The finality of signing a contract should rightly inspire caution in the signing parties. Once your name is on the dotted line there isn’t a lot you can do when things go wrong. You have to abide by the terms of the deal, all of them, even those included in the fine print. Words that you didn’t see, or implications that were not apparent at the time of the signing, become attached to your name and reputation.
Today, our conversation will shed some much-needed light on the process of negotiating a contract. If you follow some simple ground rules, and learn from our past mistakes, you will be well on your way to creating safe agreements that you are prepared to fulfill and abide by.
On this episode you’ll hear:
- The basic tenets of a contract
- The story of a bad contract and the lessons we learned
- More practical tips for protecting yourself from bad contracts
If you are looking for some practical steps to protect yourself in contract negotiations then this one episode you won’t want to miss!
- Free Chapter of “Profit Leaks” by James Kennedy and Garret Carragher
- Contact Us: [email protected]
Transcription of This Episode
The Gross Profit Podcast is your one stop shop on the path to profitability. Each week we share authentic advice on the positive practical steps you can take to make the company you love more profitable. If you’re looking for a positive plan to help you avoid common spending mistakes, control costs, and increase your profits, then this is the place for you.
I’m Ryan Cowden, and this week we’re joined by James Kennedy and Garret Carragher. In this episode of The Gross Profit Podcast, James and Garret discuss some of the ground rules that will help you wisely and safely negotiate new contractual agreements with your clients. The finality of signing a contract should rightly inspire caution in the signing parties, once your name is on the dotted line there can be little recourse. You have to abide by the terms of the deal, all of them, even those included in the fine print. Words that you didn’t see or implications that were not apparent at the time of signing become attached to your name and reputation.
Today, our conversation will shed some much needed light on the confusing process of negotiating a contract. If you follow some simple ground rules, and learn from our past mistakes you will be well on your way to creating safe agreements that you are prepared to fulfill and abide by. On this episode, you’ll hear the basic tenets of a contract. Every contract needs to include mutual consent, and offer an acceptance of common terms, and an exchange of value. Next Garret will tell a story of a bad contract he experienced and the lessons he learned along the way. By sharing a past story of a bad contract his company found itself in, Garret realized some of the biggest lessons he’s learned about what to look for in a contract and why they are so important.
Finally, we’ll offer a couple more practical tips for protecting yourself from bad contracts. By setting up ways to manage expiring contracts and issuing your own purchase words, you can set yourself up to be even more secure if you need to protect yourself from bad situations. If you’re looking for some practical steps to protect yourself in contract negotiations then this is one episode you won’t want to miss. There’s a lot of actionable advice in this episode, so grab something to write with because you’re going to want to take notes. As always, I’ll be back on the other side to wrap up any loose ends. So without any further ado here’s our conversation with James and Garret.
Hello, and welcome to the Gross Profit Podcast. It’s James Kennedy, CEO of www.procurementexpress.com. We help hundreds of companies spend billions of dollars each year safely. I am joined by the secret CFO in his ivory tower, Garret Carragher. Garret, how are you today?
Super James how you getting on? Feeling good today.
Why are you secret? Secret because you are worried that you might be get you might get kick out of your tower when they find out you are doing a podcast. It’s personal what you’re doing.
Yes, It’s the Stig of accountancy, you know what I mean, you know, it’s the super fast driver is the one you don’t want people to know your secret identity, you know.
It’s just so exciting. If you don’t know what the Stig is it’s Top Gear isn’t it? Top Gear they have a secret driver who would do crazy things in a car and no one know who he was. I thought he was a girl. Wasn’t he a girl once?
Well, I’m not sure, I’m not sure, he seemed a bit tall for a girl but maybe. Could have been, could have been girls are very good drivers so it could have been easy a girl or a bloke. It could be anybody, or from any gender, or any race, anywhere I suppose.
Absolutely, absolutely I can tell you’ve got
I can tell you’ve covered everyone in there
You’ve obviously been on that HR course Garret.
Yes James has really helped me. Really got rid of my bad attributes.
OK so let’s get into contract management the good the bad and the ugly. We have a nice juicy story from Garret on how things can go wrong when it comes to contracts. But let’s jump in with some of the basics. I’ve got a definition of what you need at the very least to be a contract I got this from legalmatch.com so if it’s wrong you can blame them. I’ve seen an extended list of this in different jurisdictions but at the very least there are three things you need to constitute a contract in all the jurisdictions, which is the first thing is contract must be by mutual consent. It’s not like you can conscript someone into a contract they have to use their freewill to come into it. There must be a record of that mutual consent between two or more parties. There must be an offer and an acceptance so in other words this normally takes the form of money in return for service and acceptance of those terms and conditions. And finally you have this legalese term which is consideration, which is a term for basically there must be some exchange of value in other words it can’t be outrageously unfair contract in terms of what’s been offered and received and there must be benefit for both parties.
So if you have that and there are a lot of so called contracts that there are agreements which happen informally. You know contracts don’t have to be written down. It can be written, it can be oral it can be in an email, it can be in a 100 page document it doesn’t really matter what form it comes in it must contain those items and often times you will have your team entering into contracts whether they realize it or not, all of time over the phone, by email even if its inadvertent so it’s worth making sure that everyone is aware of what makes up a contract.
So Garret we’re going to talk about good contracts which I just talked a little bit now, but you have a story but you have a story around a bad contract and what can go wrong.
So I was working for a business, a large business here in Ireland and a lot of the business, it was a multinational, a lot of the business we got was from the other parts of the European parts of the business that might be from the UK, Germany, Switzerland, wherever. And they would sign up to a contract to cover a particular customer the whole of Europe. So these are large customers. What would happen then is sometimes We could find that we’d been signed up to a contract to support and supply a supplier here in Ireland that we didn’t know anything about it. So it sounds incredible, but it is in fact true.
So one of the ones we got signed up for was a large business it actually started in Ireland but it was based in Ireland and the UK it was a large business in what they did was, and they still do is they allow people to gamble on different things. This is a large business in Ireland and UK and they are gambling shops basically. We get this support contract for that and the support contract meant what were we supposed to do. Well we were supposed to go in and you know, clean up each of their premises, make sure all the electronics were working elec. and mech. its called electronics and mechanical, so that might be shutter doors, or lights, or switches and different things like that. And also get rid of the waste so we’d be pouring out bins out every night, if there was, I’m not sure if they had much waste disposal but it could be every second night or every night they pour out bins.
The UK had actually signed us up this contract, the UK and Ireland but because it initially started as an Irish company we actually had more of their premises here in Ireland. The story was then that they hadn’t involved the Irish part of the business really in this log. What we find out as the contract started was the location of the premises in the UK was more dense than in Ireland. In Ireland even a bit more shops they were spread out over bigger distances. Whereas in the UK they had roughly the same amount of shops but they were more condensed and I might have three shops in the one town or city, whereas Ireland is a more rural country as you know and it’s more dispersed.
It turned out then that there was a huge amount of cost to go to all these different premises in Ireland compared to the UK. The second issue we had was we were supposed to do the waste disposal for the business. Now when they initially costed it they had got it subcontracted out and they got a subcontractor somewhere here in Ireland to do it or something like Horton’s waste disposal or someone like that. They had offered it at a particular price that was maybe $400,000 a year to do the waste disposal on all these premises but actually what happened was Horton’s looked at that proposal and they were able to work out that due to the location of the premises around Ireland they were going to lose money on it, lose money on this believe it or not, so they elected not to do it. Suddenly we are left then with a huge cost on the waste disposal and no one to do it. We have to provide the service so what happened was we had to go then to a different waste disposal and pay them significantly more money to get it done. In fact by paying them the additional money we actually put the whole contract into a loss making situation.
Some people might be saying well why don’t you just not pick up the waste or not deliver. Well a lot of contracts you have to read the fine print and this particular contract was none under performance clause, which meant if we did not deliver on particular aspects of the contract one of the was waste disposal, every day, then we would be hit with significant financial penalties. Believe it or not it was getting to the stage where it was nearly cheaper to be hit with the financial penalties and just not provide the service rather than provide the service at a loss.
As you can imagine James this contract didn’t go to well for us and what happened in the end was we had numerous meetings we tried to meet up with the customer and negotiate more money they wouldn’t pay. We went back to the UK and said you’ve signed us up a loss making contract, they just said that was our problem, not very helpful even though we are part of a larger group but that’s the way things can go. At the end of the day what happened was we actually lost that contract after first year. In fact, we were happy to lose it because we actually lost a lot of money on it. It just shows you that just shows you when you sign up for a contract you need to understand the fine print because what can happen very often and what happened in this case is sales can sign you up for somethings that ops can’t deliver and which hasn’t been reviewed by finance.
No I’m sure it will hardly even happen.
So this is a key thing. All the stakeholders involved because everyone signed off on it, that’s actually a new process that was brought in. Even though sales would say we’ll take away your waste and gold covered wheelie bins and empty it and everything will be done to the highest standard and we will polish bins afterwards and all this. That needs to go through ops for them to understand can they actually do that. Then it needs to go to finance can we do it at the right price. That would be my top tips for anyone who’s thinking of signing up for a contract. Understand those three things and you can’t go wrong.
Great thanks for that Garret. I mean there’s some practical steps we should finish off on my desk for everyday because that’s a big story with a big story with a big impact but actually a lot of these mistakes happen in the day to day down in the trenches. If you don’t have a repository managing your contracts or when they are expiring I would totally recommend that you start doing those straight away. It is one of the easiest ways default into contracts, a lot of contracts are in subscription form. If you don’t catch them on the right time you will be locked in to that contract for a further year whether you like it or not.
I see that fairly regularly, for people who are using other pieces of software and they find that they can’t move away from the software because they have been faulted into another year. Having some alert system for expiring contracts is the very minimal I expect people to have. Second thing you can do is which is a great feature at www.procurementexpress.com which is that feature sending as purchase orders at customers or to suppliers rather, you will be then be setting the terms for the agreement. Many times you will get a quotation from a supplier, if you agree to those terms, you just said go ahead and agree, you will be agreeing to all the fine print that they have within the quotation.
Let’s face it a lot of T&Cs quotations can have a lot of fine print but an easy way to avoid that and to enter into agreements with suppliers without having to read dozens of different of terms and conditions is to use a purchase order and attach your own terms and conditions. If it ever does come down to a legal tussle, due to a precedent known as the battle of the forms. You will be discussing the disagreement if you like on the basis of your terms and conditions and your purchase order, instead of theirs because your terms and conditions will take precedent over the quotation terms and conditions.
So those are the two tips I have for anyone I have out there listening to this who want to guard against the risk of ending up in a bad contract as my poor old friend Garret did.
Thanks James, I wrote them down for future reference and make sure we keep a close eye on them from now on.
All right thanks Garret this was fun as usual you’re a star. See you next time.
Thanks James good to talk to you. Talk to you next time.
All right folks there you have it. That wraps up our conversation with James Kennedy and Garret Carragher. They shared a ton of valuable insights and advice today about the basic rules you need to understand about contracts. We also shared some tools and resources which will all be linked up in the show notes. Don’t forget to click on one of those things to get a free chapter from the book Profit Leaks by James Kennedy and Garret Carragher. Hope you enjoyed our conversation. Please consider subscribing, sharing with a friend, or leaving us a review in your favorite podcast directory. Until next time, best of luck in all that you do and we’ll look forward to seeing you on the next episode of the Gross Profit Podcast.