Cost Management Hurdle: Binding Contracts With Suppliers

One serious cost management hurdle that many companies face comes when they have signed long-term contracts with suppliers in return for price and service concessions. Typically such deals can be good for both parties. However, many companies are not aware of a very important fact: they are, in most cases, allowed to change the terms of the contract even after it has been signed. Finding ways to renegotiate contracts with service providers is something that a third-party cost management firm specializes in.

For example, say a company has negotiated an affordable rate for waste management or landscaping services as part of a multiple-year contract. However, midway through the contract term, fuel costs increase and the provider tries to pass on a surcharge to offset the cost increase.

Now the client is stuck over-paying for services -- or are they? It may be possible to change the terms of the contract. Instead of paying more than they should for the same services while losing savings, an expense reduction professional could help them re-negotiate their contracts by giving the vendors a simple choice: either continue their same higher rates and lose the business when the contract expires, or do the right thing and lower the rates, in turn gaining customer loyalty and a renewed contract when the original expires.

Another way to stay on top of cost management, especially in regard to binding contracts, is to ensure that every contract has a cost management clause. This clause would hold both parties accountable for delivering documented savings during each year of the agreement. In the examples above, have an index to track raw materials increases and agree to a formula to increase rates. That way, companies can stay on track with their cost management goals. Vendors are also held accountable for the services they provide.

Another important thing to know about binding contracts is that many have an auto-renewal clause that extends the contract automatically after the expiration date, unless the firm opts out in writing. This is another area of cost management that an outside professional can help with.

The CFOs of most companies are incredibly busy with the overall financial management of the company, so typically contract renewal dates fall to the bottom of the to do list. A cost management firm can help implement a software tool that sends notifications when contract renewal dates are approaching. A cost management firm could also help them implement their own standard operating procedure for ensuring that contract renewal dates are not missed.

Binding contracts with suppliers are typically seen as a hurdle to cost management, but it does not have to be that way. By working with a cost reduction expert to determine the best way to negotiate with their vendors, it can be a fairly seamless process for companies to find cost savings for themselves while also receiving the same quality of service from their vendors.

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