Published here December 2004.


Musings Index

A Question on Real-Life Contract Closure

The following exchange will be of interest to anyone involved in new information technology project work under contract.

Barbara White asks Dr. Davidson Frame:

After 33 long months of effort, we are now using the new patient care system for medication management on all inpatient care units and it is time to close the contract with the vendor. However, a situation has been raised by one of our stakeholders and on which I would like your advice. The issues and my question are as follows.

  • The contract states all the functions & features that should be delivered. These are contained in the Request for Proposal, the contract and the Statement of Work.
  • The contract states that successful completion on the part of the vendor is that the technology is being used on [at least] one patient care unit.
  • The vendor has billed, and we have paid the full price to the vendor as the contract states.
  • Our contracting department has issued a certificate of completion and a contract completion notice, but unfortunately did not contact the project manager before doing so.
  • However, not all the functions and features are actually present. Most are not significant but one is.
  • The contract described this function in general terms, but not precisely what that feature is and it is understood in the professional literature that the feature should be there. Also, other vendors are now placing that feature in their competitive products.

Based on the text in your recent book in the chapter on contract closure, there are more steps to contract closure than just paying for the product. So should I advise my executives to contact our Purchasing/Contract office to alert them that:

  • We are requesting the features be done as soon as possible and that the vendor is complying.
  • The vendor is working on fixing the features. They have not closed the contract at their end. We have new technology in the industry and they know we are in collaboration to make this a model for success for all parties. We are very important to their success and a reference site for prospective clients soon.
  • The vendor has not done the lessons learned, sent final invoices, etc.

Dr. Frame, do you have any recommendations for me? Any recommendations will be gratefully accepted.


Dr. Frame Replies

It is not unusual at the end of contracts to determine whether the contractor has really met the terms and conditions of the contract. I'm not sure that I fully follow how payment terms were established. If multiple items are supposed to be delivered, it is unusual to pay in full upon delivery of the first item.

In contracting, I am not a hard-ball player. I know that multiple interpretations on whether the terms and conditions have been met is a common occurrence, so I am prepared to take a win-win approach with the contractor to resolve things so that both parties are happy.

I presume that your contractor is a quality vendor that wants to maintain a good reputation and wants to continue working with your organization. If that is the case, you should be able to work things out smoothly. If your contractor is a recalcitrant sleaze-ball, then you've got troubles and need to take a tough position.

In general, when writing a contract you need to specify explicitly the conditions for acceptance of a deliverable. Many organizations carry out a CAT (customer acceptance test) as the last step before accepting a deliverable. At a minimum, the contract should state that acceptance will occur after a review of the contracted effort and its deliverable by an authority from the purchasing office.

Certainly, your organization should talk to the contractor to see how you will work things out. I think the initiative should come from your purchasing folks, with backup from you. At this point, the purchasing folks control the purse strings. Also, they have what I call "bureaucratic" authority -- if purchasing procedures are not followed (either by the contractor or by your fellow employees), payments cannot be made. They may explain to the contractor that the user is not authorized to accept the deliverable on his/her own, and that purchasing needs to do a quick review of the purchasing process to make sure everything is kosher -- this includes a technical review of the deliverable, as well as an examination of the degree to which terms and conditions have been met.

In working on making final adjustments to the deliverable, firm delivery dates should be established. I am not sure what the disposition of payments is -- you say that the stakeholder made total payments, but you also state that the purchasing folks need to issue a Certificate of Completion. Certainly, you have to figure out this issue. If full payment has not been made, a portion of the payment should be withheld (20%? -- should be large enough to give the contractor incentive to make finishing the work a top priority), but I would not withhold all payments because it sounds as if the contractor has acted in good faith.

Hopefully, everything can be worked out in a friendly way. Other considerations that might affect the outcome include:

  • If adding the desired feature has design impacts and entails a lot more work, the question of who is going to pay for the feature needs to be resolved.
  • If this is a fixed price contract (with progress payments along the way), any additional work done by the contractor will reduce their profit -- you can see that this is not a happy prospect.
  • If it is a cost reimbursable contract, and the additional work is determined to be new work, then your organization may need to reconcile itself to paying for extra work. If it is a cost reimbursable contract and the contractor simply has not done all he/she was supposed to do, you can make a good case that he/she has underperformed and needs to make up the deficiency on his/her own nickel.

Dr. Frame Lessons Learned

It is important that the original contract is clear on what should be delivered, when it should be delivered, and what tests of acceptable performance will be carried out. If there is vagueness in the contract, then the kinds of issues you are now facing are bound to arise.

Payments should not be made for work until a full customer acceptance review, as well as contract terms-and-conditions review have been carried out. Once the contractor has received payment, the buyer's leverage is gone. Also, the making of payments can be viewed as prima facie evidence of the customers acceptance of the deliverable.

For the most part, my suggestions are based on common sense. I hope they help.

David Frame

Max Adds His Two Cents

In general I agree with David. In the last analysis, the questions are:

  1. What is the basis of payment to the vendor for the work in the contract?
  2. What does the contract actually say about the required work, and payment therefore?
  3. Has your organization complied exactly with those terms and that there is no fault on your side?
  4. What is the value of maintaining good relationships with the vendor?

Depending on the answers, as David says, the best approach is still to sit down with the vendor and arrive at a just solution for any "outstanding" work and for your organization to decide whether to pursue any "additional" work.

Meantime, don't forget to check whether the contract includes a warranty and support period for bug-fixing. It does include this doesn't it?



Barbara White R.Ph. FASHP is a pharmacist with a B.S. in Pharmacy from University of Kansas and a Fellow of the American Society of Health-System Pharmacists. As Business Technology Analyst at Missouri Rehabilitation Center, Barbara is the project leader of a hospital-wide medication use redesign project that will use the latest wireless, barcode technology. Prior to her present appointment, she was a clinical consultant with Shared Medical Systems consulting in both home health and hospital settings in the US and Canada. Barbara can be contacted at: She is author of the Guest article: Can A Project Manager be a Servant Leader? A Reflective Critique

Dr. Davidson Frame PhD is Academic Dean at the University of Management and Technology. His latest book is Managing Risk in Organizations (San Francisco: Jossey-Bass, 2003) He served as PMI's Director of Certification from 1990 through 1996, and as PMI's Director of Educational Services from 1997 to 1998. He served a three year term as a member of PMI's international Board of Directors, from 2000 through 2002.

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