6 October 2011 | Matthew Sutton

Best practice when negotiating terms with new or existing suppliers

1. Consider the pricing arrangements
When contracting for stock warehousing and management services, paying charges on a cost-plus basis protects a supplier against unexpected costs. However, buyers need to consider whether this sort of arrangement offers the best way to manage cost, or whether it could incentivise supplier inefficiency. Would a fixed transactional price for items shipped offer greater certainty and better value for money?

2. Be practical
Even where services are purchased at a fixed price in longer term contracts, buyers will need to recognise that a supplier may have to be able to pass on all or part of certain cost increases, such as increases in warehouse rent or fuel costs, if it is to be able to provide services profitably. With some costs, such as labour, this may be best dealt with by way of an annual adjustment linked to a published index. Buyers may look to ensure value for money by reserving the right periodically to benchmark the supplier’s prices against those of other suppliers of comparable services.

3. Be clear about responsibility and risk
Suppliers usually expect a buyer to take on some responsibilities and associated risks, and lack of clarity in this area can lead to costly disputes. Buyers should be clear about the responsibilities and risks they are prepared to accept and make sure that the price agreed with the supplier reflects that position. For example, it may be cost effective for the buyer, rather than the supplier, to insure stock when stored at the supplier’s warehouse.

4. Make sure you have an exit management plan
Suppliers should expect to be measured against agreed performance criteria, but what happens if they fail to measure up? If things go wrong, buyers need to know that they can end a contract, and both buyers and suppliers need to know how the termination will be managed. A clear exit management plan can reduce the potential for dispute by making it clear what will happen and who will foot the bill. 

5. Don’t overlook people-related costs
Purchasers should take care when negotiating contracts to ensure they have not overlooked costs and liabilities that could be incurred when terminating a contract. For example, if on contract termination, the buyer proposes to contract with another supplier to provide similar services, or if the buyer decides to bring services in-house, the affected personnel of the outgoing supplier may have a right to continued employment with the new supplier or buyer under TUPE regulations. Advice should be sought when negotiating the contract to ensure that all potential people-related costs and liabilities are considered.

☛ Matthew Sutton is a partner at Shakespeares