Here’s a thing that’s hitting home harder the longer I’m in this job: people running businesses don’t understand contracts. By that I don’t just mean we don’t understand the contents, the legalistic language, or the meaning of the clauses. It’s that some of us don’t understand what a contract is and think it’s irrelevant to our businesses. Is it any wonder then that we don’t know when we will get paid?
I don’t think this is entirely our fault as small businesses owners. Over the years, contracts have, become more and more impenetrable, designed by lawyers worried about protecting firms in the event they’re taken to court rather than being used as tools to make sure the customer and supplier know the rules of engagement during the time they work together to make sure they each get the best possible outcomes.
Having said that though we do need to take care to understand what we’re signing up to before putting pen to paper. My despair was sparked this morning when the Casework Manager told me that she’d had a call from a business owner who had invoiced her customer for additional money because her own costs had gone up. When you are a small supplier you struggle if costs go up and the price you’ve agreed to accept no long covers your costs. But if the price to be paid has been agreed, then unless there’s a clause in the contract that allows you to go back and ask for more money, the price is the price end of story. A contract is a contract.
The supplier supplied the goods according to the contract. There was nothing in it that said that if the supplier’s costs increased over the course of the contract period the amount to be paid for the work delivered could be increased. These types of ‘contract variation’ clauses are sometimes included in contracts in sectors where costs are prone to increase as materials for example go up in price. The construction sector contracts often allow for variations in the amounts that can be charged.
Our small business supplier was adamant that because her costs had gone up she should be entitled to invoice for the extra money. She had submitted an invoice for the additional amount she thought she was due, and was furious that her customer had simply refused to pay. What were we (OSBC) going to do about it? On reading the contract, signed and therefore accepted by the supplier, there’s nothing we can do about it. There’s nothing in the contract that allows for the price to increase if costs increase. The price agreed is the price, full stop. What do you say to a supplier who keeps saying ‘It’s not fair. I’m entitled to that money because my costs have gone up’? We felt her frustration and indeed desperation, but we can’t force customers to pay more than the price agreed. We can’t intervene in contract agreements at all. Those agreements are between the supplier and their customers.
While a contract may not cover every eventuality it is the document that will set out how the supplier and the customer will work together. World Commerce and Contracting research shows that 88% of business people find contracts difficult or impossible to understand. If we don’t understand them, the chances are we will simply sign on the dotted line without taking in what they mean for the way our business with the other party to the contract will be conducted. That lack of understanding leads to disputes and damages working relationships. World CC says though that organisations are increasingly recognising that clearer and simpler contracts improve relationships, reduce risks, and deliver outcomes more efficiently.
Please get the agreements you make with your customers or suppliers in writing.
When a page looks dense without breaks people are immediately put off. Put in breaks, space it out and add symbols to draw attention.
If you want people to understand, communicate in language the intelligent 12-year-old would understand.
Drop your company jargon. That’s your own shorthand but why should anyone who isn’t part of your company understand it.
A picture, flow chart or a diagram speaks volumes.
Keep is shorter, simpler and clearer so everyone can understand, and you’ll have fewer disputes.
Don’t just draw up a contract to suit yourself. Make sure it’s clear and fair to everyone. It will take a lot less time to get it signed and over the line.
If the project you’ll be working on is long running there’s a high probability that costs will increaser. Consider putting in clauses, or asking for clauses, that allow you to ask for more. Some big firms expect that to happen now.
If you get the contract right, people want to work with you, your business relationships improve, and everyone benefits.
