In the current economic climate everyone is looking for ways to save money and one route often overlooked by our clients has been reviewing their existing contractual arrangements. Every company has in place a wide variety of contracts with suppliers, customers, IT providers, facilities and maintenance providers.
How does reviewing these save money? Looking at any contract there will be a number of options available:-
- actively enforcing the current terms of the contract for example by buying only the minimum amount specified, exercising the right to reject goods that do not precisely meet any specification or ensuring that the contractual processes set out in the agreement are properly adhered to;
- re-negotiating the price payable, the type of goods delivered or the range of services provided;
- considering how to terminate the agreement in the most cost effective manner.
As well as looking at the precise terms of the contract, you also need to consider what the contract does not say. For example, if a supply contract is not stated to be exclusive, you may wish to consider buying products, from a cheaper supplier.
Change of control clauses can also provide a cost free exit from a contract that is no longer wanted. It is worth checking with the other contracting party whether or not a change of control has occurred in terms of the particular drafting of that clause often people fail to notify changes of principal shareholder or bankers which can trigger these clauses. Retention of title clauses should be reviewed to ensure that they work effectively and that their terms are being complied with. Failure to comply may give grounds for termination.
If a customer's credit rating has plummeted it may be time to consider asking for a guarantee from either the directors or a parent or associated company in order to allow the relationship to continue.
Does the contract allow you to change your invoicing and payment terms? If so then change to loans that are more favourable and actively enforce these. In the current environment considering credit insurance or debt factoring may well be worthwhile in terms of improving cashflow.
Before starting negotiations on price review or potential termination it is always worth checking that you know exactly what contractual provisions are in force both written and implied and that you properly understand what termination of the contract might involve. You may need to recover documents and business information, there may be issues with employees transferring under TUPE and there may be costs payable in terms of the agreement. All this needs to be factored into your negotiation strategy.
In any negotiation it is essential to make sure that good commercial relationships are not damaged. Contract review can be an effective method of bringing down costs, getting rid of non profitable or overpriced contracts and focussing people's attention on securing the best deal for the company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.