Marinaccio, Supply Chain, Companies Should Maintain Some Flexibility

Supply chain warning: Don’t over-commit to your customers

Building flexibility into contracts may be key for companies dealing with rising costs and supply chain shortages.

While businesses struggle to maintain prices for customers and deliver on time, one local expert said it’s important that companies don’t over-commit on a product or project that could be slowed due to outside factors.

“I wouldn’t over-commit to anything. Companies should maintain some flexibility and make sure the contract language allows some leeway when it comes to delivery times,” said Richard Marinaccio, a partner at Phillips Lytle LLP who specializes on business transactions and corporate law.

Marinaccio said supply chain holdups and costs are causing headaches for both sellers and buyers. Sellers, he said, are looking for ways to not commit to something they can’t deliver on time or that they’d lose money on. Buyers, he said, are hunting for predictability.

Many companies find themselves in both positions. Manufacturers, for example.

“They’re in the middle,” Marinaccio said. “As the seller, they want flexibility, and as the buyer, they want predictability.”

It may come down to forecasting. Some companies may need to purchase more materials in advance to ensure they can deliver product on time.

When it comes to late deliveries, Marinaccio said, many customers understand it’s a process.

“With delivery conversations, there’s always some aspect to reasonableness or credits back if something is late,” Marinaccio said. “At the end of the day, they still want the product.”

Adding language to a contract that allows for flexible pricing could be more challenging, he said.

“Pricing right now is very unpredictable,” he said.

Customers want to be able to lock into prices, without being surprised by increases down the road.

“With pricing, people tend to expect that this is the price, and they want to rely on it,” he said. “Rather than dictating a specific price, one solution could be tying increases to specific standards, or making the price based on certain conditions that will affect the price.”

Either way, neither the seller nor the buyer wants either party to be in breach of their contract.

“It’s best for both parties if they can come up with an agreeable solution,” he said. “It’s about understanding the particular facts, your situation and your ability to meet your customers’ demands. That’s no different than any other time, except there are more circumstances now that could lead to delays and increased costs. It’s just a little more planning.”