During the past few years, construction and manufacturing industry survivors have become experts at controlling costs and reducing nonessential assets, and are cautious about expanding operations.
They have also carefully managed their contractual dealings in an effort to preserve customer relationships. In order to maintain these relationships, companies have largely relied on cost cutting to protect profitability rather than raising revenue, says John E. Benko, a member with McDonald Hopkins PLC.
“While all of these efforts were required to survive during the past few years, they have had negative effects,” says Benko. “During the recession, companies quoted and budgeted aggressively to win work necessary to provide essential cash flow. As the economy recovers, these contracts are becoming a burden. Cost cutting and downsizing have left administrative personnel overburdened and, in some cases, unable to properly administer new and existing contracts profitably.”
Smart Business spoke with Benko about how to improve contract value.
What legal rights do companies have to help maximize the value of existing contracts?
All contractual relationships are controlled by the terms of the contract, and each party must understand what the contract includes. Knowing the terms will permit a company to know when a request for a price increase or decrease may be appropriate or allowed.
For example, in construction projects, the contract includes the plans and specifications that accompany the contract itself. If an owner asks a contractor to perform work citing boilerplate language from terms and conditions, the contractor should make certain that the work is included within the project scope.
Companies may have previously simply performed such work without additional compensation. However, when dealing with a contract that was bid aggressively during difficult economic times, it must seek compensation for every potential change.
Likewise, manufacturing purchase orders should be reviewed to determine the scope of the agreement. A careful analysis of the terms and the contracting process is necessary and prudent to determine the real terms of the parties’ relationship, as suppliers may have significant rights of which they were not aware. Requested changes in quantity, design or delivery of product may also open the door for renegotiation.
Course of performance between the parties will also be relevant to a manufacturer’s rights. Customers will argue that if a supplier has performed for years without complaint, this defines the terms of the parties’ relationship. However, course of performance flows both ways. Under certain circumstances, limited resourcing by a customer of some parts may open the door for the supplier to terminate its remaining obligations despite contractual language to the contrary.
Contractors and suppliers should also keep in mind that sometimes the best way to maximize the value of a particular contract is to strategically end the relationship, or threaten to do so, if there is no hope of profitability.
