World Bank report a concern for many supply contracts

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These days, supply contracts include price escalation mechanisms to better manage risk between the supplier and the business. Just the name of these mechanisms indicates that they are often geared to only increase.

This hasn’t been a problem in a booming economy but as the latest Commodity Markets Outlook report by the World Bank illustrates, prices are likely to come off instead of increase. This is bad news for poorly constructed supply contracts.

Unfortunately, many businesses (large and small) still include vague clauses in their supply contracts that say something like “Prices will be reviewed on the anniversary of the contract and the supplier must be able to clearly demonstrate actual cost increases to their business”. The problem is that rarely do suppliers proactively approach their clients and illustrate that their costs have decreased.

The Commodity Markets Outlook, released early this month illustrated that Oil prices fell by 47 percent in 2015 and are expected to decline, on an annual average, by another 27 percent in 2016.

Further more, all main commodity price indices are expected to fall in 2016 due to persistently large supplies, and in the case of industrial commodities, slowing demand in emerging market economies. In all, prices for 37 of the 46 commodities the World Bank monitors were revised lower for the year.

For those currently establishing their future supply contracts, we will be releasing an update on this soon to illustrate the process of creating a price adjustment formula. In the mean time, check out what happens when a company forgets to include a price adjustment formula.

For more information, please contact Simon Thompson.

Acquire Procurement Services is a specialist procurement consultancy firm based in Brisbane. Acquire specialises in establishing and renegotiating supply contracts for Australia’s leading organisations, and has extensive experience within the mining, oil and gas, manufacturing and utilities industries in both private and public sectors.

 

 

 

 

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Procurement and Supply Australasia (PASA) is the leading provider of information and education to procurement and supply professionals throughout Australia and New Zealand. PASA supports the largest community of engaged procurement stakeholders in the region, through its renowned series of events, publications, awards, plus various community and network building activities. PASA is a trading name of BTTB Marketing, for many years recognised as the leading producer of conferences and events for the procurement profession in Australia and New Zealand. Whether producing under the BTTB, CIPSA Conferences or now PASA brands over the last ten years, our events have consistently led the market in terms of both educational and networking opportunities.

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