Costs are still the most important factor of the decision to purchase services and/or carry out projects. With an enormous number of contracts with even more suppliers, it becomes a problem for any company to keep track of them all. In addition, the complexity of individual contracts makes it difficult to compare them. So that it is not clear at a glance whether the services are all comparable and what costs they will trigger.
And if that weren't enough, in many cases there can be an increase in overall costs as well. Unnoticed, so to speak hidden costs, can arise through several cases. What these costs are, what triggers them and how you can avoid them, you will learn in the following article.
A common issue with purchasing services and support activities is that not only their delivery is charged. In most cases, a general administrative, or so-called management, overhead is also required to be paid.
Common arguments for this are:
All of them are true, but in the end not calculable. When a service is bought based on resource estimations, then it must be transparent what is added on top as overhead costs in the first place.
The important thing for you to do is to limit those overhead costs. It is definitely not recommended to look always on absolute and fix numbers. Furthermore, you should estimate them with respect to the size of the project, support delivery, etc.
A good approach for this includes the following 2 steps:
Over the past 10 years, COLAs have not been an issue in many parts of the world. But in times of rising inflation risks and other price drivers, COLAs are becoming increasingly important and can be a key point of contention in negotiations. It is therefore worth examining the current and near-term environment in which you operate and what you can do to put yourself in a good position.
Therefore, existing contracts need to be examined and evaluated for regulations related to the application of COLA. Compare your contracts to see which regulations, etc. are working well or where they should be optimized to reduce costs.
For the future, it is beneficial to establish a common standard for your contracts. Therefore, it is crucial in negotiations that you bring your bargaining power on the table:
Use your power to bring your approach to COLA into the contract and remember the following: It's about balancing of volume and business expectations on one side with the risk on the other for the supplier.
If it comes to difficulties to implement a generic COLA clause within your contract, it could be very helpful to differentiate on cost types. Below some examples are listed:
It can be worth to separate COLA agreements based on cost types. All of those agreements should come with a cap anyway (therefore please see the following chapter “Limit COLA with an overall cap”). For usage of COLA clauses also the underlying cost-model could be crucial.
In general, large companies and supplier of such services are more likely to agree to lower cost-of-living adjustments for fixed prices. This is for the very simple reason that they allocate their own costs in fixed-price projects or ticket-based billing.
These methods give them more opportunities to allocate or subtract resources. With standardized rates for TM models and similar, there is hardly any room for movement and absorbing COLA.
In summary, it is very important to make such a differentiation when it seems impossible to agree on your standardized COLA determinations.
It has been mentioned several times, but is an absolutely critical factor at present. Current inflation rates are rising, which is drawing everyone's attention more and more to COLA. If not excluded at all from the beginning of a contract, it can cause problems in budgeting, calculating project costs, sustainability of funding models, and so on.
Therefore, it is important to bring in some limitations. COLA should be limited:
In many cases it is also beneficial to explicitly exclude some costs from the usage of COLA. This ensures that at least not all cost components will rise.
Reducing currency risk is essential. Paying your bills with the money you earn is not the worst advice one can give (from a risk perspective).
However, there may be good reasons for using other currencies in certain circumstances. Therefore, it is often unavoidable to include exchange rate clauses in the contracts. Take some time to think in advance about how you want to define this mechanism to your advantage and consider the following points.
The mechanism must:
Review your existing contracts, define how this topic shall be handled in the future, and try to implement it as defined above. This will bring you several advantages such as:
Costs are rising all around the globe!
Read our guide and find out how to reduce costs overall, increase planning certainty and reduce effort required to produce the same results.
Included in this guide:
Before Covid, travel was not only common, but used extensively. Project kickoffs, milestone releases, workshops etc. - there are many reasons that justify business travel requests.
In times of rising costs, a strong demand-driven travel management and policy can significantly reduce costs. To reduce travel costs, you should try to avoid them in general:
If it cannot generally be avoided, then try to minimize it. Implement a clear travel policy according to your expectations and standards within your contracts. In addition, it is very helpful for each project to create a travel cost estimate as part of the scoping phase:
This allows you to estimate the amount of costs and already integrate those right away into the budget for the project.
As a general remark: Make sure you take the lead in submitting expenses for all travel requirements. This means that the vendor must follow your travel guidelines you agreed within the contract and provide you with an estimate in advance. Then you can decide on the number of needed resources, duration and so on with a clear calculation of triggered costs.
For the long term, try to make some change management efforts. As more and more offshore resources are used, traveling should be reduced.
And keep in mind: It all worked during Covid with internals and externals, so why should it not work now or in the future?
In times of digitization and automatic archiving of contracts, it is still possible to keep track of the number. But with the best will in the world, after a certain number of different contracts it is impossible to remember the exact contents of each agreement.
Therefore, it is highly recommended to establish standardized framework agreements with strategic suppliers. Such agreements should, of course, include all the points already addressed in this article, but they offer a wide range of additional benefits. Some of them are listed below:
However, a major advantage also lies within the area of hidden costs:
And probably the most important thing is that such agreements increase the likelihood and ease of choosing the more favorable and suitable option for you.
At the beginning it seems very complicated and there are many things to consider. But once a well-functioning and standardized framework for the mentioned cost driver is implemented, you will:
If the room for interpretation and differentiated application of contract components is eliminated by precise wording and standardized mechanisms, transparency and thus plannability are achieved at the same time.
