INFORMATION TECHNOLOGY BRIEFLY         
December 1998 Issue No 4

BUYING I.T. SYSTEMS

This is the second of a two part article dealing with the process for tendering and contracting for IT systems. This part focuses on the contracting process. (See the November 1998 edition for the first part of this article.)

Negotiating - a valuable process

Negotiating the contract forces the parties to read and understand the contract provisions. This raises awareness, for both parties, of the exact obligations and expectations that each other has. If these matters are properly understood by the time the contract is executed, then they are unlikely to become issues of dispute later. Most disputes arise because the two parties have differing expectations or understandings.

Time

If timing is important, then the tender must clearly set out your required timeframes and the contract must oblige the successful tenderer to meet those timeframes. If a completion date is critical, then the contract can provide for liquidated damages for delay. But remember that the amount specified must be a genuine pre-estimate of likely loss to be suffered, and not simply a penalty (which is not enforceable).

The contract will often call for the preparation of an implementation plan by the contractor, to meet an overall timeframe specified by the client. In many cases, further input from the client will be required. Remember that the contractor will be excused from meeting a strict timeframe where it is delayed by the client not providing necessary input.

Warranties

The contract must include express warranties from the contractor relating not only to the quality of the product, and its ability to meet the specifications, but also in relation to the professionalism and effectiveness of services to be provided.

Copyright and Licences

Make sure that the contract covers these adequately. If the contractor is only a distributor, then you need to ensure that an appropriate licence is given direct by the owner of the product, or alternatively, a sub-licence from an authorised distributor.

Key Personnel

Often the client will have a high degree of confidence in particular individuals that it has dealt with in the tender process, and the contract will be secured on the strength of the experience and capability of key people. The contract should oblige the supplier to ensure that those particular people manage the project or work on it at the right level. Of course you cannot stop people moving on or changing their employment, but the contract should provide that substitute personnel must be equally qualified and experienced, and approved by the client.

Handover and Acceptance Testing

Testing the finished product, and being satisfied that it does actually meet the requirements of the specification and the contract, is critical. Detailed procedures and criteria for testing and accepting should be either specified in the contract, or developed by the parties during the course of the project.

The contract should make it clear that successful testing and acceptance does not release the contractor from its general and ongoing obligations in relation to the quality of the product and its ability to continue to meet the performance requirements of the project.

Payment

There needs to be a reasonable and fair balance struck in the program for payment. A typical arrangement might be:

• hardware is paid for by the client on delivery. A transfer of title clause should be included in the contract (so that the hardware becomes the client's property as soon as it is paid for);
  

• implementation services, and possibly the supply of software, is paid for periodically with payments linked to successful completion of identified milestones in the program;
  

• some fees for implementation and software would be held back, to be paid on successful testing and acceptance of the system. The greater the amount of this retention, the greater the incentive for the supplier to ensure that the project is successfully completed;
  

• in some cases, a further retention amount could be held back until the system has performed satisfactorily for an agreed period of time.
  

Training

Training is vitally important and the contract must set out clearly what the training requirements are. It must also make it clear that detailed training notes must be provided.

Limitation of Liability

Most "standard contracts" produced by the industry contain the following two provisions:

• a complete denial of all liability; and
  

• if that denial of liability is not effective law, then liability is limited to the amount paid under the contract (ie. the client can get a refund and nothing more).
  

There is great resistance by the industry to any change or relaxation of these provisions. But clients needs to be aware that if a critical project for their organisation turns out to be a disaster, then (if the contract contains these limitation of liability clauses), apart from obtaining a refund, the client will have no recourse for lost business or consequential loss, no matter how unprofessional or incompetent the contractor may have been.

Support and Maintenance

When awarding a contract for implementation of a system, you need to give consideration to the future support and maintenance of that system. There is no point in paying for a cheap implementation if it is going to cost an arm and a leg to support and maintain that system into the future. Here are some issues that need to be addressed:

• the supplier must be obliged to provide support for a lengthy period (many support contracts allow the supplier to terminate at any time). The client needs the security of knowing it can have support for the expected life of the product, but at the same time the client should be able to terminate on reasonable notice if it does not need the support any longer;
  

• applicable fees need to be agreed, including any methods by which fees can be reviewed/increased;
  

• the support agreement should be clear and detailed as to the nature and extent of the support services to be provided.
  

For further information please contact:
Steve Aitchison, Partner, on (61 8) 8210 1209 or email: saitchison@normans.com.au
Robert Chalmers, Senior Associate, on (61 8) 8210 1229 or email: rchalmers@normans.com.au

We wish you and your families all the best for Christmas and the New Year, and look forward to assisting you again in the near future.

The contents of this newsletter are for information only and should not be taken as advice on the law. This newsletter may be reproduced in whole or in part with the prior permission of Norman Waterhouse and acknowledgement of its source and copyright.