Andrew Morrison: Can we renegotiate our public sector contract?

Recent events in the Middle East are sending shock waves around the world. One of the reverberations is in the business world where initial joy at winning a contract with the public sector can turn to pain if your costs are rising considerably more than you budgeted for. What are the options available in this situation?

First, your client would expect that you would have priced in risk and have access to working capital, reserves and additional facilities (e.g. overdraft, loans, etc) to tide you over. We are very much in a VUCA world now – Volatile, Uncertain, Complex and Ambiguous. So, market shocks (especially over a multi-year contract) are to be expected. However, it is fair to say that many bidders sharpen their pencil to win work and some sectors (e.g. construction and facilities management) operate at wafer-thin margins. So, when the tide goes out, we find out who was swimming with no trunks on!

What steps would I suggest you take if you think your business may not be able to continue to deliver the contract at the current tendered prices?

1. Examine your contract very carefully: You may need to take specialist legal advice to understand what your actual contractual position is in your current (and possible future) circumstances. For example, there may be force majeure provisions that allow you to trigger contract change control / variation provisions, or even to exit the contract. Be careful though about exiting the contract as the public sector can have a long memory and may now view you as unreliable. Nevertheless, if your financial survival is at stake, going early on this may be necessary. The contract may also detail dispute, mediation / arbitration procedures, so these could potentially be invoked.
2. Gather the evidence: Before you ask to meet with your client, you will need to have evidence to back up your case. Be prepared to consider open book accounting for the contract and think about transparency around your company financials, revenue streams, commitments and facilities. Show the assumptions you made when tendering for the work. Demonstrate how these were reasonable e.g. look at the assumptions that the public sector client themselves, the Government and its various quangos as well as relevant trade bodies were publishing at the time. Your business case for a contract variation can also include elements such as effects on jobs, supply chains, local businesses, etc. You should also outline the savings / efficiencies you have already made.
3. Look carefully at where you can give your business greater financial breathing space: There are likely many ways that you can cut your own costs to keep more revenue in the business (you may need to be ruthless and let go of some ‘sacred cows’); double down on your own credit control; seek extensions to credit terms with your suppliers; give thought to increasing borrowing; perhaps bringing in an equity partner for a cash injection, etc. Be very careful about giving your house as collateral for business debt. It is also worth exploring what Government assistance there may be for businesses (especially SMEs) affected by the current situation.
4. Manage your stakeholders: Relationship management will play an important part in what can be achieved. While your situation can seem all-consuming, it is essential that you also demonstrate an understanding of your client’s position e.g. their costs will have gone up too! Gently socialise your key client contacts to the developing situation and seek suggestions from them in how to manage it. It is always helpful if you have cultivated relationships with the decision-makers in your client organisation as this can increase the likelihood of negotiations being successful. If both parties can approach the issue as a shared problem (and the client will have a problem if you exit the contract as they will need to get a replacement likely at a considerably increased cost), then there may be a greater prospect of a successful outcome. If your business is a member of a trade / professional body and / or you have trusted relationships with other suppliers, you may gain some intelligence in what is happening elsewhere in the market.
5. Consider escalation routes: If your client plays hard ball and is not willing to compromise on anything, then you may still have some options. Publicly elected politicians (e.g. local authority councillors; members of Parliament, etc) could be approached and asked to intervene on your behalf. While much of the decision-making rests with salaried officials, they will often take on board representations made via elected members.
6. Have contingency plans if your request is refused or the decision-making is slow: The public sector does not usually make quick decisions and these are often further delayed by budget and electoral cycles. So, even if there is goodwill, you may be kept waiting longer than you can cope with. What is your Plan B? and Plan C?

While we all hope the current situation will de-escalate quickly, businesses need to stress test and scenario plan their responses as costs could continue to rise inexorably. Those who make a good case to their client at the right time (neither too early or too late) are the ones whose contracts are most likely to survive the current difficult times. Your client may start to get a myriad of similar requests, so there may be some merit to getting in early, if you really require this assistance.

Going forward, businesses may need to take more time examining contracts in more detail during the tender process. Ask clarification questions designed to test the client’s likely responses to market shocks and then factor these into your overall commercial risk appraisal of whether to bid for the contract. As Kenny Rogers said: “You need to know when to hold; know when to fold; know when to walk away; and know when to run!”

Of course, many of the above considerations can also apply if you wish to renegotiate a contract with a private sector client.

In volatile markets, the suppliers who will survive are not necessarily those who priced perfectly – but those who acted early, presented credible evidence, and treated renegotiation as a structured commercial exercise rather than a last resort.

In addition to obtaining legal assistance, there are benefits to getting bidding and relationship management advice from niche specialists who have many years of experience in helping their clients successfully navigate bidding and contractual issues.