Adam Bernstein considers the matter of cost control, and what suppliers should be aware of when it comes to pricing in a challenging business environment
In a fast-moving world where prices are rising at a pace not seen in decades, firms are struggling to keep pace and, worryingly, stay in business. The natural reaction to rising prices is to pass on cost directly to customers. However, that’s not always possible. So, what can a firm do to protect its position in respect of difficult markets?
James Crayton, partner and head of commercial at Walker Morris, says that to combat skyrocketing energy bills and material and labour shortages, firms should initially conduct an assessment of their current commercial arrangements – including considering their own supplier relationships as well as their relationships with customer – “to understand whether there are any contractual or common law remedies which can provide them with flexibility or assistance to maintain good relationships, whilst not detrimentally impacting their finances.”
Pricing
The aim of the process is to get a fix on the current position. And this starts, clearly, with the current contractual position on pricing, especially where the firm is party to long-term supply contracts. He says that “while the simplest price mechanism is a fixed price, often more detailed mechanisms to determine price are included in longer term agreements and you should assess if this price is broken down into components which may be able to be changed.” This is particularly the case in circumstances where the firm can demonstrate that the cost of supply has significantly increased.
But if the contract specifies a fixed price, then he advises considering whether the contract contains provisions with regard to price indexation. “With such a clause,” says Crayton, “the contract will provide for the price to increase in relation to an index, such as the Retail Price Index (RPI) or the Consumer Price Index (CPI).”
However, without an express provision, Crayton says that “the price specified in the contract will not adjust in line with either of these indexes, or any other method for measuring inflation.”
Similarly, with general price reviews or adjustments, there needs to be an express clause in its agreement providing for the right to do so. Here Crayton warns that “vague statements that variations may be agreed are unlikely to be enforceable.” He adds that the contract may contain provisions for an annual price review, but “these tend to be about setting a framework for prices to be agreed, rather than a unilateral right to increase.”
Force Majeure
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