Make sure your accounting department know what's in your contracts.
Many businesses sell their product to clients based on volume - ranging from volumes of bandwidth to volumes of spaghetti sauce to volumes of heating oil. Both suppliers and customers benefit from making certain volume commitments in advance. Customers have a chance to lock-in a certain amount of supply, often at a set price. On the other hand, minimum volume commitments permit suppliers to appropriate resources accordingly.
Volume commitments often tie discounts to per-unit pricing with higher advance volume commitments leading to lower per-unit prices. Salespeople sometimes urge customers to make big volume commitments to get cheaper per-unit pricing with a sotto voce message: “Hey, don’t worry, if you don’t hit a volume commitment, no one will ever find out.”
Shockingly, experience often proves these salespeople correct! Companies that sell by volume typically calculate the total due by multiplying the actual volume by the discounted price to calculate the amount due. Company accounting departments often fail to catch minimum volume commitments buried in customer contracts and statements of work. As a result, companies under bill clients when clients fail to meet their minimum volume commitment.
Tracking Auto-Renewal provisions can save you millions.
Modern businesses specialize in the core products or services they want to sell. To do so, each must depend on the specialization of partners, suppliers, vendors, and contractors to supply necessary products and services for its business to operate. For example, you are probably reading this website using software from one company and Internet access from another.
Specialization creates efficiencies but if we don’t know the secret trick of managing it, costs skyrocket. Increasingly, modern supply contracts last for a defined length of time and then auto-renew. These auto-renewal provisions lock in price increases and eliminate the ability to negotiate a better deal when circumstances change.
When purchasing a particular service, we often spend the time and effort to shop around and identify the ideal pricing plan. Odds are high, however, that the same pricing plan won’t be right for your company’s circumstances forever. Your company may grow or it may shrink; market prices may change; a vendor’s quality may suffer; or you may simply decide to change directions. Buying outsourced services gives you more flexibility but only if you stay on top of Auto-Renewals in your contractual relationships. Many Auto-Renewal provisions require you to notify the supplier by a certain date (the Notice Date) if you want to terminate the agreement before it auto-renews. If you miss that Notice Date, your company will be stuck for another term - which could be a year or a half a decade depending on the contract.
A verbose lawyer is dangerous.
Some attorneys seem to believe they are paid by the word and that job security stems from developing texts indecipherable to the layman. The reality is that long sentences in contracts can bite you.
Take a “simple” agreement between a telecom operator and a company that owned utility poles. Within the 14-page contract, they agreed that “This agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party. ” Sure, it was longer than a sentence that a normal person would write but because lawyers were involved, people assumed that longer sentences must be more
After signing the agreement, the telecom company thought the utility pole owner was bound by the agreement for a minimum of five years. Thus, the telecom company expended large amounts to augment its phone and cable services across 91,000 of the company’s utility poles. Unfortunately for the telecom company, the utility pole company interpreted the run-on sentence differently. The utility pole owner believed that the right to “terminate by one-year prior notice” applied at all times -- even before the renewal period.
The resulting court battle cost more than $1 million. It would have been so much simpler to break that long sentence into two separate shorter sentences. And perhaps include a simple illustrative table showing the possible options.
If you cannot understand what your lawyers wrote, then the other side might not understand either. Avoid major legal expenses by aiming for clarity upfront.