HKSM

Agreements are legally binding documents between a buyer and a seller that describe scope, responsibilities, commercial terms, and conditions for delivering goods or services. They establish the baseline for performance, risk sharing, change control, payments, and remedies.

Key Points

• Agreements are binding contracts that formalize the buyer-seller relationship and obligations.
• They define scope or statement of work, deliverables, acceptance criteria, schedule, and pricing.
• Contract type selection influences how cost, profit, and risk are allocated between parties.
• Clauses for change control, claims, dispute resolution, and termination govern how issues are handled.
• The project manager monitors supplier performance against the agreement with support from procurement and legal.
• Clear, measurable language reduces ambiguity, rework, and the likelihood of disputes.

Purpose

Agreements set enforceable expectations for what will be delivered, when, and at what cost, while allocating risks and defining how changes and disputes are managed.

• Translate business and project needs into enforceable commitments.
• Provide a baseline for technical, schedule, cost, and quality performance.
• Allocate risks and responsibilities to the party best able to manage them.
• Enable fair payment, acceptance, and closeout processes.
• Support governance, compliance, and auditability.

Key Terms & Clauses

• Scope or Statement of Work: defines deliverables, boundaries, and acceptance criteria.
• Contract Type: fixed-price, cost-reimbursable, or time-and-materials, with any incentives.
• Pricing and Payment: rates, milestones, retainage, taxes, currency, and invoicing rules.
• Schedule and Milestones: delivery dates, lead times, and liquidated damages if applicable.
• Quality and Service Levels: standards, SLAs, KPIs, and measurement methods.
• Change Control: process to propose, evaluate, approve, and implement changes.
• Acceptance and Inspection: test methods, documentation, and sign-off procedures.
• Warranties and Remedies: defect correction, response times, and credit or rework terms.
• Risk, Liability, and Indemnity: caps, exclusions, and responsibility for third-party claims.
• Confidentiality and Intellectual Property: ownership, license rights, and data protection.
• Compliance and Security: regulatory, safety, ethics, and information security requirements.
• Insurance and Bonds: coverage types, limits, and proof requirements.
• Termination: for cause, for convenience, notice periods, and cure rights.
• Governing Law and Dispute Resolution: jurisdiction, escalation, mediation, or arbitration.

How to Develop/Evaluate

• Confirm make-or-buy decisions and define high-level procurement strategy and contract type.
• Gather detailed requirements and convert them into a clear, testable statement of work and acceptance criteria.
• Select a contract type that aligns with market conditions and desired risk allocation.
• Draft commercial and legal terms with procurement and legal counsel to ensure enforceability.
• Define measurable service levels, KPIs, and reporting requirements.
• Include a change control process, dispute resolution path, and termination options.
• Develop source selection criteria and evaluate vendor proposals objectively.
• Negotiate scope, price, schedule, incentives, and risk-sharing to reach a balanced agreement.
• Baseline the final agreement, obtain signatures, and store it in a controlled repository.
• Communicate the agreement to the project team and align it with the procurement management plan.

How to Use

• Guide supplier onboarding, kickoff, and expectations using the agreement and SoW.
• Monitor performance against SLAs, milestones, and quality criteria; document results.
• Process scope or schedule changes through the agreement's change control mechanism.
• Validate invoices against contract terms, rates, milestones, and deliverable acceptance.
• Manage risks, issues, and claims using agreed escalation and dispute resolution paths.
• Maintain records of communications, notices, and approvals to support audit and claims.
• Close the agreement by verifying deliverables, resolving open items, releasing retainage, and archiving.

Example Snippet

Illustrative excerpt from a simple services agreement:

• Scope: Supplier will deliver the listed deliverables in Appendix A per the acceptance criteria in Appendix B.
• Schedule: Milestones M1, M2, and M3 will be completed by the dates in Appendix C.
• Pricing and Payment: Time-and-materials at agreed rates in Appendix D; invoices monthly with 10 percent retainage.
• Change Control: No changes are valid unless approved in writing via a change order signed by both parties.
• Acceptance: Buyer has five business days to review each deliverable; acceptance occurs on written approval or upon cure of documented defects.
• Warranties: Supplier warrants services will conform to the SoW for 90 days after acceptance.
• Termination: Either party may terminate for convenience with 30 days written notice.
• Dispute Resolution: Escalate to executives, then mediation; New York law governs.

Risks & Tips

Risks:

• Ambiguous scope or acceptance criteria leading to change disputes and cost overruns.
• Misaligned contract type that shifts excessive risk to one party and harms performance.
• Missing or weak change control, allowing scope creep outside formal approvals.
• Unrealistic SLAs or penalties that incentivize the wrong behaviors.
• Gaps in IP, confidentiality, or data security exposing the organization to legal issues.
• Inadequate record-keeping that weakens the buyer's position in claims.

Tips:

• Use precise, measurable language and link each deliverable to acceptance tests.
• Choose contract type based on risk, market maturity, and cost certainty needs.
• Include clear escalation paths, with time-bound responses for issues and claims.
• Align incentives to outcomes that matter, such as quality, schedule, and customer satisfaction.
• Maintain a contract change log, version control, and formal notice procedures.
• Engage procurement and legal early and throughout to ensure compliance and enforceability.

PMP Example Question

During execution, the supplier rejects a requested scope change, stating it is outside the original statement of work. What should the project manager do first?

1. Review the agreement's scope, acceptance, and change control clauses and follow the contract change process.
2. Approve the supplier's invoice for the extra work to maintain the relationship.
3. Issue a corrective action requiring the supplier to perform the change at no cost.
4. Initiate legal action for breach of contract.

Correct Answer: A — Review the agreement's scope, acceptance, and change control clauses and follow the contract change process.

Explanation: Changes must be handled using the agreement's defined change control process. Bypassing the contract or escalating prematurely can increase risk and cost.