By Garry Hojan, fractional CEO
This question is so important when dealing with a high-liability, highly regulated industry like aerospace.
The requirements generally start with a deliverable in a purchase order.
The purchase order will likely reference terms and conditions. I recommend reviewing them carefully and not dismissing those terms; more on that later. The document will also line item the deliverables.
The standard requirements will be the terms and conditions. However, I’ve received purchase orders that only called out applicable and specific clauses within the terms and conditions; others may reference them in their entirety. I don’t recall ever receiving a purchase order that did not have this reference.
Then, there is the technical documentation that usually accompanies a purchase order. This can be drawings, standards, working documents, etc.
Generally speaking, there will be language that states that anything you supply must meet all the customer’s requirements. This is usually referred to as “flow-down” requirements.
Some examples of this can be quality control, first article inspections, traceability, documentation, shipping, retention of documents and even parts, and systems and objective evidence of these items. Ask for any reference documents or standards called out within drawings and terms. Be sure to review those to avoid not meeting additional requirements contained therein.
You will also usually be required to notify the customer of any issues you become aware of that could affect the quality and safety requirements, not only while working on the purchase order but anytime afterward as well.
As an example of the notification requirements, say you get a letter from your material supplier that says they just discovered an issue with a particular heat of metal from three years ago. You will need to be able to trace that to any parts you may have made and then notify the customers affected. This is also usually done per your customers’ quality system procedures, which are in alignment with Title 14, FAA requirements, and, yes, the flow-down requirements you agreed to.
Now, let’s look at those terms and conditions and non-technical requirements.
Years ago, I hired the highest-powered and largest legal firm I could find in preparation for taking an aerospace company global. While dealing with some contract negotiations, I’ll never forget what one of the attorneys said: “Garry, you are about the only CEO we’ve ever dealt with that understands this stuff. Most executives just see dollar signs and sign the contracts, and we see them after there are contract issues.” Although humbling, I was shocked and dismayed to hear this, and here’s why…
The company I/we were building received a lucrative project purchase order from an aerospace stalwart. I was given the contract and terms to review. Their standard terms essentially stated that their engineering team would design it, we would build it, and if something went wrong in the field because of their design, we were liable for it.
Crazy, right? Yes, I thought so, too. I redlined that out of the contract and sent it back. They accepted, and we accepted the amended terms and purchase order. But if I didn’t read it, see it, and redline it, guess what? Our company just agreed to it, which could potentially put our company out of business if it went wrong.
More recently, a client asked me to review a project contract from a foreign government entity before sending it to their attorney.
It’s incredible what was in the contract on a multi-million-dollar project. A large percentage of earnest money by the supplier would be due upfront to have a contract awarded, with no guarantee of final payment and lots of “outs” for the government, which was open-ended without reason. There were repercussions and financial penalties to the supplier solely based on the government’s discretion of performance without clarity on what that meant. No payment or guarantee of any kind until the government was satisfied (again, no qualification on what “satisfied” meant). The terms were 180 days after satisfaction and the project closing, if they choose or not. Let’s not forget the guarantees in perpetuity.
Yes, that’s a big no. Rewritten and returned for counter review.
The point is to read everything and be familiar with what you are saying yes to. It’s never just that part or service.
Attorneys are hired to write these terms, conditions, and contracts. Their job is to protect their client. They do this by transferring pretty much all of the liability to you, their supplier. They are banking on you just agreeing to the purchase order. The bigger the company, the more they can and do do this.
By understating everything you agree to, you’ll never compromise your company for the dollars at stake. Something that’s simply not worth it.
Need help on how to review contracts? Let’s chat
Never any sales pressure, a no charge initial consult, and a simple guarantee…I provide higher value over cost, or you don’t pay.
You can email me at ghojan@jhaero.com or call my cell at 208-627-2565.
