Are you an SME that wants to engage in a third-party contract but unsure of what it takes to do it well? Apollo Muyanja Mbazzira from Private Sector Foundation Uganda (PSFU) answers key questions to help you get started 

Third-party contracts (also referred to as implementing partner contracts) are agreements wherein a third business supports a contract between two distinct businesses by providing goods or services that support a common goal. These contracts are critical for the profitability of many businesses and key to the Ugandan economy. Small- and medium-enterprises (SMEs) often build their businesses around serving as third-party suppliers, playing a critical and integral role in supply chains by contributing the goods and services that support lead firms’ operations.  

For instance, independent SMEs may provide contracting services to a larger manufacturing firm. Lead firms – the larger companies at the top of the supply chain – typically need these SMEs to build their supply chains or ensure that they maintain market leadership. But along with important benefits both for lead firms and implementing partners, engaging in third-party contracts comes with unique risks. Fortunately, those risks can be managed by best practices around third-party compliance.  

The COVID-19 Business Info Hub sat down with Apollo Muyanja Mbazzira, a project director with Private Sector Foundation Uganda (PSFU) to understand more about the topic. PSFU recently partnered with Mastercard Foundation to design and implement the Lead Firm Structure for Youth Employment in Uganda program. Operating as an implementing partner for Mastercard Foundation has given PSFU first-hand expertise on the importance and benefits of third-party compliance. 

What is third-party compliance? 

Before diving into the ins and outs of third-party compliance, Apollo defines what it means – essentially, it means that the parties in a supply contract adhere to the rules of that contract and are held liable in the case that they do not.  

As a key first step, SMEs engaged by lead firms in an implementing partner contract typically need to be business compliant – registered with a TIN and up to date with all tax obligations. This ensures that the businesses involved in the implementing partner contract are all governed by rules and regulations that apply to the sector they are operating in and can be held legally liable in the case that they do not fulfill a particular obligation.  

What are the risks around engaging in third-party contracts? 

Contract inflexibility is a major risk that comes with third-party contracts. With more parties involved than in a simpler two-party contract, delays in deliverables or changes to activities may be more likely and have broader effects. If the contract is not structured in such a way as to allow for some contingency or for a method of modifying activities based on challenges or changes that come up, these delays or changes can cause issues with the ability of some parties to meet obligations or receive payments.  

Apollo also explains that some contract structures employed in Uganda have been borrowed from Western contexts. These contracts are modeled on a business structure and relationship that does not consider the nuances of Uganda’s business environment. This creates a risk to SMEs who may enter a contract that disadvantages them in their relationship as an implementing party. A typical example is that large manufacturers in Uganda are surrounded by companies that may prefer to acquire goods and services from informal service providers, which are considered much cheaper in comparison with formally run businesses. A third party contract written in Western contexts may restrict hiring to only formal service providers – and therefore put the contractor at risk of breach of contract for hiring informally. It is important to look for these kinds of nuances when reviewing a contract and ensure that the terms match.  

Are there best practices that help to mitigate those risks? 

The main tool that businesses have in mitigating the risks that come along with implementing third-party contracts is to ensure that obligations are spelled out clearly in the contract itself. In particular, businesses should pay attention to the following:  

  • Terms of reference – Are the obligations and activities required by all parties spelled out clearly? Is it obvious which party is responsible for what? 
  • Payment structure – Are the deliverables due to trigger payments from one party to another clear? Is there a timeline in place for invoice due dates and payment turnaround times? 
  • Timeline – Are there deadlines for obligations and activities in place? Is there a contingency plan or method for managing delays? 
  • Arbitration methods – While no business wants to think about what might happen if they or a partner business violates the terms of an implementing partner contract, it is sometimes unavoidable. In this case, is it clear what the method of arbitration will be?  

Ensuring these basic aspects of an implementing partner contract are in order safeguards businesses from major risks while allowing them to grow their business and network. Businesses are encouraged to engage their third-party counterparts to ensure their partnerships are mutually fair and beneficial.