Insight

By Jim Japczyk, CFO at Optimas OE Solutions

When it comes to business contracts, there are often special groups in companies to administer them because of their complexity and importance. The significance and the fundamental necessity of doing business with others makes contracts both daunting to create but exhilarating once executed.

Often, a contract is viewed as ‘what’s in it for me’ when the reality is a healthy contract, ensuring both parties are treated fairly and meet the needs of both equally, can be a win, win for everyone involved.

Never are healthy contracts more important than in the supply chain industry. I have worked in this business for more than 20 years and I have seen, negotiated, and signed off on many contracts. And, yes, while the process may be a little daunting, the reward of delivering an agreement that all parties are comfortable with and feel meet each party’s needs is significant and satisfying. 

As the world of business becomes more challenging with its fast pace, paradigm shift given Covid-19, and the greater need for strong partnerships, a healthy contract becomes the focal point of success quite often.

From my experience, there are a number of things that make up a healthy contract, whether with suppliers, manufacturers, customers, distributors, or facility managers. Each is not in and of itself independent of any other part of the contract. Rather, parts of agreements can very well affect other parts of the agreement. So, one needs to be careful how this intricate set of conditions work together to deliver a healthy contract.

First, when entering into contract negotiations, the fundamental principle of a healthy contract – fairness and ensuring it meets the needs of all parties in an equitable and mutually beneficial way – should be the guiding principle or theme for the negotiations. For example, it is important that all parties have strong financial incentives built in – whether that is making money or trimming costs. Another example is ensuring that each party has a reasonable ‘out’ clause in the contract. Feeling like you have a proper way to end the contract without damage to any of the parties makes for not only a healthy contract but a healthy working arrangement.

That leads me to the concept of anticipation. This means one should always ensure the contract is written in such a way that it tries to anticipate what might change in the business arrangement and offer provisions in the contract to address those fairly and equitably. This is challenging to say the least especially given our recent experience with unexpected events such as the Covid-19 pandemic. For example, steel prices have been moving up dramatically and it has put pressure on our cost of goods. In our contracts, we have a provision to help soften the impact of price on all parties. It is a fair provision that anticipates cost of goods changes, treats the customer fairly and helps address issues beyond our control.

Flexibility in a healthy contract is another important attribute. The ability to adjust or modify provisions in the contract as business needs or conditions change is key to a healthy contract. We find this particularly important with the many facilities we have. To adjust our physical plant as the business changes is always extremely healthy as business drives demand up or down. Our healthy contracts allow us to do that while being fair to the leaser.

Some of you have probably heard the old expression ‘clear as mud’. Well, that is something we definitely want to avoid in healthy contracts. Often the language of a contract does not afford itself to provide a clear understanding of intent to business executives. The clearer and more specific the language ensures there will be no misunderstanding at any point in the business arrangement. My rule of thumb is just write the contract in plain, understandable, everyday language and apply the KISS (Keep It Simple Stupid) principle.

Clearly understood ramifications is the final building block in a healthy contract. While no party ever wants to get to the point in a business arrangement of having to invoke the ramifications of not meeting the conditions of the contract, it behooves every party to have those spelled out clearly. No one is trying to impose their will on another party or be vengeful, but sometimes parties do not meet the provisions of a contract and ramifications have to be invoked. A contract without these clearly spelled out is not a healthy contract and businesspeople understand that. It is best to be transparent and honest about consequences and what that means.

So, in the end, I stress one over riding theme when it comes to healthy contracts. The most important thing is having all parties clearly and understandably explain what is needed in the business arrangement to make each successful in their respective business endeavor – by having a written contract that is binding and respected by all. Healthy contracts can simplify the partnership and deliver better products and services, greater profitability, smoother operation and overall business success.

Healthy contracts usually result in a healthy business for all parties and deliver a strong bill of health for all involved. 

About the author

Jim Japczyk joined Optimas in 2019 as senior vice-president and chief financial officer. His prior career experiences include CFO leadership roles within the distribution, manufacturing and consumer services sectors, primarily under private equity sponsorship. 

Jim has directed the finance, technology and human resource functions and, together with his teams, provided transformative leadership that established the path to drive enterprise valuation growth. Before his CFO roles, Jim was vice-president – controller at a publicly traded consumer products manufacturer. He has also served in various SEC reporting and financial management positions.