Insights


Why do so many contracting businesses pay insufficient attention to the contracts they enter?

It’s a dangerous time for contracting businesses in Australia with falling demand and declining margins being the norm. However, of equal significance is the lack of attention paid to contracts.

As they say, the devil is in the detail; and it is the details that are damaging Australian contracting businesses, by exposing them to significant financial risks that threaten their viability.

At Vantage Performance, our 6 tips for clients before they enter a material contract are:

  1. Price the contract correctly. Refer to our recent blog on activity based costing.
  2. Understand the contract. You will need to rely on the contract if work has stopped and the parties are in dispute. Therefore, consider how the contract can help you avoid a dispute, and how it could get you out of it favourably.
  3. Understand the cash cycle. How will the contract affect your cash flow given the payment terms expected by all parties?
  4. Prepare a risk analysis. For example, contracts with a high fuel component might wish to mitigate this risk through rise and fall clauses.
  5. Negotiate clauses that will not work for you. If the client wants your most competitive price, or needs the work performed immediately, then you may be able to negotiate contract changes.
  6. Know when to walk away. If you can’t negotiate away unacceptable clauses, or the risks are too high, you may need to walk away from the contract.

 

Here’s an example of how understanding the implications of a contract can ensure the future survival of your business.

John, a Vantage Performance client, was the Managing Director of a $47M turnover, non-listed contracting business. He wanted to accept a $30M, 10-month contract with a listed mining business at 20% margin and on 90-day payment terms. John calculated he would make $6M gross margin over the 10 month period.

However, on closer examination, a risk analysis revealed he would be $7.2M out of pocket on a cash flow basis – and therefore insolvent – before he received a cent from his client. When the client confirmed that the 90-day payment terms were non-negotiable John had no choice but to refuse the contract. John lost an opportunity to earn $6M in gross profit but saved his business.

Andrew Birch, Executive Director at Vantage Performance, has over 20 years’ experience successfully managing troubled businesses. David Bilclough, former Client Director of Vantage Performance, uses his experience as a Director of construction and contracting companies to improve business performance.

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