SEIFSA’s mission is clear: the organisation intends to help companies, especially in the metals and engineering industries, to strive effectively to attain sustainability for their businesses. This goal extends to giving Managers the specific tools and skills to deal with uncertainty and change. In an increasingly volatile environment, every business should plan. No matter what form that planning takes, SEIFSA’s Price and Index Pages (PIPS) and its Theory of COKontract Price Adjustment Training are but two tools that will expand the scope of a business’s foresight.
Planning, as a management concept, gives direction, reduces the impact of change and minimizes waste and redundancy. It also establishes a coordinated effort. PIPS and Contract Price Adjustment force managers to look ahead, anticipate change, consider the impact of that change and develop appropriate responses to reduce uncertainty. One of the ways in which both SEIFSA products aim to alleviate pain is through the effective management of Price Escalations. Companies that are new, to the tendering process, for instance, often do not understand the purpose of the escalations.
In order for any business to remain sustainable, it needs to keep track of price escalation trends, amongst other things. . Companies supplying products to “buying institutions” have to monitor price escalation trends in order to ensure that they are adequately compensated for any price increases, or understand the amount of potential losses to be made, in case of price decreases.
For large companies, national and provincial governments and municipalities buying products need to monitor price escalation trends in order to contain their costs, ensure that price increases (or decreases) are accurate and that they will not lead to project cost over-runs. In an environment increasingly sensitive to both corruption and public service failures, these planning tools become essential for Public Servants, Project Managers and Financial Public Managers to use at their fingertips.
Let’s look at the practical side. Contracts are complicated, at the best of times. For small businesses and those that are new to the process, the fine print can make or break the business. For public institutions, having no foresight of prices can jeopardise important infrastructure projects and mire them in a nightmare of a political jackpot.
The basics of price escalations contracts can stipulate that a specified period of the contract is fixed. This means that the supplier is not allowed to escalate prices during that specified period. Alternatively, the contract can stipulate that the supplier is only allowed to escalate once a year. Often, as a result of being new to the process and not having a clear understanding of it, the supplier agrees to the terms and conditions, only to realise a couple of months into the contract that the company is losing money. In this case, certain dynamics may change.
An example of this is as follows: let’s assume a company is in the Logistics industry, which means that transport will be one of the largest input cost components. It is stipulated in the contract that escalations can only be done on an annual basis. Therefore, due to the nature of the contract and the terms and conditions agreed upon, the supplying company is not able to recover costs on a regular basis, even if the price of fuel is consistently increasing.
The supplier would have a hard time persuading the buyer to have the escalations done on a more frequent basis. However, the supplier can request that an additional clause be added to the contract. Such a clause could typically state that the supplier will escalate, once a year, as stipulated. However, should the price of petrol increase or decrease by more than a certain percent, the supplier is allowed to escalate on that component, even if the escalation falls within the stipulated annual escalation time frame. Therefore, inclusion of an additional clause has the potential to assist the supplying company to recover some of the unforeseen costs incurred, thereby minimising the potential losses.
The SEIFSA tools of PIPS and the training component of the Theory of Contract Price Adjustments show practically, even to novices, how to solve these problems – before they become drainers of profit and start affecting a business’s sustainability.
Contract Price Adjustment (CPA) is a methodology used to adjust defined areas of cost over a defined period of time. The goal is to cover cost fluctuations beyond the control of parties to a contract. The CPA model helps buyers and suppliers to reach an agreement on the adjustment of prices in a contract over a specific frequency.
The training adds a valuable planning tool to a business’s armoury and Project Managers, Procurement Managers, Supply Chain Managers, Financial Directors and business owners are increasingly coming to SEIFSA for direction for advice about managing the cost and inflation profile of a company.
Chief Economist Dr Michael Ade says: “SEIFSA is making a very important contribution in ensuring that volatile cost components are accounted for. SEIFSA is also committed to ensuring that PIPS and the CPA Training workshops continue to be the best tools to mitigate the effects of inflation and other variables that erode the sustainability of companies”.