Contracts are legally binding agreements between at least 2 different legal entities named as the buyer (Pharma) and a seller (CRO and other suppliers). The buyer wishes to buy certain goods or services from a seller. The seller, in return for the goods or services provided, expects monetary or other values to be paid to them.
When a buyer and seller agree to work together as mentioned above, both sides will have an expectation to receive some value from the other party. And both sides also have certain obligations to fulfil towards each other. A legally binding contract will help protect the rights of both sides by ensuring both sides fulfil their obligations. In case of any issues, any of the aggrieved sides can take legal recourse.
A contract should not be looked at as the document to only apply control it can be used to incentivise and set a template for cooperative working.
In Clinical research the contracts are often defined by the pricing criteria i.e.
Fee for service (or variable)
Fixed Unit Price
Fixed Price or outcome-based contracts are used when the scope of work is clearly defined and the requirements are well understood. The overall cost of the services is then agreed and is fixed for the duration of the project unless the defined scope of work changes. This type of contract works best when there are few unknowns and a low level of risk e.g. A simple phase one study with healthy volunteers confined in a clinic for a relatively short time. The sponsor is usually invoiced after agreed milestones have been met. There needs to be a change order process in place to cope with any changes of scope. Change orders incur transaction costs, (the costs of administration) that can have significant impacts for both Pharma and CRO.
Fee for service
In this case an hourly rate for the various staff employed on the project is agreed and the sponsor is invoiced for the hours worked (hours x rate per hour). This type of contract is employed when there is a relatively high level of uncertainty and or complexity associated with the project. It affords a much higher degree of flexibility and relies on collaboration between the contracting parties. Conflict over goals, asymmetry of information and opportunistic behaviour is reduced which is why these are often referred to as behavioural based contracts. Critics of fee for service contracts claim that they take away the CRO’s incentive to work efficiently, however there are very effective ways to monitor progress and efficiency e.g., Earned Value and ways to incentivise the CRO e.g., Pain and Gain contracts.
Fixed Unit Priced
Fixed unit priced contracts rely on breaking the scope into repeatable units. The units are then priced and the CRO is paid according to the number completed. It is critically important that the units are deliverables and not activities. The hope was that fixed unit price would give you the best of fixed price i.e., control and fee for service i.e., flexibility, unfortunately you still have the issue of developing a fixed price for the units and your flexibility is restricted by the definition of the unit.
The above pricing criteria are not the only considerations. There are many clauses in a contract some of which are neutral in terms of the effect they may have on the Pharma CRO relationship e.g., force majeure, others like incentives and penalties can have profound effects on the relationship. It is worth taking a critical look at the clauses of the contract to determine whether they are helping or hindering the project.
Why is it in the Lab?
Contracts are often viewed as legal documents that only come into play when things go badly wrong. We see the contract as a tool that can promote good project management and set the tone for a positive interaction between sponsors and suppliers thus negating the relational risk. The more complex and uncertain a project is the more flexible your contract should be and the greater the emphasis should be on collaboration. A contract should always aim to emphasize positive behaviours.
“What I love about this is that the contract can be used a positive tool for reducing relational risk and promoting good project management.”
“These are great, straight forward explanations of options that deal with varying levels of uncertainty in trials, you should also look to commercial incentives to build these out and maximise focus on the right goals.”
“This provides a simple explanation of different contract options, which shines a light on the importance of selecting the right type of contract for a given situation and how, if this selection is done correctly, it can help drive desired behaviours.”