Renegotiation and Termination

More often than not, it is more desirable to renegotiate a contract than

to terminate one. What do you think may be some of the efects of a
contract termination from the buyer's perspective? What about from
the seller's perspective?
Termination of a !" contract #ill cause each of the parties to incur
additional costs. The $uestion to ask #ould be if the additional cost
out#eigh the risk or cost of not terminating and %o# much are the
costs and can they be mitigated. &'amples of such costs may include
additional fees to the vendor for providing termination services, such
as maintaining parallel environments and training of customer
employees.
There are other things that both the parties need to consider. As part of
renegotiation and termination discussions, both parties would need to review the
intellectual property provisions in the BPO contract to determine their ownership
and use rights of certain key intellectual property e.g., software, methodologies,
tools, documentation upon termination. Often at the center of renegotiation or
termination discussions is a project that was not successfully implemented, not
implemented on time, delayed, or canceled. The parties will need to review the
BPO contract to determine each partys obligations with respect to the project
and the impact on the BPO contract if the project was not implemented as
designed or on schedule or was delayed or canceled. !as the vendor provided all
deliverables in a timely manner" !as the vendor met all re#uired milestones" $s
there a termination right associated with the failure to provide deliverables or
meet milestones %in addition to the right to terminate for material breaches&"
'oes the customer have the right to re#uest li#uidated damages" Are there any
third parties that did not perform that have impacted project implementation" $f
so, which party bore the risk of third(party nonperformance"
)eferences*
+ohn ,. !alvey and Barbara -. -elby. %.//0&. Business Process Outsourcing.
1econd 2dition. +ohn 3iley and 1ons, $nc.
"n both sides, contract termination generally costs time, money and
can result in ill(#ill by one or both parties.
$ would think both sides have a vested interest in making it work. They have both
devoted much time and many resources in developing the contract and the
relationship to this point. $t is better for both sides to salvage what they can and
renegotiate rather than scrap everything and start over.
$n a situation where a material breach has not taken place, there may be
opportunities when the purpose of the contract is no longer applicable. $n these
cases, termination would be a mutual bene4t. $n the case that a material breach
has taken place, renegotiation is the best option if the contractor has the ability
to complete the scope. But, in the case that a contractor does not have the
ability to complete the scope of the contract, then termination due to breach is
the only option. $n the end, the job has to get done.
5rom the buyers perspective it would mean basically starting over with
negotiation process and possibly the whole outsourcing process depending what
occurred. This will create cost issues for the project as well as delays in
completion of the process. 5rom vendors viewpoint it would mean loss of future
revenue and it may also cause the vendor to have a total loss on the project with
no vehicle to recoup the loss.
$f the contract is terminated then the buyer has lost the source for their business
process. $n this case they either have to rebuild the process internally, which
may involve hiring, or re(hiring employees back from the vendor as well as
relearning skills and even rebuilding infrastructure. this can be a signi4cant
e6pense. The other option is to 4nd a new 7endor for the process which will
entail all the issues that had to be worked out with the original vendor, plus
working out how the process will be transitioned and the learning curve with the
inevitable changes. The up front monetary costs in this can be signi4cant, and
the disruption to the organi8ation as the transition goes through can be severe.
5rom the sellers perspective, they lose the revenue that the buyer provided, and
they may also lose in their reputation in the industry. Because of the di9culties
in changing a BPO provider and the fact that it is often preferable to avoid that
eventuality it may re:ect badly on the seller. Also, depending on the terms
involved there may be legal or 4nancial penalties from a contract termination
that will have to be dealt with.
Terminating a contract does not come easy for both the buyer and the seller.
-ost well written contract includes an early termination clause, especially if the
seller does not meet their performance goal. !owever, service contracts could be
terminated by the seller as well if the buyer does not live up to the terms of the
contract. 'epending on the circumstances that led to the termination either of
them could face a negative cost. This is as simple as a prenuptial agreement
between a man and a woman or a breach of contract caused by the seller in
most cases
$ndemni4cation could be one of the greatest e;ects in contract termination,
which in most cases involve some kind of re(imbursement to pay for loss of
compensation, damage or liability. Others include*
)emoval of deliverables from buyer<s premises.
2mployees of the seller losing their jobs.
=onfusion and distrust between everyone involve.
Buyer<s cost in renegotiating a new contract.
3hen it comes to contract termination, there are conse#uences on both sides,
buyer and seller. Both may have reasons for the premature closure of the
contract and both have e6pectations when then contract is terminated.
1ome of the e;ects that may cause a buyer to prematurely terminate a contract
would be unreali8ed cost savings or results that are under par. $f the buyer sees
some advantages to canceling the contract such as another vendor o;ering the
same services for less, then the buyer might want to e6ercise termination. Also if
the buyer is seeing sub(par results during periodic inspections then to avoid
further setback they may want to settle the contract and award another vendor.
)o you think that the contract structure selected for the contract can
help reduce or avoid the need for renegotiations or terminations?
*upport your ans#ers ( elaborate+
$ deal with contract or agreements every day. $ know that what the vendor signs
and what we signed are binding. That is to include the service we provide, to the
use of e#uipment of who owns what as well as who will 46 any issues. Per our
agreement we have to provide what we signed. 1hould there be any change
need we have something called an amendment.
There are several contract types that can be used to avoid some of these
situations. $f a unit price contract is used then the level units re#uired would not
need to be renegotiated because if volume increased or decreased the cost
would adjust with it. >ou can also try and anticipate some of the things that may
change over the life of the contract. These can be addressed in the agreement
when or if they happen.
1ome contract pricing structures will reduce terminations because structures
such as unit price or cost plus have the ability to adapt to a changing scope. Also
if the price per material is too high then it can be renegotiated without retroing
the costs already paid. 5or instance say you were paying ?@ per item and you
bought A// items over the past year. 3ell this year you found a vendor that will
charge you ?A per item. 3ith the unit cost all you have to do is change the cost
per future item bought and it will not e;ect anything else.
The various types of =ontract 1tructures o;er di;erent risk when e6amining
renegotiationsBterminations, mainly due to the associated costs of each type. But
when speci4cations are clearly laid out in the beginning stages of the contracts
developed, and the true intent of the services needed are written $ believe that<s
where most of the attention should be directed.
"ften times if the contract or management agreement doesn't include
all the necessary re$uirements to administer the !" services, it is
inevitable for terms to be renegotiated. Renegotiations are common if
there are changes #ith the scope, cost, or timing that is listed in the
present contract. ,t the same time, no one can predict unforeseen
changes and if should something happen to change the schedule or
budget. The structure of the contract is not necessary helping reduce
any renegotiations. )etailed scope, performance measurements and
terms-conditions are the main parts of the contract that can help avoid
renegotiations. .f both parties have a full understanding #hat is
re$uired, ho# it is measured, and #hat happens if they are not meet,
then everyone should feel that there are not too many issues that can
allo# a contract to go bad.
"ther than price-cost, #hy #ould one renegotiate a !" contract?
There can be several reasons for renegotiating a BPO contract and they are*
( =hange in -anagement ( Cew management can have di;erent set of objectives
and might want to renegotiate in line with the new set of objectives
( $nade#uate service level ( The service level may not be appropriate and
ade#uate
( =hange in organi8ational structure
( Ac#uisition, merger or divestiture
( =hange in scope or project de4nition
( =ontract 26piration
( 'elay or cancellation of roll(out of new environment
( 'esire to bring the services in !ouse
)eferences*
+ohn ,. !alvey and Barbara -. -elby. %.//0&. Business Process Outsourcing.
1econd 2dition. +ohn 3iley and 1ons, $nc.
Other than priceBcost other reasons that might trigger renegotiation are*
Catural disaster
=ustomer feels vulnerable
7endor feels overburden
5ailure to meet deadlines
Dnskilled workers
$ncreased or reduced volume
Cew projects not re:ected in current contract
'esire to increase the length of the contract
/an you give e'amples of the absolute need for termination?
$ think absolute need for termination is when a subcontractor of vendor fail to
meet the re#uirements. $f they cant sign your terms and agreements and agree
to our terms then there is a problem. Also, if you see that they cant get the
material they are suppose to supply to the jobsite ontime, then you should
terminated with them and go with someone else.
$ would think not meeting set deadlines and performance goals that are clearly
de4ned in the scope would be . reasons for termination. $f this lack of
performance is caught early you can still hire new contractors and keep on track
and budget. 1ometimes contractors over estimate their own ability to
accomplish tasks.
$ think that an absolute need for termination would be if the seller is not
performing well, as others have stated. Also, if the buyer wanted to change the
scope drastically one way or another the seller may want to terminate the
contract. Another reason would be if the seller were to continuously raising their
prices, the buyer may want to 4nd someone that is less e6pensive.
According to law, a contract is automatically void if the contract is in any way
shape or form not followed through as agreed upon. $n order to avoid any risk it
is wise to use a legal professional review your contract once it is established, and
reviewed once by the individual agreeing to the contract to assure the
understanding of a binding contract and the ability to enforce it according to the
law. $t is a halthy way to establish a good and professional relationship. The
outcome of a good and a understood contract is good work,,,,if there are :aws in
a contract the relationship is hurt and law suits maybe the only way to resolve
the di;erences.
26amples are not getting paid in time, taking longer then what was agreed for
the 4nal product, failing to go through the scope etc..
$n my opinion reasonsBe6amples for the absolute need for termination are*
( =ontractor not meeting the scope of the contract or not meeting the
deliverables
( =ontractorBvendor missing the deadline or timeline repeatedly and not taking
corrective or remedial measure to correct that
2ven after repeated escalation and discussion, if the vendorBcontractor is unable
to meet the deliverablesBmilestones of the project, then the customerBclients
management doesnt have any other option but to go for termination of the
contract.
$t is not easy to break a contract or force a renegotiation no matter what the
circumstance. $ have several service contracts in my business where we lose
money doing it. 3e are basically stuck with the contract for the duration unless
the buyer will renegotiate. $t is like buying a 4tness membership and then
deciding you would rather stay on your couch. >ou may be able to negotiate a
settlement but it will still cost money to break the contract terminate it. 2ven
non(performance can be di9cult to use especially if there is not a clear violation.
$n most cases these things get settled in court if a settlement cannot be reached.
A few e6amples that may spark an absolute termination of a contract are*
$f any federal laws have been broken by either party.
$f privacy rules are violated.
Eovernment regulatory laws are broken.
$f con4dential information are released.
$f key criteria of the contract are not done.
2ither party goes out of business or 4le bankruptcy.
'eath of the principal buyer or seller.
,s outlined in our te't, some of the reasons #hy a customer #ould
seek termination of a contract are0 ,c$uisition, merger or divesture,
failure to roll(out of ne# environment, poor customer or vendor
relations, among many other reasons.
,nother big reason #hy a customer #ould #ant to terminate a contract
is #hen the customer #ants to renegotiate, and uses this as a #ay to
force the vendor to renegotiate. The customer might argue that the
pricing is e'cessive, #hich can either be true or not, since the customer
perceives so. 1et's say that the customer is not achieving the
forecasted levels of pro2ts, thereby he-she sees the !" contract's
termination as a #ay to cut do#n on e'penses. %-she does not #ant to
terminate the contract due to its repercussions, but he-she kno#s that
the vendor #ill try to reach an agreement in order to keep the contract.
/ould contract termination cause serious 2nancial conse$uences? /ould
it go all the #ay to the e'treme #hereby a contract termination could
have irreparable harm for a vendor? What are your thoughts as #e go
all the #ay 3so to speak4? 5(4
$f the vendor has made signi4cant cash or capital investment in a project as part
of the contract and the buyer walks away or terminates the contract then the
vendor can be left with no way to re(coup the investment. $f it is large enough
this could cause irreparable harm to the vendor. $ think in this case the vendor
would take legal action to recover the costs, but depending on the situation the
remedy may not be in time to protect the vendor. $ think though that a vendor
who willingly walked into a situation where the loss of the contract or its failure
to be ful4lled would be fatal would either be taking a huge risk or just not very
e6perienced or wise. $ would like to think that a vendor $ was working with had
the resources to survive if something went wrong. $t might mean that they do
not have the resources to meet the contract terms unless everything does just
right. $f they cannot handle the failure of the contract, do they have the
resources to truly meet the need"
There is a risk of irreparable harm. .f the vendor leveraged a great deal
of money or assets against a speci2c contract and the contract #as
terminated, the vendor could 2nd themselves in default of loans. This
could be particularly damaging in manufacturing if the vendor is
producing parts that are speci2c to a customer and they lose that
customer #ithout anything in the pipeline.
>es, the contract can cause serious 4niacial conse#uences for the customer, $f
the contract success is linked with some other major activity of the company and
it impacts the 4nancial revenue or the PFG. Then, it can have serious implication
for the company. Also, the client can su;er the contractual claim or loss resulting
from the mutual agreed terms in the contract. Termination can also lead to
4nancial loss resulting from people attrition, e#uipment loss and material
wastages. 5or the vendor, it could cause irreparable harm if they have
committed su9ciently large amount of resources %people, capital& into the
project and redeploying them would be a costly a;air for the vendor. 7endor can
also su;er contractual claim or damage out of the agreed terms and conditions.
There could also be litigation cost involved in case of serious con:ict emerging
out of contract termination.
>es, it could de4nitely cause a serious 4nancial conse#uences if the contract has
no early termination clause to protect the vendor. Then this could cause the
vendor to be responsible for paying the buyer a fee or even be responsible for
training the ne6t vendor that the buyer ac#uire to get them up to speed.
contract termination if not followed with the legal fore of the contract could
cause the vendor irreparable 4nancial harm including closing down his business.
This is why it is important that a contract manager or perhaps a close out
manager should be involved both during a regular closeout and a termination
because they may have some legal knowledge on the how, what, or when a
contract termination is feasible. !owever, both buyer and vendor could be in
4nancial trouble if the termination is not well followed. At this point neither the
buyer nor vendor wants to be out of pocket. $t could be a bitter court battle if it
involves millions of dollars. This is why a provision in the contract must clearly
state when, why and how a contract must be terminated. $t may also help if the
vendor has liability insurance.
.n your opinion #hich contract pricing structure better facilitates a
contract renegotiation?
$ can see ways in which each kind can have room for renegotiation, but $ would
think personally that a unit(cost plus percentage would probably give the most
room for some renegotiation. The vendor is going to push the percentage as
high as they think they can realistically obtain and therefore may be willing to
work downward on the percentage, particularly if they managed to 4nd other
areas to save money or reduce costs. At the same time the buyer may be willing
to go up o the percentage a little especially if the percentage cost is not a
signi4cant fraction of the unit cost or overall project cost.
$ will say Time and -aterial with a pause, which $ think is best, suited for
renegotiation because both the seller and the buyer can control the cost. The
buyer can reduce the cost by cutting down on the amount of work given to the
vendor which will eventually reduce the amount of materials used. !owever, if
the vendor procrastinates he can earn more money. 1econdly, this type of
contract is most :e6ible then the rest. $t also has no de4ned value at the
beginning of the contract. $t is also very easy to see when things are going wrong
because it is simple as pay as you go and access regularly. This type of project
can stop for renegotiation at any time. $t can also be changed into a 46ed fee
contract after the specs are identi4ed. 5le6ibility is a good word in renegotiation
and TF- is where you can 4nd it.