Speeding up commercial contract negotiations isn’t always simple. But getting the right master service agreement in place could help you speed up discussions and address any concerns so that you can speed up the sales process and get back to managing your business. But how do you make sure you get your master agreement right, first time? And what do you need to include to protect yourself from any nasty surprises down the road? Here’s our guide to master service agreements and what you need to know to get ahead.
- What is a master services agreement (also known as framework agreement)?
- What are the benefits of a master services agreement?
- What are the risks of master services agreements?
- What is a statement of work?
- What is a call off contract?
- How does a Master Services Agreement reference other documents?
- Framework agreement: Checklist of key contractual terms
What is a master services agreement (also known as framework agreement)?
A master services agreement or framework services agreement is a contract between a service provider and a customer that sets out the terms of engagement for future work. It’s an outline of the process of requesting, contracting and paying for work that hasn’t yet been determined.
A master services agreement will set out most but not all the terms between the parties. Its purpose is to speed up and simplify the process of agreeing future contracts. Typically, a master services agreement will spell out payment terms, delivery requirements, intellectual property rights, warranties and dispute resolution processes.
Master services agreements are used in business-to-business transactions where services are provided pursuant to a statement of work. For example, a master service agreement sets the framework under which a customer may make an order from an IT service provider without the need to negotiate a new contract from scratch each time.
What are the benefits of a master services agreement?
Master services agreements agree a process and a standard set of terms for transactions in the future. They make it easier and faster for the parties to reach agreement where the parties anticipate conducting multiple transactions together as time goes on.
Framework agreements can help to achieve consistency for a supplier as it aligns the terms on which it will do business with different customers. This can make it easier for a supplier to do business and help achieve economies of scale.
Master services agreements also avoid the need to conduct multiple procurement processes as they set the framework for all negotiations.
What are the risks of master services agreements?
Master services agreements can add a degree of complexity. They run the risk of introducing provisions that are inconsistent or contradictory, or that run contrary to future objectives. If the contemplated transactions are different in nature then a framework agreement may not be appropriate.
Framework agreements may pose particular problems under public procurement processes that prohibit the parties from substantially departing from the terms of the framework agreement.
Master services agreements (MSA) introduce a degree of complexity regarding termination and it may be necessary to consider the relationship between the MSA and statements of work as well as the relationship between individual future contracts.
What is a statement of work?
A statement of work functions as an order form that creates a legally binding agreement between the parties. It is a contract entered into after the framework agreement that specifies the exact nature of the work to be conducted and key terms. For example, a statement of work may set out for a customer to pay in instalments based upon certain deliverable work milestones.
If a customer has requested build or development services, an acceptance testing clause may be present in the master services agreement. Acceptance testing is where a product is tested for errors and compliance with the agreed specifications.
What is a call off contract?
A call off contract is another term for statement of work often used in the public procurement sector. It is the final stage in the contractual process where the final terms of the work are settled. A call off contract will typically be in a pre-set template form and will detail the total contract value, how it is to be paid and primary contact details for the buyer and seller.
How does a Master Services Agreement reference other documents?
Complex master services agreements will refer to several different documents. It is common, for example, to include template forms for call-off contracts, available services and charges in the schedules to a framework agreement. These templates set out the outline structure for future contracts. Frequently, a framework agreement will set out the overall call-off contract process, including how a customer may request the provision of services from the supplier.
One important reference to other documents within a framework agreement is with regards to termination. The parties need to consider carefully how a framework agreement may be brought to an end and how this will impact any existing work contracts.
It is common, for example, to provide that a call-off contract in force will continue after the termination of the master services agreement. Conversely, it is common that the termination of any individual call-off contract will not have any effect on the overall master services agreement.
Care should be taken with complex framework agreements to clearly deal with the eventuality that the provisions of the framework agreement conflict with those of an individual statement of work. Frequently, a framework agreement will stipulate that the terms of the MSA will take precedence over those of any call-off contract.
The parties should also consider any dependencies between contracts. In particular, it is important to consider how liabilities are handled if they arise from the framework agreement, from a future contract or from both. In particular, care should be taken to ensure that the remedy for breaching any individual contract is proportionate and appropriate given the circumstances.
Framework agreement: Checklist of key contractual terms
When considering a framework agreement or master services agreement, you should consider the following key terms:
- Amendments. Consider the effects of amendments to the framework agreement on future contracts, both existing and future. For example, consider whether amendments only apply to contracts entered into after the date of the amendment.
- Call-off contract process. Consider whether the service provider is required to provide services if requested by the customer or if the service provider may turn down the work. The supplier should ensure that adequate lead time is allowed to ensure that they have sufficient resources to meet demands. The purchaser should consider what steps it may take if there is a shortfall in the availability of the supplier’s goods or services.
- Mandating affiliates. The customer should ensure that it is possible to mandate that its affiliates use the framework agreement for the procurement of services.
- Precedence. Whether the terms of the framework agreement should take precedence over those of the call-off contracts.
- Signatories. Consider whether entities other than the signatories may need to take advantage of the terms of the framework. Consider whether for example a member of the customer’s group or the supplier’s group may enter into future contracts. If other members are allowed to take advantage of the services, the parties should consider inserting provision to allow the customer to enforce contracts on behalf of its affiliates.
- Termination. Specifying the process for termination and the consequences on call-off contracts.
- Terms of future contracts. Terms are likely to include audit, change management, exits, governance and pricing.