Contractual aspects of Project Management Tuesday 30 st

Contractual aspects of Project Management Tuesday, 30 st October 2007 Faculty Club - Leuven

Program • 18: 00 Registration & Welcome of attendees • 18: 45 Introduction of PMI Chapter by Stephan Vandevoorde, PMI Belgium Rewarding the sponsor of the evening • 19: 00 1 st Speaker: Johan Vandendriessche – De Wolf & Partners “Contractual aspects of project management: legal pitfalls throughout the life of a contract” • 19: 35 Questions & Answers session • 19: 45 2 nd Speaker: Jean-Paul Triaille – De Wolf & Partners “Specific issues of IT-related projects” • 20: 30 Questions & Answers session • 20: 50 5’ Wrap up by Anja Vandenbergh, PMI Belgium • 21: 00 Reception & Networking session

R. C. F. Update Research Collaboration Fund Awarded to Prof. Dr. Vanhoucke Mario 3

R. C. F. Update Fund partly used to have additional computer power Research is well under way Results will be published by mean of 7 papers will be published in “The Measurable News” edition 2008 a quarterly publication of PMI CPM papers will be posted onto the PMI Belgium website 4

R. C. F. Update TRACK 1: Research Results Paper 1: submitted “Measuring the forecasting accuracy of earned schedule predictors” Paper 2: drafted “Earned schedule forecasting accuracy and activity criticality” Paper 3: drafted “Forecasting a project’s duration under various topological structures” Paper 4: in progress “A Schedule Performance Index stability study” 5

R. C. F. Update TRACK 2: Future Research Paper 5: “Measuring schedule adherence” Paper 6: “Measuring time: a project duration forecasting accuracy study” Paper 7: “Pro. Track: Project Tracking with earned schedule” 6

Contractual aspects of project management Legal pitfalls throughout the life of a contract

Overview 1. Introduction: contractual aspects of project management 2. Pre-contractual phase • • • (Private sector) tendering NDA (pro forma) LOI / Authorization letter 3. Contractual phase: • • Nature of obligations / liability issues Evolution of agreements in function of projects / business decisions 4. Post-contractual phase: hidden obligations

1. Introduction • PMBOK (Project Procurement Management Overview) – Plan Purchases and Acquisitions – Plan Contracting – Request Seller Responses – Select sellers – Contract administration – Contract Closure

1. Introduction • Make/buy analysis – Contractual issues generally implies “buy” decision has been made – Buy decision imposes insourcing • Ad hoc basis – Individual agreements for specific contracts / large projects • Structured basis – Standard agreements for “standard procurement” – Formalized “tendering”

2. Pre-contractual phase • Negotiation of contracts is subject to obligations (conduct of parties) and restrictions – “Good faith conduct” obligation – Information obligation • Sanction: pre-contractual liability (“culpa in contrahendo”) – Untimely rupture of negotations – Creating expectations that are not delivered • Difficult to assess impact and consequences

2. Pre-contractual phase • Solution: formalize negotiations in a contractual framework – RFP/RFQ – LOI/Mo. U – Authorization Letter • Practical advantage for project manager – Manageability of procurement process – May put “commercial pressure” on provider

2. Pre-contractual phase: RFP • RFP/RFQ – Techical aspects • Project description (requirements / solutions) – Legal aspects • • Confidentiality Non-binding nature (unilateral!) Disclaimer Model agreement (optional) – Procedural aspects • Description of selection procedure / time-lines – Do NOT refer to public sector legislation (unless public sectorà – Do NOT make it too strict (not complying may lead to liability) • Shortlist / Ba. FO

2. Pre-contractual phase • Letter of Intent (LOI) / Memorandum of Understanding (Mo. U) • Content – Preamble – Purpose of the LOI / intention of the parties – Binding / non-binding nature (? ) – Subject matter of main agreement – Commencement and termination date – Confidentiality and non-disclosure

2. Pre-contractual phase • Specific case: consortium of companies participating in a tender – “Teaming agreement” / “Consortium agreement” = specific LOI – Lead contractor / Subcontractor • Determine engagement of subcontractors (B 2 B) • Determine respective obligations • Project-related exclusivity

2. Pre-contractual phase • Specific case: time-lines require performance of agreement prior to the conclusion thereof – “Authorization Letter” / “Letter to Proceed” = special LOI – Risk: impact on ongoing negotations • “Point of no return”

3. Contractual phase • Nature of obligations? – Obligations of means (middelenverbintenis / obligation de moyen) • Reasonable efforts to achieve a certain result • Result is not guaranteed – Not obtaining a result is not per se a breach of contract – Burden of proof (!) • Obligations can be reinforced: “best effort”, “effort of a top-tier service provider”, “best efforts in accordance with high industry standards”, description of parties in preamble (!)

2. Contractual phase • Nature of obligations? – Obligation to obtain a result (resultaatsverbintenis / obligation de résultat) • Result is guaranteed • No result: breach of contract, unless “force majeure” (verify definition of force majeure!) • Burden of evidence (!) • Qualification of obligations can be changed by interpretation clauses (!)

3. Contractual phase • Example: “The Parties acknowledge that their respective obligations shall be, depending on their nature, obligations of mean (“middelenverbintenissen” / “obligations de moyen”) or obligations to obtain a result (“resultaatsverbintenissen” / “obligations de résultat”). However, the Parties explicitly agree that any obligation (i) whose performance can be measured in an objective manner or (ii) which is sanctioned by a service level or a mechanism of liquidated damages or another compensation mechanism, shall be considered an obligation to obtain a result (“resultaatsverbintenis” / “obligation de résultat”).

3. Contractual phase • Specific problems for long-term and/or complex projects / agreements – Agreements are considered as “private laws” (article 1134 Civil Code) – Change of agreement requires (in principle) mutual consent • May be difficult to obtain • May be inflexible / formalistic • May be unpredictable

3. Contractual phase • Potential problems and solutions – Evolution of price • • Indexation clause Hardship / price revision clause Benchmarking (price & quality) “Most favoured customer” clause – Quality (pro forma) • Audit • Service Levels – Content • Change request clause – Dispute resolution • Contract management and escalation

3. Contractual phase • Evolution of price (generally upwards) – Indexation • In principle not allowed (exceptions exist) • Limitation to 80% of real cost increase (limited “indexation”) • Price increases are allowed (e. g. annual increase of 3%) – Hardship clause • Fluctuate price (or other modalities) in function of changing market / technical or other conditions

3. Contractual phase • Evolution of price (generally downwards) – Benchmarking • Correction mechanism to ensure “market compliance” • Pay attention to criteria to avoid/ensure inapplication or limitation – “Most favoured customer” clause • Price equivalent of lower to best price offered to other (comparable) customer • Dangerous mechanism (management / potential for downward spiral in case of several customers)

3. Contractual phase • Change of content of an agreement – In principle: mutual agreement – Modalise negotations by a change request clause • Who can request a change? Which information must be included? • What must be the reaction of the receiving party (e. g. service provider must give opinion on feasibility and pricing impact) • Deadlines? Good faith negotiations?

3. Contractual phase • Contract management – Large project: contract management by means of a project manager (daily operations) and contract management committee (fundamental issues) – Smaller projects: project manager or contract manager for informal contacts

3. Contractual phase • Conflict management – Disputes (litigation) are time-consuming and costly – Avoid / manage conflicts where possible – Escalation clause • Dispute notification between project managers • Escalation to contract management committee • Escalation to management – Provide sufficient time to resolve conflict, but avoid lock-in • Validity has been upheld in court (!)

4. Post-contractual phase • PMBOK: “Contract Closure” – Termination of contract ≠ end of all contractual obligations • • Confidentiality Non-competition Non-solicitation Intellectual Property Rights (indemnification) – Ensure proper follow-up as part of “contract closure”

Some specific issues of IT-related projects Jean-Paul Triaille De Wolf & Partners, Osborne Clarke Alliance Lecturer, FUNDP

Specific aspects of IT- contracts/projects? – Examples of “IT projects”: • • Software development agreement IT-outsourcing agreement Webhosting agreement Etc. – IT is a part of almost every project – For the most part: general contract law principles – But sometimes highly technical aspects related to IT itself: • Insert definitions, preamble, technical annexes • Important role for the project manager • Dialogue between legal adviser, IT people and project manager is key factor to success – And some issues are “typically important”

Some important provisions in IT-contracts: – Clauses on intellectual property rights: • to ensure ownership – Service Level Agreement: • to ensure quality – Audit clauses: • to ensure compliance – Benchmarking clauses: • to ensure competitiveness – Reversibility clauses • To ensure independance

Clauses on “IP rights” (intellectual property”) – to ensure ownership of project – Importance of IP rights (yet often poorly managed) – Copyright, patents, database rights (also : trade secrets, trademarks, domain names, etc. ) – Highly regulated sector – Sometimes heavy formalism (registrations, notifications, etc. ) – Forget about your “common sense”. . . and involve your legal adviser

Clauses on “IP rights”: distinguish “Make” or “Buy”: • Make (internally): – Copyright on works of employees: • No transfer of ownership to the company, except for software and databases – Patent rights on works of employees: • Some uncertainty as to ownership – IP rights on works by consultants: • No transfer of copyright to the company, even for software and databases • At least if agreement is with a natural person (rather than with a company) : be careful ! • Uncertainty as to patent rights – Conclusion: • insert specific provisions in employment agreements and agreements with consultants • make sure these provisions are compliant with law – How important is this, really? – Not many disputes in court – But very relevant in case of acquisition/divestiture : audit and “due diligence” by candidate buyer – Use of existing open source software ? Be aware of the consequences. . .

Clauses on “IP rights”: distinguish “Make” or “Buy”: • Buy (external solution): – To acquire the rights (on custom solution) ? • No automatic transfer of IP rights on works commissioned • Acquiring rights will be more expensive than obtaining a licence – To obtain a licence? (not “make/buy”, but “rent”) • Make sure the license is flexible enough: – who will use the software? Where? By affiliate entities also ? – Licence to use only ? to adapt also ? • Beware of future audits (bad surprises may be expected. . . ) • Think about a right of access to the source codes – Alternative to acquisition/licence: • Obtain a licence, with a temporary exclusivity (no similar development for a competitor) • Grant a commercialisation licence, for specific sectors only – Conclusion: • Important issue, with influence on the future of the project (independance vis-à-vis the provider) • Make sure you understand the consequences of the choices made

Clauses on Service Level Agreement (SLA) - to ensure quality of project/service – “agreement in the agreement” to determine the quality level of a service in a measurable manner and imposing a mechanism of positive or negative evaluation (service credits) – “Service credits” if Level is not reached • Price correction mechanism: – Automatic ? – Immediate ? – With a cap ? (usually 10 to 15 %) • Sometimes coupled with bonus • Attention: often linked to liability – Often amounts to a limitation (cap) of liabilty – To avoid this : preserve your rights to claim other damages if penalties are not sufficient

• Functioning of an SLA – Service provider must provide information to client (calculation of parameters) • Regular reporting by provider detailing results on KPI (key performance indicators) • Client may request underlying measurement data (may avoid the need of audit) – Pay attention to parameters • • Measurement period (sometimes missing) Criteria of service level measurement: measurable Description of service levels: objective “ITIL” may help : common glossary – Again, important role for project manager

Audit clauses – to ensure compliance – Audit by client (SLA) or by provider (licence) – Audit clause, or “guided tour” ? • • • Advance notification ? How often ? (keep it reasonable) At which party’s costs? For which purposes? (regulatory compliance, contract compliance) Access to which documents? (only the relevant ones) – Right to third party assistance • Ensure confidentiality (via signature of NDA by auditor) • Ensure impartiality (no competitor) – Consequences: • Penalties? • Right to terminate (if breach is substantive)? • Rediscuss terms of agreement?

Benchmarking clauses – to ensure competitiveness – Ensuring that prices and quality levels remain conform to market conditions, by granting “benchmarking right” to client – Imperative in long-term agreements / complex agreements with unclear parameters – Reputable third party with experience in market comparisons

• Benchmarking mechanism – Detailed rules on procedure • Who chooses benchmarker? Right to refuse ? • Costs of benchmarking? • Benchmarking group? How many ? Where (off-shore)? Which capabilities ? Duration of agreement ? • Benchmarking scope ? Each element, or the whole “package”? Investments made ? • Objectives ? Comparison of prices and/or of quality ? • Tolerance margin : e. g. 5 to 15 % higher • Form of report by benchmarker (with conclusions) – Consequences of benchmarking? Difficult issue. . . • Automatic adaptation? Retroactive ? • Rediscussion? • Right to terminate earlier? Who has the right ? – Attention: too high threshold(s) may lead to lock-in

Reversibility clauses – to ensure independance – What is at stake ? In-sourcing, transition to other provider – Sometimes compulsory (outsourcing in banking and insurance sectors) – How do you ensure “reversibility”? • • • Good documentation by supplier (of processes, means, . . . ) Access to documentation (incl. at the end of agreement) Good understanding of processes of supplier Provisions on “swift transition” Cooperation obligation in case of transition Continuous application of SLA during transition Ownership of IP rights on solution (or compulsory licence) Detailed transition plan (negotiated in advance) (Re)transfer of personnel Payment of services at the end of transition period only – Question : who pays ?

Final remarks – The objective of these presentations: to improve your “good reflex reactions” – The objective of “your agreement”: to live with the project – Have your own “check-list”/priority list – Importance of the project managers and other “non-lawyers” in the negotiation and drafting process – Cooperate with the legal advisers (as early as possible in the process) – Make sure you read/understand every clause of the draft agreement – But require in return that your legal advisers understand what you want and write with understandable terms (“plain English”). . .

Thank you for your attention ! Jean-Paul Triaille Partner De Wolf & Partners Osborne Clarke Alliance Brussels jean-paul. triaille@dewolf-law. be www. dewolf-law. be www. ocalliance. com www. businessandlaw. be

5’ Wrap Up • OPEN PMI Chapter Meeting Theme: Backstage @ Broadway Attendees: 300 - Invite your colleagues Place: De Montil in Affligem Date: Thursday 29 th November 2007 Award: Project Manager Year 2007 Network: Training sponsors of PMI Belgium Connection: Project Management in a just-in time world Event: for you only

Another 5’ Wrap Up • Election Board 2008 -2009 Flight: Take a seat as board member candidate on Bo. D 0809 Timeline: now – 151107 0: 00 Passengers: All candidates on Bo. D 0809 Voting: 171107 0: 00 – 301107 0: 00 Results: 051207 Take Off: Official start of Bo. D 0809

The Bo. D 0809 taking off. . .

To discuss about new projects, new ideas. . .

To present these on the PMI New Years Reception