Companies assume that having a contract with a supplier means they will automatically receive all the benefits they negotiated. But errors, misunderstandings and inadequate oversight means contracts don’t always deliver what they should.
Given the time and resources procurement teams devote to vendor negotiations, it’s good business sense to make sure contracts deliver all that they promise.
Contract compliance can unlock the value that’s been negotiated across your supply chain. By triggering essential conversations about the future relationship, renegotiation offers a unique opportunity to start the process.
Overpayments and sub-optimal processes
Some supplier invoicing errors can be easily remedied while others have the potential to balloon into something more serious.
Perhaps you have a long-standing contract with a materials supplier where pricing has not been updated in recent years. This could lead to products or components being sourced off-contract on an ad-hoc basis, creating greater exposure for excessive mark-ups.
Another issue can arise when specialist services are procured from an external provider such as IT or back office. If the pay bands for roles, projects, and deliverables aren’t carefully prescribed, the provider may move the same people up and down the bands without prior discussion about suitability, or have the same people working on multiple projects concurrently – again at different pay bands.
There can be perfectly legitimate reasons why this occurs. Still, in a complex staffing agreement covering a broad remit or multiple countries, there is enormous potential for error.
Five key considerations when renegotiating a supplier contract
1. Get the language right
Crafting contract language and communicating the key terms to all stakeholders on both sides can reduce supplier payment errors caused by confusing or unclear wording.
Ambiguous contract language around tiered pricing, for example, could create a mismatch in expectations and payments, causing loss due to overpayments or discrepancies in delivery. By establishing clarity and consistency in contract language, procurement teams can make permanent fixes that improve existing contracts and minimize future issues.
Ideally, contracts will use clear and straightforward language that limits the opportunity for interpretation. Contracts should also have a comprehensive audit rights clause covering access to relevant financials and data.
Both parties should understand clearly what is and is not included in the contract. Activities to be undertaken by suppliers are an important part of this. These need to be captured in order to minimize any practices that do not comply with the terms of the contract, like additional component sourcing or sub-contracting.
2. Make sure both parties understand and acknowledge the commercial terms
Contracts also need to capture the intent of the parties. That means ensuring that the primary mechanics of the contract are clear and consistent, including mark-ups, pass-through costs, expected margin, lump sum, and time and materials.
Similarly, rebates, volumes, discounts and other allowances should also be considered and clearly set out.
And for data compliance and auditing purposes, contracts should adequately cover data retention requirements to allow for retrospective audits.
3. Ensure accountability and responsibility
Using renegotiation to improve supplier relationships also means making sure both sides in the contract understand their obligations.
You (the purchasing organization) should be in control of the contract. It’s yours. You own it and should ensure that any variations to it are documented and recorded.
Copies should be held centrally in a secure environment along with any attached scopes of work, agreed variations, contract addendums and supporting documentation.
All stakeholders at your and the vendor’s organization should be aware of the contract’s terms and conditions, and they should acknowledge they bear responsibility for compliance with the contract.
Ultimately it is the supplier’s responsibility to make sure they charge in line with the contract, and they should be fully aware of this expectation within the contract relationship.
4. Embed strong governance in the contract and the relationship
When a supplier provides services or materials that are critical to your business, it makes sense to undertake regular reviews to ensure the contract and relationship are operating as expected. The review can highlight any issues and point to service level agreements and key performance indicators at contract renegotiation that can better govern and measure performance.
If there are any gaps between wording and application of the contract in ‘the real world,’ these need to be surfaced and discussed openly. Both sides should be able to discuss if the benefits captured in the contract are being realized as expected.
Having risk mitigation and control language, along with a ‘what happens if something goes wrong’ clause are all necessary elements. They put the onus (and cost) on the supplier for correcting any errors.
5. Structure the supplier relationship correctly
Strategic and sensitive supplier relationships require investment, including regular communication, reviews and reconciliations on a predictable schedule during the contract lifecycle.
Remember that while operations may own the relationship, in many cases procurement owns the contract. Stakeholders from both areas need to be involved in renegotiations.
It’s also worth noting that no matter how aggressively you've negotiated a contract, suppliers still need to make a profit. If the contract is unbalanced, it increases the risk that a supplier might try and extend margin with hidden charges and perhaps leverage any ambiguity in contract language to their advantage.
The tie that binds
Contracts are the essential bond between companies and their supply chains. They should deliver everything procurement teams have negotiated and meet every agreed term – every day.
That’s why contract compliance is critical to protecting margins.
Contract renegotiations offer the perfect opportunity to begin the process. By incentivizing greater on-contract spend, controlling risk, and improving supplier relationships, organizations can make sure they see all the value they’ve fought hard to secure.
