When a buying company awards a tender to a supplying company, it is important for the parties to the contract to understand that a contract, at its core, is a relationship that they are entering into. The reason is that the parties to the contract ultimately agree to work together and build a relationship that is not only beneficial to both parties but will also last for years.

A contract outlines the full understanding of the business relationship that will be forged and the scope of the work to be completed, which in turn, highlights the mutually dependent nature of the client-and-supplier relationship. Why do we say that the relationship is or will be mutually dependent? This is because each party to the contract gives something and expects something in return. Both parties to the agreement agreed at the onset when payments [including Contract Price Adjustment (CPA) payments] are due, and when the manufactured products must be supplied. The buying company, therefore, pays money to the supplier, while the supplier, in turn, manufactures a product and delivers it at an agreed-upon future date. 

From the supplier’s point of view, they manufacture a product that will be delivered on time and expect due payments on time. Both parties have a clear understanding of their respective roles and responsibilities during the project life cycle, which will contribute to the sustainability of both businesses during and after the completion of the project.

It is equally important to achieve a balance in the buyer-supplier relationship, especially given that the outcome of the contract and subsequent CPA escalations should be fair to both parties to the contract. It is imperative, therefore, to set up the terms and conditions (Ts and Cs) in such a way that the outcome of the CPA calculation does not benefit or disadvantage either party unfairly. By having a balance in the buyer-supplier relationship, both parties would be in a position to highlight their concerns at the onset of signing the contract and be able to negotiate Ts and Cs that are fair.

Imagine the following scenario from the supplier’s perspective: 

You, the supplier, applied for a tender for a CPA-linked contract that spans a period of three years (with the option of renewal), with escalations due at the end of each year. Given that you were new to the tendering process you did not fully understand the implications of not submitting a detailed cost component breakdown (such as labour, materials, transport and overheads) in the tender bid application, and you subsequently just listed the main cost components (i.e. labour and material). You also did not consider that transport and overheads (such as rent) should form part of your company’s cost component breakdown.  

At the end of the first year, the first annual escalation was submitted and approved. Thereafter, you decided to attend a workshop presented by the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) on the Theory and Calculation of a Contract Price Adjustment. During the training session, you realised that you made a big mistake when you compiled the cost component breakdown and that you erroneously excluded important cost components from the breakdown which should have been included.

From the onset, you – the supplier – and the buying company forged a good relationship, with both parties understanding what is required of them. You subsequently meet with the relevant individuals of the buying company and explain the situation. The buying company states that it understands the predicament, and while it cannot change the terms and conditions of the contract as it is legally binding, it is willing to compromise. The buying company further states that when the contract is up for renewal at the end of the third year, it will allow you to put a new cost component breakdown together and that you should ensure that all the relevant costs are included.

In this instance, had it not been for a good/healthy buyer-supplier relationship, the outcome would most probably have been completely different. The fact that the buying company was willing to compromise is a clear indication that it understands the importance of having a good buyer-client relationship and that this is an aspect that must continuously be improved upon. It is imperative, therefore, to understand that just because you are in a position where there currently is a balance in the buyer-supplier relationship, it does not mean that there is no further room for improvement. Continuously improving the buyer-supplier relationship is crucial throughout the project life cycle.

PIPS Management

Author PIPS Management

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