How robust contract management can keep your money where it belongs

By January 19, 2016Blog, Strategic Risk
contract management risk image

By now we’re all aware of the upcoming changes to our Grocery Services Agreements due to the Food and Grocery Code of Conduct. If you need a refresher read our previous article which covered the FGCC in detail.contract management risk image

As you know, every organisation has a multitude of different types of contracts, some of which command more or less focus than others. For example, some businesses may spend a great deal of time and effort on their key customer contracts and very little on their supplier contracts, lease agreements, maintenance agreements, software as a service (SAAS) contracts etc. However, with your GSA bound to change it’s an appropriate time for you to look at how to best manage your contracts across the board.

For most businesses understanding all the contract terms you’re entering into and their implications on your other commercial interests, like insurance, can be a daunting task.

Why you need to be on top of your contract management

Most organisations in the Food and Beverage industry won’t openly announce they’re facing issues with their contracts and I don’t blame them. So, while I can’t share any specific examples, I’ve been involved in over a hundred or more risk reviews and have seen my fair share of contract management no-no’s.

For example, a claim was recently brought against a client whom had been supplying ingredients to a contract manufacturer who was then supplying their end customer. This customer claimed the manufacturer’s product was contaminated – from which the contract manufacturer sought to make a claim against my client.

However, the contract manufacturer had signed a contract containing a full indemnity clause, meaning they were unable to make a claim against my client, saving them and their insurer a six figure sum. The compounding problem for the contract manufacturer was their failure to notify their insurance provider that they had signed an indemnity clause. Considering the end customer is a global player, the manufacturer is now facing a six figure claim without insurance, as their policy contained a common Contractual Liability exclusion.

The best part for our client is that they had trade credit insurance, meaning that when the contract manufacturer decided to withhold payments for the claim, they were able to completely recover their money through insurance, and pass on this liability to the trade credit insurer to pursue their loss.

That is just one example of how a contract can either protect or damage a Food and Beverage organisation depending on whether they’ve got the correct processes in place.

How can I protect myself and my organisation?

Firstly, if you’re concerned or unsure about your current contract management process, I strongly recommend making this a priority, especially because of the changing dynamic between supplier and retailer heading in to 2016.

If you’re looking to improve your contract management ask yourself the following questions:

  1. Do you have at least a basic contracts register which outlines what contracts you have in place, who they relate to, who is responsible for them within your organisation, what the key conditions are and when they are due for review?
  2. Do you have a clear delegation of authority procedure that will ensure staff don’t sign agreements outside their authority?
  3. Have you clearly identified areas where you need external review from either a legal or insurance advisor?
  4. Are you measuring performance against your contracts and what service levels are you measuring or being measured against?

You need robust answers to these questions in order to be comfortable with your contract management processes. Why? Because sticking your head in the sand and hoping the contract will never be needed is not a risk management strategy for any mature business and could cost you dearly.

What you should bear in mind

If you’re dealing with much larger companies chances are they have the resources to cover their legal bases. It’s up to you to make sure you’re prepared enough to mitigate the risks in your business through your contractual negotiations.

Some things you should remember:

  • There is no harm going back to a third party and raising a concern with a contract, it demonstrates that you take it seriously
  • Contracts are not just documents you sign to kick off business, they are documents you’ll be expected to actually honour
  • Not signing a contract is not enough. Whether you sign or not, if you trade on those terms you’ll be held accountable.

The final point is something I’ve seen far too often where a company which “hasn’t signed anything” has been trading with the other party for months at a time. In this case, your complicity is your signature!

Next steps

If you’re unsure how to proceed with your contract management, especially right now in the Food and Beverage industry, get in touch with the Victual team. We’ve conducted more than 100 enterprise risk reviews, all of which have highlighted issues with the handling of contracts and have developed best practice approaches to contract management.

If you’re particularly troubled by the upcoming changes to your GSA feel free to register to attend our New South Wales or Victorian workshops where we break down how to negotiate the terms and conditions of your retailer supply agreement.

Remember, contracts contain numerous parts most people hope they never have to look at. Look at them! Understanding your contracts is a key step towards correctly managing and mitigating your risk.