OCA White Paper on OGC Contract Terms

 General Points on OGC Contracts

 

`  OGC and industry should aim for “win/win” contracts: a major problem at present is the addition of unreasonable terms that bear no relation to the substance of the contract, often by external advisors seeking to “add value” to a particular deal. Both OGC and OCA should make common cause to stop unreasonable terms being applied. Unreasonable terms create risk and undermine trust: leading to badly implemented deals and unsuccessful programmes.

`  OCA is looking at short-term solutions. OCA is looking for achievable changes to ask for at OGC level or at ministerial level.

`  The ‘devil is in the detail’ and understanding the detail is important. For example, a financial distress clause has been introduced into OGC’s ICT standard T&Cs. From a policy point of view this appears contrary to the more general current government policy of supporting companies in a period of “credit crunch” and not penalizing them for financial, as opposed to operational, matters. There is a clear conflict of priorities here and this is something OGC should reconsider given the credit crisis.

`  A governance and control issue is that ‘Buying Solutions’, and the different government departments, all have a tendency to ignore OGC guidance with the insertion of more onerous terms; again a matter on which OCA and OGC should make common cause. (The Conservatives have recently indicated that they will look at governance on public contracts and have read the Read report for HM Treasury of April 2009, which proposed changes to governance and in life monitoring of public contracts).  

`  Framework agreements should not place onerous terms on suppliers: unforeseeable risk creates unquantifiable liability and frameworks need to be sensitive to this.

`  When Government acts as a commercial buyer it has a position of substantial market power in many markets. Given the recession and credit tightening, government contracts may be strategically more important for many suppliers.  The credit status and cash-flow benefits of government by comparison with other customer contracts places government in a privileged position. As the most important ICT customer sector, government contracting underpins the UK technology industry, and the impact of the recession on banking and finance, where high ICT spending on mission critical systems has been reduced, may have increased the relative importance, (and market power) of government. OGC should be sensitive and ensure that contracts are not abusive given this increase in the level of government market power and impact on the economy.  The OFT has issued basic guidance recently (Government in markets) and OCA is interested in how OGC will take this forward with government departments. (e.g. How do government departments assess their level of buyer power? How often does this exercise take place? What is done to avoid imposing abusive terms on suppliers?).

Top 5 Issues

 1.   Financial distress (credit status reduction)

`  This provides government with termination rights in circumstances where there has been no change in performance, or where the supplier may be facing administration or bankruptcy. The clause appears contrary to overriding government policy of supporting industry where there is no issue of contractual or failure of performance. It may also be questionable as an attempt to defeat creditors generally and an abuse of process. (See above).

 2.   “Time of the essence” clause

`  This should only be imposed when speed of delivery or hitting a deadline is really an issue and it is agreed with the supplier. Where time is not critical to customer requirements it should not be defined as being ‘of the essence’ and any blanket definition is inevitably disproportionate.

3.   Due diligence

`  ‘Deemed” due diligence will inevitably mean that suppliers have not been able to identify and manage risk. Failure of government as the client to provide detailed information in the first place and then to stand behind the information provided prevents recovery of genuine additional costs.

`  Time should be spent on full due diligence and government should gain the benefit from risks being known and managed on an agreed basis: some may need to be managed by government departments as key dependencies to supplier performance. Lack of information requires more careful thought; many risks come back to haunt government even though the issue is not the “fault” of government. The attitude should be that due diligence makes a difference to effective operational performance and making the service or supply work, rather than identifying who is to blame should be the approach.

`  In an environment where suppliers have very little cash they may agree to almost anything, including taking a risk on the extent of due diligence, but this does not necessarily result in a successful project.

4.   Technology neutrality

`  With the shift to software as a service and cloud computing there is an increasing issue of technology lock-in to legacy systems and interoperability with existing platforms.

`  Customers want choice at all levels of the technology stack: where there is no choice the lack of competitive constraint may lead to higher prices and lower quality (we understand the US Department of Justice is looking into this issue).

`  Companies need to protect their intellectual property. This has in some cases led to the perception that “Free” software is the best available. Governments have found it attractive to use Open Source software; and have ignored the technology lock-in issue: layers of software patches and lack of any asset registers add to the levels of complexity and mean that government does not update to newer, cheaper and better alternatives. The hidden costs of open source may be substantial. What a technology department may decide to do in the short term, by tailoring open source software may lead to longer term difficulty in identifying the intellectual property rights, and reduce flexibility. Government is a long-term business and should think over the longer term.

`  This is on the EU agenda and should also be on the UK’s.

`  We want the OGC to consider this issue: when it comes to specification the tender documents should be technologically neutral and avoid specifying the technology in terms of today’s products. Output specifications should be preferred.

5.   Limitation of liability

`  There is still a tendency to use indemnities inappropriately in place of normal contractual commitments. 

`  Unlimited liability has also increasingly crept into contracts, again introduced by contracting lawyers.

`  Perhaps what is needed is educating the lawyers to realize that what they are doing is unreasonably increasing the supplier’s contract risks, harming the ability for a supplier to deliver to contract and harming the wider economy rather than improving things.

`  The counter argument is often raised “if you do not like it you do not have to sign the contract”. In the current climate people will sign the contracts with their eyes only on the next quarter; government should care about risks and deliverability over the contract life and the effects on the wider economy.

`  It is impossible to obtain insurance without a significant increase in premiums: so increasing the level of liability is abusive and unrelated to performance: incentives to increased performance are such things as gain sharing, not liability: English contract law is defined in terms of avoiding windfall gains and losses and the duties to mitigate, and avoidance of penalty provisions, are there to help secure the performance of a bargain.

`  Unlimited liability increases the cost and risk to new entrants because existing suppliers know what the risk is and are in a better position to assess the risk (RAND Report). This is a problem outside the UK in government contracting; can we take the point together?

`  Benchmarking may be a more principled basis for identifying reasonable terms and conditions when a department has a strong buying position/market power: this however needs to be done on a systematic open and transparent basis looking at competitive markets. OCA / IACCM may be able to help in this regard. 

The Open Computing Alliance

5th November 2009, London

Download the full report here