GM's New Purchase Order Program Extension Clause: What Suppliers Need To Know

General Motors Company (GM) has added a new "Program Extension Clause" (Clause) to its purchase orders (POs) that allows GM to extend the purchase order term in some circumstances. GM suppliers should understand this new Clause to make an informed decision about whether and how it applies to them and to make strategic decisions about responding.

Although there has been some discussion of the new Clause in the press and by other law firms, what we have seen has not adequately conveyed important details and how it compares to industry norms, which should be considered by any supplier before making decisions regarding the Clause.

Key Provisions

There are three key points in the new Clause:

• It applies only to: (i) new POs, (ii) amended POs that provide a price increase (excluding increases tied to engineering changes or previously agreed raw material or other index adjustments), or (iii) other POs if GM and the supplier have agreed it will apply. A supplier that rejects a price increase PO based on the new Clause may also be rejecting the price increase.
• For those POs, GM may extend the duration with six-months' notice. The Clause does not specify the length of any extension. That likely will be specified in the extension notice. Also, there may be successive extensions. Especially for new POs, suppliers should consider this new extension right from the beginning of the bid process, as it may be relevant to, for example, the initial cost assessment and related pricing decisions.
• If extended, GM and the supplier will attempt to negotiate a price adjustment. If unable to agree, "the price will be equitably adjusted by GM based on a fair cost assessment." However, the supplier is not entitled to any adjustment unless it provides extensive cost and other information.

Comparison to Industry Norms

GM POs typically have been for a fixed-term, with no express right to extend. That gave suppliers potential legal leverage for improved terms if GM decides to extend a program, since the supplier generally would not be obligated to continue supply beyond the fixed-term. The GM fixed-term approach was unusual for the industry, which typically have a duration of life of the program, including program extensions. In this respect, the new Clause aligns GM with industry norms.

The new Clause varies from industry norms in a way that may be favorable for many suppliers. If a program is extended under the typical industry contract, the price remains the firm-fixed price that was in place prior to the extension. The GM Clause does provide for a price-adjustment (if supported by documentation and other data) if a program is extended. The new Clause does not determine the amount of the price adjustment (that is, it does not provide a formulaic measurement, or even identify specific factors relevant to the "fair cost assessment") and certainly there is no guaranty that a supplier will be satisfied with the adjustment. Nevertheless, it is favorable to suppliers compared to the industry norm.

Takeaways

There is not a "one-size fits all" answer as to how suppliers should address the new Clause, and this Client Alert does not address every potentially relevant issue (such as how the new Clause effects lower-tier suppliers). But every supplier should understand the Clause and make strategic and informed decisions about it. Butzel's Automotive Industry Team has decades of experience in supply chain contracting and is ready to help you in that evaluation. Please contact the authors of this Client Alert, or your Butzel attorney for assistance on these decisions.

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.