Deliverable

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What Is Deliverable?

A deliverable refers to any quantifiable good or service that must be provided upon the completion of a project or as part of a contract or financial agreement. It is a fundamental concept across various disciplines, including Project Management and Financial Contracts. Deliverables can be tangible, such as a newly constructed building or a piece of software, or intangible, like a strategic plan or a training program. In finance, the term often applies to the assets or cash specified for exchange at the Settlement of a Derivative instrument, such as an Option or a Future contract.

History and Origin

The concept of a deliverable is rooted in the fundamental human activity of exchanging goods and services, formalizing promises of future performance. While the precise term "deliverable" gained prominence in modern Project Management in the latter half of the 20th century, the underlying principle has existed for centuries within commercial law and trade. For instance, the historical development of Future contracts, which inherently involve a deliverable, traces back to organized agricultural exchanges in the mid-19th century United States. The Chicago Board of Trade (CBOT), established in 1848, formalized forward contracts for agricultural commodities, paving the way for standardized futures that required the future delivery of a specific commodity. This evolution ultimately led to the formation of entities like CME Group, which emerged from the merger of the Chicago Mercantile Exchange (CME) and CBOT, continuing to facilitate transactions with defined deliverables.¹⁰ The Uniform Commercial Code (UCC) in the United States, particularly Article 2 concerning sales of goods, provides a foundational legal framework for the "tender of delivery" in commercial transactions, underscoring the long-standing legal importance of defining what is to be delivered.⁹

Key Takeaways

• A deliverable is a quantifiable output—a good, service, or result—that is produced and provided to a stakeholder or party as part of a project or agreement.
• Deliverables can be tangible (e.g., a report, a product) or intangible (e.g., a training program, a strategy).
• In financial markets, deliverables are critical in contracts, specifying the Underlying Asset or cash to be exchanged at expiration or Settlement.
• They serve as clear benchmarks for measuring progress and ensuring accountability in various contexts, from Project Management to complex financial transactions.

Formula and Calculation

A deliverable, as a product or outcome, does not typically have a mathematical formula for its direct calculation. Instead, its "value" or "completion" is assessed against predefined specifications, quality standards, and timelines outlined in a Contract or project plan.

However, in the context of financial derivatives, the value of the underlying deliverable influences the pricing and settlement of the derivative. For example, the value of a physically delivered Future contract is directly tied to the spot price of its Underlying Asset at the time of delivery.

The calculation of the final payment for a physically settled financial contract involves:

Where:

• Quantity of Deliverable refers to the specific amount of the asset (e.g., barrels of oil, bushels of corn, shares of stock) to be delivered.
• Agreed-Upon Price is the price per unit specified in the contract (e.g., the futures price or option strike price).

For Cash Settlement, the deliverable is not a physical asset but a monetary amount, calculated based on the difference between the contract price and the market price of the underlying asset at expiration.

Interpreting the Deliverable

Interpreting a deliverable involves evaluating its adherence to specified requirements, quality standards, and timelines. In Project Management, stakeholders assess whether the deliverable meets their needs and contributes to the overall project objectives. This evaluation is crucial for determining project success and often triggers payments or the progression to subsequent project Milestones.

In financial markets, the interpretation of a deliverable is typically straightforward: it is the specific asset or sum of money defined by the Contract. The critical aspect lies in ensuring that the deliverable meets the exact specifications (e.g., grade, quantity, location for commodities; specific security for equities) to avoid disputes or delivery failures. For example, in a Physical Delivery futures contract, the deliverable must precisely match the terms outlined by the exchange.

Hypothetical Example

Consider a company, "TechSolutions Inc.," that signs a Contract with a client, "GlobalCorp," to develop a new customer relationship management (CRM) software system. The project plan outlines several key deliverables:

1. Phase 1 Deliverable: A detailed software requirements document, due in 30 days.
2. Phase 2 Deliverable: A functional prototype of the user interface, due in 90 days.
3. Phase 3 Deliverable: The fully coded and tested beta version of the software, due in 180 days.
4. Final Deliverable: The complete, deployed, and documented CRM system, accompanied by user training modules, due in 270 days.

For each deliverable, TechSolutions Inc. must submit the specified output by the deadline. GlobalCorp then reviews each deliverable against predefined acceptance criteria. For instance, the "functional prototype" deliverable would be evaluated for its responsiveness, ease of navigation, and inclusion of core features as outlined in the requirements document. Upon successful acceptance of a deliverable, GlobalCorp might release a scheduled payment to TechSolutions Inc., illustrating how deliverables serve as critical benchmarks and payment triggers within a Project Management framework.

Practical Applications

Deliverables are ubiquitous in the financial world and beyond:

• Financial Markets: In derivative contracts, a deliverable specifies what is to be exchanged at the expiration of the contract. This can be a Physical Delivery of a commodity (e.g., crude oil, gold, agricultural products) for a Future contract, or Cash Settlement for equity index futures or most Options. The Commodity Futures Trading Commission (CFTC) oversees regulations related to the physical delivery of commodities in futures contracts to ensure market integrity.
• ⁸ Investment Banking: When a company undergoes an initial public offering (IPO) or a merger and acquisition (M&A) deal, deliverables include due diligence reports, valuation models, prospectus drafts, and regulatory filings.
• Lending and Credit: For a loan or bond issuance, deliverables include financial statements, collateral documentation, Performance Bonds, and legal opinions.
• Project Finance: In large infrastructure projects, deliverables range from feasibility studies and engineering designs to construction phases and operational readiness certificates.
• Regulatory Compliance: Financial institutions produce numerous deliverables for regulatory bodies, such as stress test results, compliance reports, and audit findings, often under strict deadlines. The Federal Reserve System, for example, emphasizes managing Settlement Risk Management for physically settled transactions.

##⁷ Limitations and Criticisms

While essential for clarity and accountability, deliverables also present limitations and potential criticisms:

• Scope Creep: Poorly defined deliverables can lead to "scope creep," where project requirements expand beyond the initial agreement, resulting in delays and increased costs. Clear Contracts are vital to mitigate this.
• Focus on Output, Not Outcome: An overemphasis on checking off deliverables can sometimes overshadow the broader goal or desired outcome. A project might deliver all specified outputs, but if they don't ultimately solve the underlying business problem, the overall effort could be deemed a failure. This highlights the importance of connecting deliverables to overarching strategic objectives.
• Quality vs. Quantity: A focus on delivering a quantity of items might compromise the quality if sufficient attention is not paid to quality control and assurance processes.
• Rigidity in Dynamic Environments: In fast-changing environments, rigid deliverable schedules can hinder agility. For instance, in software development, an iterative approach might be more effective than a rigid plan if market conditions or user feedback necessitate changes.
• Settlement Risk in Financial Deliveries: Despite robust systems, the actual delivery process for financial instruments, especially in Physical Delivery contracts, can involve Settlement risk. This is the risk that one party fails to deliver its part of the bargain, even after the other party has performed. Measures are in place to mitigate this, but it remains a critical consideration in derivatives markets.

##⁶ Deliverable vs. Settlement

While closely related, "deliverable" and "Settlement" refer to different aspects of a transaction or project.

In essence, a deliverable is what is delivered, and settlement is how that delivery (or its financial equivalent) is completed. A financial transaction requires a defined deliverable to enable a proper Settlement process.

FAQs

What types of deliverables exist in finance?

In finance, deliverables can be physical assets, such as specific grades of commodities (e.g., crude oil, gold, wheat) or securities (e.g., shares of a particular stock, government bonds). They can also be cash, particularly in Cash Settlement derivative contracts like equity index futures, where the profit or loss is paid in cash rather than exchanging the underlying asset.

How do deliverables impact financial contracts?

Deliverables are central to financial Contracts because they define the exact obligations of each party. For instance, in a Forward Contract or a Future, the deliverable specifies the asset, quantity, quality, and often the location and time of delivery. This clarity is crucial for pricing the contract and ensuring smooth Settlement.

What is the difference between a deliverable and a milestone?

While related to project progression, a deliverable is a tangible or intangible output or result that is handed over. A Milestone, on the other hand, is a significant point or event in a project timeline that marks progress. A deliverable might be completed to reach a milestone, or a milestone might signify the completion of one or more deliverables. For example, the completed "detailed software requirements document" is a deliverable, and its acceptance could mark the "requirements complete" milestone.

Why is physical delivery rare for many futures contracts?

Despite being specified in many futures contracts, Physical Delivery occurs for a very small percentage of trades. Most participants use futures for Hedging or Arbitrage purposes, not to actually take or make delivery of the Underlying Asset. As the expiration date approaches, traders typically close out their positions through offsetting trades to avoid the logistical complexities and costs associated with physical handling, storage, and transportation of the deliverable.¹²³⁴⁵