How do you actually ensure that you don’t miss any deadlines to terminate or renegotiate contracts? Do you have a reliable system in place to help you manage contract deadlines?
Example: A premium furniture manufacturer in North Rhine-Westphalia was faced with the problem that its business volume had been declining for many years. The once unique design and excellent workmanship and precision were now also offered by Italian and Polish furniture manufacturers in Germany. However, these pieces of furniture were in the German market at retail sales prices that did not even cover the material costs of this premium furniture manufacturer. At some point, even the strong brand could not justify the price difference. In its plight of underutilization, the furniture manufacturer decided to contract manufacture furniture for another brand. Program after program was thus put into production. Start-up losses were justified and accepted on the basis of a learning curve that had yet to occur. However, after losses were still being made almost a year later, the controlling department began to analyze the situation. The realization was sobering. The more volume that was produced, the higher were the expected losses in the future. It would be better to continue paying employees without employment than to produce. A price discussion with the client for contract manufacturing was unavoidable. The valid contract provided for a deadline for renegotiation. But this deadline passed unnoticed, and the furniture manufacturer was now bound to the agreed prices for another long period.
In some cases, customers make their money primarily through their sophisticated contract management. This is often the case when customers have significantly stronger market power than their suppliers.
Example: In the petrochemical industry, where crude oil is converted into different fractions (gasoline, diesel, kerosene, fuel oil, heavy oil) by purification and distillation, it is cyclically necessary to inspect all equipment and replace worn components (pumps, pipes, gate valves and valves, heat exchangers, columns, etc.). Many inspections require disassembly, so it has proven effective to shut down individual plants for a planned period and completely overhaul them under the highest safety precautions (turnaround projects). On such occasions, improvements are also implemented or the plants are converted to the production of other products.
For this work, the refineries use external industrial service providers, with whom they conclude contracts that run to several hundred pages. In these contracts, the oil companies specify all the conditions. There are many pitfalls in the calculations, because the actual conditions on site only become apparent during project execution. The contracts contain hefty penalty payments for deviations from agreed deadlines and qualities and violations of safety regulations. Industrial service providers can earn good money, but can also lose massive amounts of money if any detail gets out of hand. If agreed-upon contract content is not translated 100% into project implementation by industrial service providers, it can bankrupt them.
In this industry, three important aspects are particularly evident: First, you need to pay the utmost attention to contract drafting. Considerable upfront work must be done in this regard. Do not leave this phase to inexperienced employees. Check every detail in several loops. Second, the contract must be known “by heart” by the project manager, every construction manager, and every team leader who is involved in project implementation. Third, projects of this type in particular must be implemented with the utmost mindfulness to anticipate and actively manage all risks.