For many, the definition of a good contract is that, once signed, it is put in a draw never to be seen again. In business I’ve certainly used that phrase myself, but it’s probably more accurate to say that a good working relationship between a supplier and its customer, where each see value in what the other provides, is what keeps the contract in the draw – regardless of whether on paper it’s a good or bad contract.
However, there are times where checking the agreement is beneficial. One of those times is to assess the effect of inflation or increased input costs on the price that can be charged. This becomes especially critical in low margin business (think software resale, Government procurement for example). If you have had a well drafted and commercially focused contract put in place it will very likely contemplate these changes, often with a direct reference to an automatic price change for Consumer Price Index (CPI) or fixed increases (either during an initial term or thereafter).
So here is the big news Annual CPI to 30 June 21 was 3.8% (https://www.abs.gov.au/).
Show me the numbers
Let’s look at some high level numbers for illustration purpose –
Low Margin Reseller business
$100 Revenue, $80 Cost of Goods, $15 Expenses = $5 Operating Profit
Apply CPI increase
$103.8 Rev, $80 CoGS, $15 Exp = $8.8 OP (+76%)
Annuity Services business
$100 Rev, $20 CoGS, $60 Exp = $20 OP
Apply CPI increase
$103.8 Rev, $20 CoGS, $60 Exp = $23.8 OP (+19%)
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Applying the increases you are entitled to under the contract may be the single biggest thing you can do to improve your margins this year.
Now this relies on you having a good contract, a good commercial lawyer that looked after your interests in the supplier and customer negotiations and the ability to automate the billing change effectively.
If you are looking for a lawyer that understands the numbers and profit as well as setting up your contracts for success – get in touch now. As you can see it pays for itself.
Get in touch – Contact us.
PLEASE NOTE: Nothing in any post on this website constitutes legal advice. All articles are opinion pieces that are subject to change and should not be relied upon. Please contact us for advice specific to your situation.
Image courtesy of ABS