How to conduct a contract risk and valuation analysis.

How to select a supplierWhat is a contract risk and valuation analysis? Do you really need to carry one out? Can all contracts be managed in the same way?

Lets start with the first question to begin with;

A contract risk and value analysis establishes the potential risk and reward for a contract. “Reward” is what can be considered as “added value” e.g. product innovation rather than just concentrating on price. By using our free toolbox on our website How to conduct a contract risk and value analysis you can establish what type of contract you are dealing with. You can then establish if a contract will be Routine, Leverage, Bottleneck or Critical.

The answer to the second question is a definite YES.

It is very important to establish what type of contract you are dealing with so you can allocate the correct resources to manage it. You can save or lose a great deal of money, time, resources etc. by spending time in the initial stages to identify what type of contract you are actually working on and what outcomes you want to achieve.

And the last question.. a definite NO.

You should not manage all contracts in the same way. A high risk contract needs time and far greater attention than those for routine items. By allocating the time and resources in the correct manner your productivity and results will be far greater. When you have established what type of contract you are managing then you can treat it accordingly.

Routine contract.

It is most likely that this will include “small services” and not major contracts or projects. For example these contracts could be for stationary, fixings, consumables etc.etc. Routine contracts should be managed in the most efficient manner possible and devolving the responsibility to the end users. A good idea would be to set up a call-off contract for stationary and consumables. Thus the price and delivery times will have been negotiated in advance and the end user can just order what they need when they need it.

With routine contracts it is beneficial to establish a long term relationship with a supplier and have a minimum of formality which allows the supplier to offer extra “rewards” for his services. The supplier you choose for this service does not necessarily have to be small. Larger companies may offer economies of scale but may not be as flexible as a smaller one.

Bottleneck contract.

Bottleneck items may not have a high purchase value but the key to managing this type of contract is to ensure the supply of the particular product or service. Negotiating price, delivery or quality for example will be restricted due to the limited availability of the product or service. The supplier does have the stronger position in this instance. If at all possible try a multi-sourcing strategy to avoid the over reliance of on one supplier. The likelihood of “reward” from this type of contract may be minimal as the supplier does not have a real incentive to provide it.

Solutions for managing this type of contract may to be establish a long term relationship, focus on a good relationship so your supplier has a mutual benefit and to try to develop different alternative requirements.

Leverage contract.

The old views on leverage contracts was that the client could exploit their position as many suppliers could offer the products or services required and have a large spending budget. However, price should not be the only factor when selecting your supplier. Other factors should be considered such as delivery, quality, capacity for example if that is important. Strict contractual terms should be enforced so the supplier minimises the risk to the client.

Critical contract.

A critical contract will have a high spend with a limited amount of suppliers who can provide the goods or services. It is a fine balance of power between the two parties who may be dependent on each other. Critical contract require the most work to maintain and ensure the right outcomes. The investment of time and money and developing programs such as total cost modelling, value analysis and continuous improvement is essential.

Developing a long term relationship should reduce risk as the supplier is assured of long term sales and is motivated to give extra “rewards”. Again a robust contractual obligation should mitigate risk to both parties.

To summarise all contracts have their own risks so the contracts officer must be complacent and manage each type of contract with the right resources and management.

Next stage

How to choose a supplier using the Carter’s 10c model.

Once again we have developed a free tool for you to use to help evaluate your suppliers and have guidance in which to choose.  This enables you to develop a structured comparison between suppliers thus making the process of selecting informed and fair.

How to select a supplier using Carter’s 10c model

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