). As such, the contract aligns with the NEC model since all the work deliverables are developed earlier. As demonstrated in figure 2 below, the New Engineering Contract (NEC) model focuses on three core principles of clarity, flexibility, and good management stimulus. RCU ensures that its principles abide by these principles to promote quality.
Figure 2:Principles of NEC Model
Article 3(b) of the contract as shown in figure 1 prevents the risk of low quality from a second party by requiring a demonstration of the party’s possession of essential resources in offering quality products or services to RCU as defined in the contact’s Scope of Services. Key resources considered comprise qualified personnel, technical resources, and professional competencies (Laukkanen, 2021). Upon completion of demonstration, Article 3(c) of RCU’s procurement contract also takes care of operational risks based on poor quality of services by assigning the Second Party responsibilities of ensuring that performance of products and services rendered conforms to the requirements in the contract.
As provided in figure 3 below, the Second Party is also responsible for ensuring that the performance of the services reasonably conform to the contract. To reinforce this, the contract allows RCU to request the second party to re-perform its duties if they do not reasonably conform to the requirements in the contract (Article 3(c)).
Figure 3:Article 3 of the Standard Service Contract
RCU recognises that sometimes risks related to low quality may occur. As such, the contract considers need for mitigation. In this regard, payment is held until the second party re-performs functions that may have not conformed to the requirements in the contract. The approach is carried out after a review of services by RCU, acting as the First Party to evaluate conformity.
Among the main approaches that RCU applies in mitigating the risk of poor quality is having the risk register. According to Mace et al. (2015), the risk register is a crucial tool in identifying possible risks in the organisation or contract and developing mitigation measures to avert the issues when they arise. Through a risk register, RCU has the potential of monitoring every incident surrounding quality and developing intervention measures. The company has a record of all potential risks, including companies that have delivered poor quality in the past, which is important in taking precautions.
Article 8(b) as shown in figure 4 is also used to eliminate the risk of not meeting the expected quality in services rendered or products offered.
Figure 4:Article 12 on the Termination and Withdrawal of Work
Despite the protection against risk of poor quality offered by the contract to RCU, there is limited clarity regarding the recommended approach for evaluating quality levels in services or products issued by the Second Party. The link to the statutory implied terms is reflected in the quality evaluation approach by RCU. However, this needs to be profoundly documented to ensure that the Second Party is comfortable with the process.
2.2 Extension of Time Risk
The Standard Service Contract refers to extension of time as the additional time given to the second party to complete his roles after the end of the initially agreed period. Expansion of time is a risk because it leads to delays, meaning that the project will not be completed within the expected time (Xie et al., 2020). The series of events surrounding delays in procurement and supply chain are summarised in the figure 5 below. Moreover, delays can be costly if they result in slowed production due to unavailability of raw materials. Since RCU is part of the Saudi Vision 2030, time is crucial to its activities (Bjorvatn and Wald, 2018). Therefore, the conditions in the Standard Service Contract covers for the risk associated with expansion of time under specific articles.
Figure 5:Events Resulting in Delays
Article 12 (c) of RCU’s Standard Service Contract as shown in figure 6 covers the Fines and Compensations associated with failure to meet time deadlines. Notably, RCU recognises delays in time as breach of contractual agreements by the third party. Therefore, article 12 of the contract gives RCU the right to impose a delay fine on the Second Party. Article 12 (d) requires the second party to acknowledge that in case of any delay caused by it, the first part reserves the rights to suspect any payments associated with the contracts.
The underlying gap in the contract’s terms and conditions relating to risk of expansion of time is the failure to explain consequences of delays caused by the First Party. Therefore, RCU may not be at liberty to delay projects as this can result in liabilities especially if the Second Party takes a legal action. Moreover, there is no explanation of consequences associated with risk of delay caused by other events such as force majeure yet they are significant (Bjorvatn and Wald 2018).
Figure 6:Article 12 on Fines and Compensations after Delay
2.3 Risk of Increased Costs
Increased costs result from incurring more expenses, often above the projected level. They have an adverse impact on organisations as they can result in budgetary constraints that may affect project implementation (Müller et al., 2019). As a government aligned entity, the Expenditure and Projects Efficiency Authority (EXPRO) manages RCU’s budgetary matters. EXPRO together with RCU’s financial department evaluates savings and cost avoidance as projects continues. Notably, the Service Contract’s terms and conditions protects RCU from risk of increased cost under specific sections. Failure to deliver the contract within the stipulated costs has a significant impact on the overall financial flow and performance of RCU. This is reflected in the risk of the production and service delivery costs escalating. This is a significant challenge in ensuring that the customers receive the products and services within the most suitable cost and price.
Article 6 (c) as shown in figure 7 requires that RCU only pay the Second Party amount that is equal to the value of services delivered. As such, the company protects itself from incurring expenses resulting from the actions of the Second Party that did not transmit value to the project. This allows the First Party to evaluate and value all the completed works. Similarly, Article 6(d) of the terms and conditions in the contract forbid the Second Party from making any claims for additional fees that are not included in the contract without approval from RCU. As such, RCU is protected from changes in expenses that can arise from price variations on the market affecting cost of raw materials for the contractor (Kouhizadeh & Sarkis, 2018). Therefore, the second party only imposes cost on RCU based in the original agreement and contract.
A possible flaw in the description regarding extra fees and payments is the absence of a procedure for imposing extra cost and expenses to the First Party. According to Mizuno and Bodek (2020), external factors such as market shifts and natural disasters may affect the cost associated with certain project deliverables. Therefore, it is imperative to have succinct ways through which the First and Second Parties can engage and work around changes in costs. Another significant gap is the lack of an incentive process to the suppliers, which may be crucial in promoting their motivation and satisfaction for efficient contract process.
2.4 Risks of Unethical Practice
Unethical practice involves……
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