How Are Your Supplier Contracts Affected By Coronavirus?

In this five-part series, PASA will explore different aspects of supplier management and how to navigate them during the ongoing coronavirus pandemic. Who is being impacted the hardest, how do you protect your supply chains, what are the best ways to manage your suppliers and what precautions should you be taking?

In part one of this series, PASA outlined the key issues at play when it comes to keeping on top of your supply chain.

In part two, PASA explores how supplier contracts are affected by coronavirus.

At this time, it’s fundamental that procurement and supply chain professionals evaluate their contracts – and fast. Could your organisation be liable for damages? Does a global pandemic trigger force majeure clauses in any of your contracts? Could there be room for any contract re-negotiation with suppliers?  You’ll also need to weigh up the option of adjusting contracts to benefit your suppliers.

Of course, you’ll want to anticipate any contract related problems long before they arise. That means a close analysis of all supplier contracts to establish how they could be used against you and where there is room for improvement.

When you conduct this analysis, here are four key things to consider.

1. Does coronavirus trigger a force majeure in any of your contracts?

It’s pretty common for procurement contracts to contain a force majeure clause. These clauses free suppliers from their contractual obligations under extraordinary circumstances,  such as natural disasters. While it’s much less common for a global pandemic to be cited as justification for a force majeure, procurement professionals must still be wary. If a critical supplier triggers a force majeure and is no longer liable to deliver your products or services, what is your contingency strategy.

2. What should you do if your suppliers stop adhering to contract terms?

Businesses are currently operating under unprecedented, and exceptionally challenging, circumstances. This is likely to compel many suppliers to deviate from contractual terms, particularly when it comes to increasing their pricing. Consider the impact on your bottom line if your entire supply chain were to increase costs incrementally – it would be disastrous for your organisation.

If suppliers are breaking agreed payment terms, procurement professionals should consider escalating the problem to their organisation’s legal team. At this time, it’s crucial to keep them in the loop

3. Does a deliverable-based contract or time and material based contract work best for you? 

Procurement professionals should review all supplier contracts with a view to deciding if switching between time and material based contracts and deliverable-based contracts could be helpful.

It’s important to understand which option is best for both your organisation and your suppliers. For example, you might have a supplier working under a deliverables contract who is currently unable to deliver their product or service. In this case, it would make sense to switch to a time and material based contract.

4. What happens if a supplier requests expedited payment terms?

Evaluate your payment terms for diverse suppliers and SMEs. If the contract states a 60-day payment term, you could consider shortening it to support them through this difficult time.

If you’re a large organisation, there’s a high chance your suppliers will come to you to request expedited payment terms. It’s worth implementing an organisation-wide strategy for managing these requests to ensure consistency and the most vulnerable suppliers are protected.

Some organisations are extending payment terms to as much as 180 days, which could have a hugely detrimental impact on minority suppliers and SMEs. If every organisation were to do the same, the economy would suffer as a result. Think carefully before you go down this route.

Remember, at this time your suppliers need your support. Now is not the time to go to market and change suppliers, unless absolutely necessary.

In part three of this series, published next week, PASA will explore in more detail how you should be managing your diverse suppliers and SMEs during this time?

On 13th May PASA Connect is hosting a virtual roundtable on Outcome based contracting : How it works and why it works. You can find more information on becoming a PASA Connect member here.