Just about the worst thing that happens in our profession every minute of every day is the overspending of contracts.
If you ask me what’s one of the biggest sins that purchasing commits, this is the one I’d pick. Busting your tail to negotiate a great contract and then letting the contract get overspent… throwing cold water on all your efforts.
When you let a contract get overspent, meaning you negotiate for one amount but you end up spending more than that, you are basically giving your supplier an out of cycle Christmas present, wrapped in a pretty red bow.
And suppliers love you for it. Don’t think for one minute that they are going to tell you a contract is overspent.
And why should they? They are in the business of making money.
And contracts don’t expire when they are overspent. Expenditures against a contract do not affect its legal validity, unless you put some provision in there that expressly states so, and no standard template contains such a provision.
What’s really bad is that I’ve yet to meet a buyer that’s not plagued by this issue. There’s probably billions of collective dollars being left on the table, with thousands of suppliers laughing all the way to the bank.
Make it stop, please. It’s so avoidable.
I know the problem. Your systems don’t easily track spends. Pulling the data is difficult, like pulling teeth. And then finding your supplier in the system may be difficult too, because one supplier could have 5, 10, or 20+ listings. Which one do you pick? And do you add up the expenditures for all of them?
On top of that, you have 50 other responsibilities and deliverables that seem higher priority. It’s a hot mess in reality, and don’t think companies with multi-million dollar ERP systems are better off.
So what to do? It’s really simple. Start holding suppliers accountable for tracking spends against contracts. Tell them that you want a monthly report stating spends against contract value, and for them to advise you before a contract is ever exceeded so you can act on that.
Better yet, make this supplier monthly expenditure tracking mechanism a contractual requirement. Failure to do so is a breach of contract.
And don’t forget, you can always renegotiate a contract. It’s your right. You don’t need to wait for it to expire. You don’t need to wait for the supplier to agree.
You don’t need to wait for anyone to agree. It’s your contract!
If you’ve overspent it, you should renegotiate it.
If push comes to shove, that’s what the termination clause is for, but you really shouldn’t have to go there.
It’s really simple. You tell the supplier that you negotiated those terms for $x and now you are spending more than that. They are getting economies of scale above and beyond what both of you bargained for, and so they need to come back with a revised proposal that reflects this increased amount of business.
In my breakthrough skills courses, you will learn contract clause language that will force the supplier to track such expenditures for you, relieve you of detrimental reliance lawsuits if you underspend your forecasts, and also the biggest thing of all…
…I have the mother of all secrets, which is how to extract savings from the money you already overspent the contract by. I’ll reveal this HUGE secret to you in my new training you can find here: https://purchasingadvantage.com/purchasing-contract-law-training.
Anyway, the money you already overspent the contract by is not “water under the bridge”. I cover how to retroactively get additional savings on those monies. Money back to you, from checks the supplier already cashed and put in the bank!
It’s not too difficult, but it is what I consider one of my member’s only type topics and it’s beyond what I can get into a blog entry.
Suffice it to say that you should
a) know exactly how much the value is of every contract you negotiate (and make sure your supplier knows too),
b) know how much is spent against that contract on a regular basis,
c) have measures in place to prevent over spending, and
d) have measures in place to address circumstances where a contract is overspent so you don’t leave money on the table.
Doing world class purchasing doesn’t have to mean that you are solving supply-chain world hunger. Sometimes the basics bring the biggest TCO value propositions. Don’t mess them up.
In terms of low hanging fruit, this is watermelon. Go get it.
Don’t forget to take a look at the brand new Purchasing Secrets of Contract Law Training I’ve put together for you.
See you next week!
