Around the same time a year ago a kg of onions cost at most Ksh60 but today the price is Ksh140. The price has in effect more than doubled. Over the same period, a bag of cement now goes for Ksh730 up from Ksh630.
Consider a business that was contracted to supply onions to a school or hospital, or a contractor who was awarded a tender to build houses or a road a year ago and is now facing the new prices that have surged.
At best these service providers will either compromise on the quality of work to be done or at worse abandon the contract altogether because it makes no sense to execute a loss-making venture. Of course, both options are not desirable for both the procuring entity and the service provider because, in the end, no one gets value.
While the above are hypothetical cases, anecdotal evidence suggests this is becoming a common trend as seen by complaints from companies and physical evidence in the form of incomplete roads, dams, buildings, and other infrastructure that are beginning to mar the landscape.
These challenges stem from contracted parties not performing as per the contractual terms because of the high costs of goods and services that are battering the economy.
If you were the business or the procuring entity what would you do?
First, from the procuring entity. Organizations can better protect themselves from unexpected increases in the price of raw materials by including an adjusted risk factor in their budgets. Put another way, budget planners must now set aside funds for the eventuality that prices will escalate by wild margins, which is becoming increasingly common. This would give them room to cushion the business from these challenges.
Additionally, the procuring entity should prioritize the timely payment of procured goods to capitalize on price discounts. In general, suppliers are more likely to give discounts to companies that settle their invoices on time.
Thirdly, the procuring organization may take advantage of economies of scale by purchasing in bulk.
Finally, the procuring entity should establish negotiation committees to engage with the contracted party to negotiate price reductions for the works, products, or services to be delivered if it is seen that delivery may pose a challenge because of the high market prices of goods and services.
What to do if you are the contracted party?
Like their procuring counterparts, contracted parties must conduct a comprehensive risk assessment. This process involves identifying and mitigating threats and seizing opportunities to improve performance and increase profitability.
For example, if a business identifies risks beyond its control, such as fuel prices, it should be candid with the procuring entity at the initial stages. The business should explain that due to market dynamics, prices are subject to change while providing facts and evidence to support this claim.
When the supplier is unable to fulfill a delivery because of circumstances beyond their control, it is only right and moral for them to be upfront with the procurement body and admit their incapacity to do so. Open communication enables both sides to work together to find a workable solution.
Both parties should also Consider incorporating flexible terms into future contracts to allow for adjustments in response to unforeseen challenges.
Finally, there is no one-size-fits-all strategy for managing risks and ensuring delivery that meets everyone’s expectations. However, by using a combination of strategies, managers and business owners can significantly improve their chances of success.
We must therefore acknowledge that we are living in a very dynamic and volatile environment, and these challenges will now become the norm rather than the exception.
CPA Philip Meeli Ole Kamwaro is a finance specialist