As a FM professional, you will almost certainly be involved in contracting procedures on a routine basis. But exactly what is contracting?  The need for contracts comes from facility or project requirements that cannot be met with full-time staff. From individual project contracts to ongoing service agreements, knowing what exactly is expected of you when it comes to contracting will be key to successful financial management. Let’s start with the basics.

What is Contracting?

According to Merriam-Webster, a contract is a binding agreement between two or more persons or parties that is legally binding; a business arrangement for the supply of goods or services.[1] It is important to understand that for a contract to be legally binding, it must be made by parties with the required capacity, meaning they are of legal age and are mentally sound.

The contract must also be lawful, meaning a contract to commit a crime is not legally binding. The contract must be mutually agreed to and there must be consideration. Consideration is an exchange of something of value for something else of value (cash for services). There must also be some avenue for parties to remedy a breach of contract and the contract must be agreed to (usually by signatures in a formal contract) by all parties. Finally, contracts can be written or oral, but you must be able to prove they exist to enforce them.

Contract Differences

  • Express vs Implied – express contracts specifically state (either orally or written) the terms under the agreement. Implied contracts are inferred from circumstances and through facts surrounding the case and by the actions of the parties to the contract.
  • Bilateral vs Unilateral – bilateral contracts are agreed upon by both parties. This comes from an exchange of promises that are mutually agreed to. Unilateral contracts, on the other hand, involve a promise from only one party. You’re probably familiar with bilateral contracts, but an example of a unilateral contract is a reward poster where one party promises to pay a set amount of money for the performance by another party (such as turning in a criminal or returning a lost dog).
  • Prescriptive vs Performance – prescriptive contracts detail all specifications that must be completed under the agreement. Conversely, performance-based contracts detail the results desired under the agreement, but leave flexibility to the service provider on how they achieve those results.

Things to Remember

  • Watch what you say – even after you sign a contract, you can alter it with the words you use. If you tell a contractor that you would like to have a certain change to the contract and he construes that to mean you authorized the change, that could be a legally binding change order. This is true regardless of what you actually meant.
  • There is fraud in contracting – be aware that contractors who bid on projects might not always be upfront and honest in their bidding. Bid rigging is when contractors get together to agree who will submit the lowest bid and everyone else submits higher bids. This effectively guarantees that one particular contractor will be awarded the project. Price fixing is when contractors agree to all have set prices, which reduces competition and violates antitrust laws.
  • Check your specifications and plans – do this in detail because you can be sure the contractor will. I have seen contractors find omissions in specifications, but not questions them during the bidding process. Then, they intentionally submit a low bid, knowing that change orders will have to be issued that they can make more profit on. Make sure your plans and specs are correct.

Wrapping it Up

Contracting is a valuable tool to use in order to accomplish your goals when you need outside help or expertise.  These basics form a general understanding necessary to look deeper into how to contract for goods and services, which we will get into in future posts.

Thanks so much for reading.  As always, if you have any questions please feel free to email me at dan@learningfm.com.

[1] “Definition of CONTRACT.” Merriam-Webster. 2017. Accessed March 24, 2017. https://www.merriam-webster.com/dictionary/contract.

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