As a procurement director, ensuring that contracts are thoroughly reviewed and understood before signing is crucial for minimizing risk and ensuring favorable terms for your organization. A Contract Review Document (CRD) is a structured way to assess and summarize how a proposed contract compares to your organization’s standard model contract.

Here’s how you might approach the creation and use of a CRD:  

Purpose of the Contract Review Document (CRD)

The CRD serves several important functions:

1. Identify Deviations: Highlight how the proposed contract differs from the standard model contract.
2. Risk Assessment: Evaluate the risks associated with any deviations, especially concerning supply chain risk allocation.
3. Decision Support: Provide a clear and concise summary to aid in decision-making.
4. Record Keeping: Maintain a documented history of contract reviews and decisions.

Components of the Contract Review Document

A comprehensive CRD should include the following sections:

1. Contract Overview
   • Contract Title: The name of the contract.
   • Parties Involved: Names of the contracting parties.
   • Contract Date: Date when the contract is set to commence.
   • Contract Value: Financial value of the contract.
   • Contract Duration: Time period the contract covers.
2. Summary of Key Terms
   • Scope of Work: A summary of the goods/services to be provided.
   • Delivery Schedule: Timelines for delivery.
   • Payment Terms: Conditions and schedules for payments.
3. Comparison to Standard Model Contract
   • Clause-by-Clause Analysis: Detailed comparison of each clause in the proposed contract against the standard model contract.
   • Identified Deviations: Specific areas where the proposed contract deviates from the standard.
4. Risk Allocation and Impact
   • Supply Chain Risk: Analysis of how the proposed contract allocates risk compared to the preferred risk allocation in the standard model.
   • Liability and Indemnity: Examination of liability caps, indemnity clauses, and warranties.
   • Compliance and Regulatory Risks: Potential issues related to legal and regulatory compliance.
5. Risk Mitigation Strategies
   • Recommendations: Suggested changes to align the contract with the standard model or mitigate identified risks.
   • Negotiation Points: Key points to negotiate with the counterparty.
6. Approval and Sign-off
   • Reviewed By: Names and titles of individuals who reviewed the contract.
   • Approval: Signatures from authorized individuals indicating their approval of the contract.

Example of a CRD Section

Clause-by-Clause Analysis

Clause	Standard Model Contract	Proposed Contract	Deviation Description	Risk Assessment	Mitigation Strategy
Payment Terms	Net 45 days	Net 30 days	Shorter payment period	Cash flow impact	Negotiate for Net 40 or Net 45
Liability Cap	Unlimited	2x contract value	Lower liability	Increased financial risk	Propose limiting to Insurance value
Indemnity	Unilateral indemnification	Unilateral (seller only)	Unbalanced risk allocation	Potential for increased liability	Seek mutual indemnification

In the sourcing process presented in course Sourcing Process part 1, LHTS introduce a standard sourcing process. Let’s break down the relevant part of the sourcing process and elaborate on the role of the Contract Review Document (CRD) within it.

Sourcing Process Steps 5 and 6

Step 5: Designing the RFQ (Request for Quotation) and Supporting Documents

In this step, the buyer is responsible for preparing and designing the RFQ along with all necessary supporting documents. The goal is to provide potential suppliers with all the information they need to submit a comprehensive and competitive offer. This typically includes:

• RFQ Document: Outlines the requirements, specifications, and criteria for the goods or services needed.
• Proposed Contract: Including a draft of the proposed contract is highly recommended. This allows suppliers to understand the terms and conditions they will be expected to agree to if selected.
• Evaluation Criteria: Clearly defined criteria on how the supplier responses will be evaluated.
• Additional Supporting Documents: Any other relevant documents that provide clarity on the project scope, timelines, and expectations.

Including a proposed contract in the RFQ serves multiple purposes:

• Transparency: Suppliers can see the terms and conditions upfront, reducing the risk of disputes later.
• Efficiency: Streamlines the negotiation process by addressing potential issues early on.
• Risk Management: Ensures suppliers are aware of and agree to the risk allocations preferred by the buyer.

Step 6: Receiving and Evaluating Supplier Offers

Once the RFQ is issued, suppliers will prepare and submit their offers. When these offers are received, the buyer begins the evaluation process. This is where the Contract Review Document (CRD) plays a crucial role:

Role of the CRD in Evaluating Supplier Offers

1. Comparison to Standard Model Contract
   • Clause-by-Clause Review: Compare the terms proposed by each supplier against the standard model contract. Identify any deviations in terms of pricing, delivery schedules, payment terms, liability, indemnity, etc.
2. Risk Assessment
   • Risk Grading: Evaluate and grade the risks associated with each supplier’s offer. This involves assessing how each deviation from the standard contract impacts the overall risk profile of the contract.
   • Supply Chain Risk: Specifically look at how the proposed terms affect supply chain stability, financial exposure, legal compliance, and operational efficiency.
3. Scoring and Ranking
   • Objective Scoring: Use the CRD to assign scores to each supplier offer based on predefined criteria. This helps in objectively comparing the offers.
   • Weighted Criteria: Different aspects of the offers can be weighted based on their importance. For instance, financial terms might carry more weight than delivery timelines depending on the project’s priorities.

Example CRD Usage in Evaluation

Supplier	Payment Terms	Liability Cap	Indemnity	Score	Risk Grade
Supplier A	Net 30 days	Limited to contract value	Mutual indemnification	85	Low
Supplier B	Net 45 days	2x contract value	Buyer only	70	Medium
Supplier C	Net 30 days	Limited to contract value	Mutual indemnification	90	Low

• Supplier A: Low risk due to favorable terms.
• Supplier B: Higher risk due to less favorable payment terms and indemnity clauses.
• Supplier C: Highest score with low risk, making it a strong candidate.

Final Decision-Making

• Balancing Cost and Risk: The CRD helps decision-makers balance the cost of supplier offers with the associated risks.
• Negotiation Leverage: Identify areas where negotiations can improve terms to reduce risk without significantly affecting cost.
• Documentation and Accountability: The CRD provides a clear record of the evaluation process and the rationale behind the final decision and in final version should it be archived together with the signed contract.

By integrating the CRD into the evaluation of supplier offers, you ensure a thorough, transparent, and risk-aware selection process that aligns with your organization’s procurement policies and risk management strategies.

Summary Using the Contract Review Document

1. Internal Review: Share the CRD with relevant stakeholders within your organization for review and feedback.
2. Negotiation Tool: Use the CRD during negotiations with the counterparty to highlight and address deviations and propose amendments.
3. Decision-Making: Present the CRD to senior management or the approval committee to facilitate informed decision-making.
4. Documentation: Keep the CRD as part of the contract documentation for future reference and audits.

By implementing a CRD, you can ensure a thorough review process that aligns contracts with your organization’s standards and effectively manages risks.

Note Illustration to the blogpost “Contract Review Document – a systematic support.” is created by Chat-GPT on May 24, 2024.

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