The scope of this guideline is to provide government entities with items for consideration in the preparation of information technology related contracts by providing the necessary management tools in the form of authorities and responsibilities, change management, invoking remedies, problem detection and resolutions and acceptance and validation of deliverables.
This guide is not intended to provide a complete contract format but identifies specific issues which should be addressed in the development of an information technology contractual agreement. The contracting entity's representative of the Office of the Attorney General should review all contracts.
Where once we looked to department procurement to develop the contracts based on traditional contract policy and procedure, this may no longer apply. Those resources may not have the technical knowledge and systems experience necessary to deal with information technology related contract issues. Time spent on developing and administering an IT related contract can be much greater than the time spent on a non-IT contract. The cost of time spent on the IT contract can be negligible in comparison to costs of a dispute on the contract requirements.
The potential impact of IT contract disputes on the State of North Dakota business processes requires more specific contracts involving IT and contract oversight by people who have a familiarity with technology issues. However, even the objectives of the best contract will not be achieved without adequate contract management. Contract management is a critical part of project management, which includes the overall monitoring of the project/contract deliverables. The active management of a contract ensures successful contract performance and achievement of the desired results.
These guidelines are to be used in conjunction with the manuals prepared by the North Dakota Office of the Attorney General and the OMB Risk Management Division:
The following are specific contract clauses which should be considered in the development of an IT contract. Each IT contract may be a unique contract in itself; however, each of the following needs to be evaluated for inclusion to ensure the full delivery of the contract on time, within the contracted cost and with a minimum of misunderstandings or disputes.
Agencies should think through their proposed contract relationship thoroughly, and specifically draft the relationship they want to exist. Agencies should use the Sample IT Service Contract template found on the ITD IT Procurement webpage. For contracts over $1 million that are required to follow Executive Order 2011-20, an agency shall use the sample contract as the basis for their contract and any changes to the template will need to be explained to and approved by the Executive Order Procurement Committee (EOPC).
An agency-generated contract using the Sample IT Service Contract template, while strongly recommended, is not always required. In some instances, such as license and maintenance agreements, a vendor's standard contract form may be used. Provisions of a vendor contract that do not comply with state requirements must be amended. These agreements are typically found as attachments to the standard template contract. Consult with your agency Attorney General counsel for review and recommended amendments to vendor contracts.
Roles and responsibilities of all parties of the contract should be clearly defined. Ensure that all aspects of the contract performance and delivery requirements are specifically identified and assigned to the proper parties. Information technology contracts may involve more than one vendor and several state personnel making it extremely important to identify and assign the contract responsibilities. Do not make assumptions. Clarify and incorporate all requirements in the contract.
All information technology contracts should include a clause requiring all products and services provided by the contract vendor comply with state information technology standards. These standards can be found on the ITD Standards and Guidelines webpage. Please note that the Security Standards are not publicly accessible outside of the state firewall, but may be provided to a contracted vendor upon request for purposes of fulfilling their contractual obligations.
What are the deliverables - products, services, and tasks - required of the contract vendor? When and how often shall management reports and work completion schedules be required?
The product(s) of the contract must be clearly identified as the contract deliverables and/or milestones. The deliverables provide the means and tools to determine the stages of the contract and contract status.
This section of the contract should, as completely as possible, explain the testing and acceptance procedures. Criteria establishing the process of accepting products or services and identifying the process to be used in the testing of the products and services is necessary to ensure the state of North Dakota is receiving what it is paying for. Identifying the specific procedures to be followed in the testing mode ensures uniform compliance with the intent and purpose of the contract.
Deliverable 2: Project Plan
Scope of Work / Description: CONTRACTOR will participate, contribute, and collaborate with the STATE, led by the STATE’s project manager, to develop a baseline Project Plan to begin within three (3) days after the parties sign the contract. The Project Plan is the single comprehensive plan for the project and is managed by the STATE project manager. Changes to any portions, including the CONTRACTOR’s schedule, must be approved via the change control process (item d below). The Project Plan also includes all components identified in the Acceptance Criteria below and the project management content referenced in the contract.
- In order for the acceptance of this deliverable to occur, CONTRACTOR will provide content to the STATE for the following sections of the Project Plan regarding all services, tasks, and products delivered by the CONTRACTOR:
- A mutually agreed upon detailed baseline scope and schedule for the project
- The management plans to control scope, schedule, cost and quality, including the variance
- The governance structure for the project
- An integrated change control process
- A process for accepting/approving deliverables including the signoff form to be used
- A human resource management plan
- A communication management plan
- A risk management plan
- An issue management plan
- A procurement management plan
- An implementation and transition plan
Because the CONTRACTOR is an integral part of this deliverable, this acceptance process relates to information the CONTRACTOR needs to deliver in order to meet the above criteria. Upon completion of Deliverable 2 , STATE will have 10 (ten) working days to determine whether or not the Project Plan conforms in all material aspects with the Acceptance Criteria (the “Acceptance Period”). Prior to the expiration of the Acceptance Testing Period, the STATE will provide CONTRACTOR with written notice that the Deliverable has either been accepted or has been rejected due to noncompliance with the Acceptance Criteria. If the STATE does not provide CONTRACTOR with written notice of acceptance or rejection prior to the expiration of the Acceptance Period, the Deliverable shall be deemed accepted. If the STATE provides the CONTRACTOR with written notice of rejection prior to the Acceptance Period, such notice shall specify in detail the conditions that prevented the Deliverable from meeting the Acceptance Criteria. Upon such rejection, STATE shall have the option of providing additional Correction Periods following the process described above or terminate the Contract without penalty or further financial obligation.
All work product, equipment, or materials created under the contract should normally be considered the property of the State of North Dakota. Upon completion of the contract all such product, equipment or material should be turned over to the state. However, each contract is unique and product ownership will need to be evaluated on a case-by-case basis. The making of the contract product may require the contractor to use a copyrighted product or the state may be purchasing a Commercial Off-The-Shelf (COTS) product. In such cases complete assignment of the product to the state may be difficult. All contracts should be reviewed with the Office of the Attorney General to determine and verify legal ownership of the contract product.
Contracts must be for a specifically stated term. Every contract must have a start date and completion date. It is not good business practice to have an open-ended contract with no deliverables and no completion date.
Normally government funds may not be committed beyond the current biennium. A contract may contain an option allowing the state to extend the contract for another biennium should funding be available. If funding is not available the contract should contain a clause allowing cancellation of the contract without penalty. The contract must also allow for termination, without penalty, should federal or state law changes prohibit the state from completing the contract. Also if contractor licensing or certification is not obtained or renewed as required under federal or state law, the contract should allow for termination without penalty.
See the Office of the Attorney General's Contract Drafting and Reviewing Manual for additional information.
What is to be paid? How much is to be paid? What must be provided to get paid? What is the timing of the payment?
Payments should be strictly contingent on the receipt of specific contract deliverables. A contract consisting of several payments should include a payment schedule identifying the specific deliverables and the documentation required when requesting payment. To minimize questions regarding payment, it is also suggested to include a statement regarding the processing time of such payment requests. Any claim for additional costs/services may be allowed only if approved as provided under the contract modification and amendment clause.
Advance Payment - There are times when contract payments may be made prior to the receipt of goods or services. This is not a good business practice and is strongly discouraged. When such payment arrangements are necessary, adequate safeguards still need to be included in the contract. In all cases, prior to signing such contracts, the state’s legal counsel should review them. When including advance payment clauses, it is extremely important such payment provisions be reviewed thoroughly to ensure all legal requirements regarding such payment conditions are included and to ensure such provision are allowable.
Open-ended or hourly contracts are also not a recommended business practice unless they contain a guaranteed maximum or a 'not to exceed' amount. (To ensure the successful completion of this type of contract requires stronger oversight procedures, which may include more frequent status reports.) Payments that cannot be readily calculated under an agreed contract payment structure may quickly lead to large unanticipated contract expense which may exceed the state’s budgetary limitations. The total contract cost should be identified in the contract, and in the event of an hourly payment clause, the agreed-upon hourly rates shall be listed.
The standard for Project Management for Large Information Technology Projects (STD009-05) requires a project management plan for all projects meeting the definition of a large project. This plan is to provide for the effective management of the project thereby assuring the successful completion of the project on time and within budget. As assurance to the successful completion of a contract, the state shall assign a primary project manager and the vendor shall assign a sub-project manager in all contracts associated with a large IT project. It is the state project manager's responsibility to monitor and control the contract, develop the project plan, monitor the project schedule and budget, manage project staffing, ensure that quality controls are in place, and manage associated risks. These responsibilities should be clearly outlined in the contract.
A contract should include a clause regarding the process for submitting and approving contract amendments. This section should identify to whom such amendments are to be submitted, the procedure for submitting the amendments, and the approval process.
Software to be provided by the contract, be it proprietary or public, should be identified in the contract or included as an attachment to the contract. The contract should also clearly state the scope of the state's right to use the software.
The contract vendor should also verify its status as a licensee of its supplier(s) of software and products furnished under the contract and that they are authorized to grant licenses or sublicenses for the use of such products.
The contract should clearly state the manner of maintenance/support to be provided by the vendor. The contract should identify the individual(s) to be contacted for service or repair of hardware and/or applications and the agreed upon acceptable response time. It should also identify the level of maintenance/support to be provided, and the billing structure for the services.
The notification process for the resolution of errors, deficiencies or defects, including the method of notification to the vendor, acceptable response time and state’s recourse if the vendor action does not correct the problem or it is not acceptable, must be described in the contract. (Ex: Notification of application errors shall be submitted in writing to the contract vendor project manager. The contract vendor will respond within 10 days with the recommended correction, at which time the contract vendor and the state will review the suggested change for approval.)
The contract vendor should warrant that all equipment, software and computer systems installed meet the contract specifications. Should such product(s) not perform as warranted, the contract should specify the vendor responsibility and state’s recourse. All expressed or implied warranties should be clearly stated in the contract. Depending on the nature of the contracted product, the period for which the product is to be warranted against defect must be stated in the contract or in an attachment.
The contract should describe the responsibilities of the contracting parties regarding the development of user manuals, technical services support manual for state staff as well as other system or application documentation.
The contract vendor should provide all hardware systems documentation providing information as to the nature and specification of all hardware required by the contract.
All training needs should be described in the contract. The nature and extent of training, the location of training, the training timeframe and the cost of training to be provided by the contract vendor or subcontractor.
The State of North Dakota and its employees are to be held harmless on third party claims based on the vicarious liability of the State. For IT contracts involving intellectual property, there should also be an indemnification provision protecting the State against claims for intellectual property infringement. A sample indemnification provision is provided in the Sample IT Service Contract template for contracts that include IT professional services requiring special intellectual ability to perform the contracted services, some of which will be performed on-site. If the contract does not include this type of professional services, consult with the OMB Risk Management Division for appropriate indemnification language.
The indemnification/hold harmless clause is important, but by and of itself, it does not guarantee the contractor is able to pay claims. It is, therefore, important to require proof of insurance coverage thus ensuring the contractor is capable of paying such claims.
Agencies should also be aware that the State cannot agree to indemnify the contractor. There are options for warranty language that may be used which could result in a breach of contract claim by the contractor against the State, but the State cannot indemnify a contractor against third party claims. An agency shall consult with its assigned legal counsel if any warranty language is required by the contractor.
Section 5 of OMB Risk Management Division's Risk Management Manual provides clarification on the need and purpose of indemnification and insurance clauses. The information contained in this manual will assist agencies in the evaluation of the contract insurance risks and in determining what type of an indemnification clause (limited or intermediate) should be included in the contract. See the Office of the Attorney General's Contract Drafting and Reviewing Manual for additional information on Indemnification, Hold harmless and Insurance Clauses.
The effects of a failure to deliver the contracted product(s) or service(s) shall be evaluated and identified. Should this failure to deliver on time affect the state’s capacity to perform its business function, a liquidated damage clause as permitted by N.D.C.C. Section 9-08-04 shall be included. This clause will establish the method for computing the reimbursement to the state for costs incurred due to the failed delivery of the contracted product(s) or service(s).
Recommended language for liquidated damages is provided in the Sample IT Services Contract template. Consult with your agency Attorney General counsel for additional guidance on liquidated damages provisions.
See the Office of the Attorney General's Contract Drafting and Review Manual for additional information regarding liquidated damages provisions.
A contract is not considered fully executed until signed by the authorized representatives. It must be signed and dated by authorized representatives of the contracting parties. The authorized state signatory is to be the elected or appointed entity director or a designated representative. The title or position of each of the signing parties should be listed below the signature line. If an oversight/controlling committee or board controls the entity, the contract approval process should be reviewed to verify the appropriate approval authority. No work should be performed or a payment made until the contract is fully executed. For more information regarding the contracting parties see the Attorney General's Contract Drafting and Review Manual.
Agencies should also review the general contract clause samples the Attorney' General contract manual. This section provides some suggested text that may be incorporated in the agency contracts. The appendix in back of the manual includes a contract checklist that may be used together with these guidelines to ensure an effective contractual relationship.