Take on more risk - or pay the price.


I've always wondered why many in the public sector have been quite so keen to push risk onto their contractors. There are far too many instances where apparent risk transfer has taken place, and yet the tax payer still ends up paying the price. In the current economy, that price is rising, and rising very fast.

A number of our clients report very challenging market conditions. New procurements are struggling to gain interest and, if they do receive tenders, prices are 20-50% greater than expected. Contracts with inflationary uplifts are also causing major problems, for provider and client alike. We're aware some organisations are considering refusing to pay the uplift that is due under their contracts. To be frank, we've seen far too much disregard of the law in the UK's national government already; bringing that approach to address inflationary issues is not, and never has been, the answer.

Our advice is to seek early conversations with the other party. Being clear of how inflation is impacting both sides can create a foundation from which sensible solutions can be found. One approach we are advocating is to identify exactly which commodities, goods or services are the most significant in inflationary terms. By adopting a more dynamic, flexible approach to contract pricing or uplifts, can create valuable benefits for all parties.

For example, if fuel or oil pricing is a major inflationary factor, the public sector buyer can agree a dynamic contract price that follows an agreed market index which results in pricing changes on a monthly or even weekly basis. By doing so, the provider can be reassured that they won't catch a cold when the market price rises, and the buyer can be assured that the price will reduce once the price drops.

Failure to adopt a dynamic approach will result in a weakened market with fewer operators prepared to bid for contracts, and significant increases in costs for the long term from those operators who choose to remain.

For advice and support in this area and in all things commercial, please get in touch. mh@ethicalcommercial.com