10 contract management challenges to solve before a recession

by House of Control | Nov 16, 2022 10:15:00 AM

In a recession, it is more important than usual to be thrifty and to prevent dependence on key personnel. Here are ten questions to ask your employees before some of them may be leaving the company during a recession.

Is a recession coming? How to prepare for a recession? In many cases, people with important knowledge of sub-deliveries and other important contracts will be disappearing from your company. When the person who was responsible for an agreement with financial obligations is no longer at work, sound contract management becomes increasingly difficult.

What happens in a recession? Are there any emergency savings you should look at? Even if key people responsible for sub-deliveries of goods and services are gone, suppliers will not end invoicing. When a company must scale back, usually there is a simultaneous or looming pressure on liquidity. How can the company become less vulnerable in the face of such challenges? We are convinced that better control with agreements and suppliers is central.

Therefore, we have collected ten questions that we recommend all companies work on before the need for layoffs and redundancies arises. 

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1. What agreements have your colleagues entered into with subcontractors?

Most companies have many subcontractors. It can be raw materials, rent, office supplies, electricity, broadband, leasing of cars, coffee machines, leasing agreements on production equipment, and so on. In a modern company, the contracts are often signed on lower levels in the organization, to ensure that the ownership of the agreements is linked to the use. When employees disappear temporarily or permanently, it is important that several people have an overview of all the agreements.

2. What are the underlying deliverables linked to the agreements?

What are the deliveries used for in your company? Sub-deliveries can be decisive for the company's value creation. Or the need can go up and down depending on the level of activity. What is certain in any case is that the invoices will continue to arrive if the agreement is not terminated. The finance department and the auditor need to know what kind of delivery the invoices relate to.

3. Who is the counterparty and contact person at the subcontractor?

Do you want to increase or reduce the use of a delivery? Do you need to complain, or is the invoice incorrect? Do you have any requests for changes in quality? Do you have input for innovation at the subcontractor? Knowledge of who is the contact at the supplier is always important.

4. What clauses are there in the agreement regarding price increases?

Inflation is higher than what we have grown used to since the 1990s, but has the supplier reserved their right to increase the price? How often can they increase the price, and which price index should be used as a basis. Can you easily double check whether the actual price increase is in accordance with developments in the relevant price index? Where does it say in the contract?

5. Do you have double up or even more similar deliveries?

At House of Control, we have a rule of thumb: Ten percent of other operating costs can be cut simply by gaining oversight and control over all the agreements. This is normally due to the company either having twice as many deliveries or continuing to pay for deliveries that are not used. When did you last consider whether there is a need for the delivery? What is certain is that people who disappear out the door are unlikely to make this judgement for you. 

More "recession" articles from our blog:

How to prepare for a recession - 12 tips

Our guide to renegotiate supplier contracts

9 ways to cut costs before or during a recession

6. Where are the contracts documents stored?

Are the company's contracts saved in the inbox (email) of employees? Or are server folders used? Is cloud storage used? Or are they paper-based and stored in drawers and folders? All the aforementioned – in a blissful mix? How easy is it to find the documents if employees quit and their user ID in the company ceases?

7. What are the financial obligations in 2023 and possibly after that?

When do the agreements expire? Most agreements contain information about which financial obligations accompany the agreed deliveries. The extent of the financial obligations, both in size and time, can be critical for the company in a recession. Not having control over current expenses is never good, but it is even more negative when the company is in a vulnerable situation in terms of liquidity. It is therefore important to obtain a comprehensive overview of the company's obligations before people with knowledge of them will be gone for a shorter or longer period of time.

8. Can the scope of the deliveries be scaled down during the agreement period?

An agreement often contains clauses relating to mutual flexibility, but the supplier will usually always have an interest in maintaining deliveries at as high a level as possible. When you know where all the contracts are stored, it is easier to find important provisions in the agreements. It is one of several reasons why it always makes sense to remove dependence on key personnel from contract management - and instead have a central storage of the documents.

9. Has a date been set for renegotiation of the agreement?

When can the agreement be terminated? Is the agreement automatically renewed if it is not terminated? If the agreement is to be renewed if it is not terminated, the time beforehand can be used for renegotiation. Do you set up notifications in advance of such dates? Who gets these notifications? How do you transfer responsibility if the person on the contract leaves?

10. Who is notified when the agreements expire?

The fact that an agreement expires does not necessarily mean that you are automatically committed to a new contract period. Sometimes there may be important deliveries for the company, where you have received very favorable conditions. In that case, it is extremely important that you can be proactive ahead of the expiry of the agreements. Again, how do you prevent dependence on key personnel and ensure good contract management if key people are absent from work?

Relevant products: Contract Management - Complete Control

 

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