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How to negotiate the perfect contract

By Martin Hudson, Head of Procurement Client Management at Pelican Procurement Services

Posted by Hannah Vickers | April 14, 2017 | Finance, legal, HR

What are the key elements of a good contract? 

The contract has to meet the client’s needs not just in the short term, but also mid- and long-term objectives. Although competitive prices and quality are key to any good contract, there are many other factors that need to be considered. A detailed set of terms and conditions of supply need to be included, which should detail: the contract term, delivery days and times, order cut-off times, non-performance clauses, termination clauses, price-hold periods combined with price review criteria, plus others. 

When supporting clients in negotiating new supplier contracts, we always ensure that we include at least 90% of the value of products that a client may purchase. This will ensure that a client receives competitive prices for 90%+ of the products that they require, otherwise suppliers may increase their profit margin on the products excluded from the contract.

How important is bottom-line cost here?

Clients who decide to go down the contract route generally do so to achieve the best value for their purchases – by doing so, it generates competition in the marketplace and discounts often come into play at that stage. 

The longer the contract and the fewer the restrictions set within the contract, the best price they achieve. From our experience in the catering industry however it’s not just price that rules. Quality is very important and clients are not prepared to serve lower-quality products in order to achieve more cost savings; this would be detrimental to their operation long-term. 

This is where commodity procurement specialists can help: savings can be achieved by changing products without compromising quality. For example, advice is provided regarding changing pack sizes or swapping branded products to own-label of the same quality. 

One client we work with was able to identify savings from changing the way they bought – instead of buying pre-cut fresh mushrooms, we advised them to buy a cutting machine and whole mushrooms. By doing so, the machine would have paid for itself in just two months and overall they would achieve 50% savings on the items, which add up over the course of a year.

It’s about having that detailed specialist procurement knowledge in each category. 

What else needs to be considered? How important are length of term, flexibility around pricing or market conditions, and issues such as EU Procurement?

Any organisation using state-funded (government) money, which is raised via taxation, is accountable to UK courts and the European Commission, and therefore must demonstrate best practice at all times, including seeking value for money for purchases made using such funds.

If your purchasing spend for one category is over £164,000 for any given contract period, organisations must adhere to EU procurement legislation, ensuring compliance with Public Contract Regulation. 

They five key principles under the EU Procurement Law that an organisation needs to adhere to are:

  • Transparency – contract procedures must be transparent and contract opportunities should generally be publicised through OJEU portal.
  • Equal treatment and non-discrimination – potential suppliers must be treated equally. 
  • Proportionality – procurement procedures and decisions must be proportionate.
  • Mutual recognition – giving equal validity to qualifications and standards from other Member States, where appropriate. 
  • Non-discrimination – suppliers must not be discriminated against due to their size, location, nationality or any other factors which does not impact on performance. 

The length of the contract term is also very important, as too short a contract will not allow suppliers to invest in the client’s business, which will mean that the prices that customers pay will be higher. Too long a contract may allow suppliers to try to increase their margin in the latter years of the contract. An ideal contract term would really be between two to three years.

Food supply and prices are affected by many factors including demand for the product, adverse weather conditions, changing dietary requirements, changing eating habits, etc. This means that on occasions the supply of certain products may be limited, and prices may rise significantly. When this happens we will advise clients and offer alternative, better value products where possible.

Having a contract in place is not just about price – it is also important to agree service levels relating to distribution, quality of products or services being procured, details relating to price-holds to ensure the client isn’t affected for sporadic price increases, plus it’s important to also consider Contract Price Management negotiations.

Clauses must be included in the contract to protect the client in case of product supply issues, for example, if the supplier has not forecasted correctly and runs out of stock, a substitute product must be provided of the same (or better) quality, at the agreed contract price so not affecting the client’s bottom line.

In the catering sector, having flexibility in the contract is important as it allows the client to adjust their menus accordingly.

How important is it that a contract incentivises both sides? 

To achieve competitive prices for any contract, it is essential that it is attractive to suppliers but also meets the needs and objectives of the client. It is therefore important that the terms and conditions of supply, length of contract, etc are fair and reasonable. This will create competition between suppliers who will be keen to bid for a client’s business.

How well do buying organisations do this? 

Some buying organisations favour some suppliers over others, which may not necessarily deliver the best contract for the customer, but may deliver the most income for the buying organisation. 

For us, it’s about taking pride in delivering a professional purchasing service, by qualified purchasing professionals – ask whether your partner is CIPS qualified for example – and whether every supplier contract is awarded on the basis that it is the best fit for the client with no hidden supplier incentives.

It is important that a procurement partner is totally transparent and provides recommendations based on sound purchasing principles and practices which are fully auditable. As a result of providing impartial advice of this nature, it then allows clients to make informed decisions based on these recommendations. 

Is there still a tendency to try and get the lowest price and hammer the supplier?

Suppliers must view any contract as attractive and sustainable for the contract term to obtain the best possible value for the client. Although price is very important, there are many other factors that need to be considered to ensure that the client receives the quality and service that they require. 

In order to achieve best value for any client, a professional tendering exercise is advisable. This will ensure that competition is created and the market is ‘tested’ based upon an agreed set of terms and conditions of supply and an evaluation criteria against which supplier bids will be analysed. The tendering exercise will create a totally transparent auditable process that will achieve the best market price based upon the needs of the client. 

Is there a need to move away from process/input driven contracts and towards outcomes?

Absolutely; contracts should be created to meet the clients’ short-, medium- and long-term objectives with clearly defined measurements. When we work with clients, we look at spend, categories, required compliance, service levels, quality and so on. We then set systems in place to be able to track outcomes very clearly. Transparency is key and today there are cloud-based systems that help manage and track all details relating to supply chain, making it easier to monitor progress, spend and outcomes.

What about negotiating the perfect contract in the catering industry? How do you cope with fluctuating ingredient/commodity prices – how can contracts reflect this?

Fluctuating ingredient/commodity prices can affect supplier prices. To ensure that clients receive consistent prices, we ensure price hold periods are included within the supplier’s contract. 

Typically these will be three months for fresh produce, as this allows customers to maintain price stability on menus whilst also being able to take advantage of seasonal price variations (eg: buying English salad in the summer when prices are low and supply high) and six months for other food categories. At the end of these price hold periods, Pelican will measure any price movements proposed by suppliers to ensure that they are fully justified. All price movements are measured and reviewed with the client regularly. We also limit price increases to an absolute minimum, challenge proposed increases versus market movements and intelligence that we have. Additionally, we negotiate new product listings with suppliers and, if needed, directly with the manufacturers.

W: www.pelicanprocurement.co.uk

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