Managing Contracts (Part 2: Determining Contract Length and Pricing)
Before you post your solicitation you should have an idea for how long you want your contract to last and you should already have done an independent cost estimate (ICE)? Is this a one off that last until project completion (rebranding an agency), or are you purchasing software that you’re going to want to use for a few years? And what should you expect to pay for this good/service?
Unfortunately some companies ignore these building blocks of a good foundation for contracting. Ignoring these building blocks leads to a list of problems: (1) how do you know the price is fair and reasonable? Remember, this will also impact pricing on the option years. (2) How are you budgeting for this purchase? (3) What’s your metric for determining the amount of options and whether to exercise them? And (4), how are you determining future price increases? Just to name a few of the issues.
Thus, my favorite approach is a two year initial term with two one-year options. I also like to ask for pricing to be expressed up front. I.E, how much is it for the initial two years, and what is the price increase per option year? Beyond four to five years forecasting prices is about as clear as mud, especially given that the market changes so rapidly and tech doubles in capabilities every two to three years. Thus, your ICE should include the forecasted price increases.
Generally sellers never have a problem with this ask. What I typically see is they lay our their pricing in the proposal, and once they get the contract and it is time to renew, they often like to ask if they can increase the price beyond their original quote. To mitigate this, I generally require a price increase request 120 days before term expiration, and a 90 day cancellation notice. Followed by an auto renewal statement. Your project manager will thank you for this.
If this is a crucial contract, then you at least have time to make a decision whether to accept the request or replace the vendor. Keep in mind, it takes at least two months to write a solicitation and select a winner. Then there is implementation of the new vendor and potential transfer of data, thus time is not on your side.
Thus, contract management, procurement planning, and refining the contracting process are so crucial.
Over the next few weeks, the articles will discuss common contracting complaints, problems, and solutions.
