The Impact of Post-Award Contract Changes on Supplier Relationships and Organisational Efforts
I was listening to this podcast – The Phil-Ins: Connecting the Dots with Phil, Kelly, and Rich – Fine Tune and part of Rich, Philip and Kelly’s discussion on trust resonated with me. Particularly about how Procurement needs to build trust within the business and its stakeholders to develop the business needs into a contract.
In one of my past roles as a Chief Procurement Officer I was having a candid conversation with an internal stakeholder who was a contract manager from a large business area. They said, “I wouldn’t worry too much about Procurement putting effort in at negotiation, just get the contract awarded. We will change it to what we want once Procurement hands it over.” I was disheartened and astounded at the same time. Procurement, and Legal, invest a lot of time, expertise and care to deliver a contract to a business area and supplier that will meet business (and supplier) needs, manage risk and deliver value for money. The supplier also invests time and effort into the negotiation and deal. How were the objectives of the business area and Procurement / Legal so misaligned?
When a contract manager changes the terms of a contract after it has been awarded, it can have significant implications for supplier relationships and the efforts of procurement and legal teams. Here, we explore these impacts in detail.
Impact on Supplier Relationships
1. Trust and Reliability: Changing contract terms post-award can erode trust between the supplier and the contracting organisation. Suppliers may feel that the organisation is unreliable or untrustworthy, leading to strained relationships. Trust is a cornerstone of effective supplier relationships, and any perceived instability can damage long-term collaboration.
2. Performance and Commitment: Suppliers might become less committed to delivering high-quality performance if they perceive that the contracting organisation can unilaterally change terms. This can lead to reduced motivation and potentially lower performance standards.
3. Negotiation Dynamics: Future negotiations may become more challenging. Suppliers, wary of potential post-award changes, might demand more stringent terms or higher prices to mitigate perceived risks. This can complicate the negotiation process and lead to less favorable terms for the contracting organisation.
4. Reputation: An organisation known for frequently changing contract terms post-award may develop a negative reputation in the supplier community. This can limit the pool of willing and high-quality suppliers, as they may prefer to work with more stable and predictable partners.
Impact on Procurement and Legal Efforts
1. Increased Workload: Post-award changes often require significant additional work from procurement and legal teams, unless they aren’t told about it. They must renegotiate terms, draft amendments, and ensure compliance with new conditions. This can divert resources from other critical tasks and projects.
2. Legal Risks: Modifying contracts after award can introduce legal risks, including potential breaches of contract and disputes. Legal teams must carefully navigate these changes to avoid litigation and ensure that modifications are legally sound.
3. Cost Implications: The process of changing contract terms can incur additional costs. These include legal fees, administrative costs, and potential penalties or compensation to suppliers for agreed changes. This can impact the overall budget and financial planning of the organization.
4. Complexity in Compliance: Ensuring that all changes comply with relevant laws and regulations adds another layer of complexity. Procurement and legal teams must stay updated on regulatory requirements and ensure that all modifications are documented and justified appropriately.
5. Impact on Future Contracts: The experience of post-award changes can influence how procurement and legal teams approach future contracts. They may implement more robust initial terms, include clearer clauses for modifications, and engage in more thorough risk assessments to prevent the need for future changes.
Changing contract terms after an award can have profound impacts on supplier relationships and the efforts of procurement and legal teams. While sometimes necessary, these changes should be approached with caution and clear communication to mitigate negative effects. Building strong, trust-based relationships with suppliers and internal teams (Procurement and Legal) ensuring thorough initial contract terms can help minimise the need for post-award modifications and their associated challenges.