Logistics contracts pose a particular challenge for those tasked with preparing a written agreement that encapsulates the needs of both the Contractor and the Client.
Avoid Costly Logistics Agreements
The importance of preparing a formal legal agreement is clearly self-evident. The contractor will be seeking to secure a revenue stream to support investment in equipment, people and property whilst the client will be seeking to achieve known costs and a consistent operational performance for a pre-determined period.
Unlike, for example, a simple sale agreement a typical logistics agreement has to be able to accommodate continuous change and a variety of unforeseen circumstances. Whilst the ‘Invitation to Tender’ document is able to provide an operational snapshot, frozen in time, the legal agreement has to be able to accommodate a wide range of variations. These can include changes in volumes to be delivered, product range, delivery locations, drop size, service levels required, stock holding levels and ordering methods - to name but a few.
Many operations start well with the obligations of both parties clearly defined but within a relatively short period the written agreement becomes of limited value in the protection of one or more of the parties because of operational changes that the agreement simply does not address.
Prepare Contracts That Work for Both Parties
For many clients, what started off as a fair contract rapidly becomes a very one-sided affair as the contractor gently eases up the margins each time an operational change is required or reduces the standard of service provided on the pretext of a ‘profile’ change. Faced with the time and cost of retendering many clients reluctantly accept that what was promised is not what is being delivered. Companies that have deliberately reduced their in house logistics expertise as part of a policy of outsourcing are particularly vulnerable to the well argued representations of the experienced contractor.
10 Tips for Writing Logistics Contracts
To ensure that the legal agreement meets both the short and long term needs of both parties, we list ten useful tips:
- Ensure that the initial distribution task is clearly defined and quantified. Where possible, the distribution profile should cover a fully representative period of operation.
- Ensure that the services to be provided by the contractor are documented in detail and are able to be objectively measured. This is one of the most important schedules and needs to be treated as such.
- In addition to service performance, ensure that the reporting requirements and account management responsibilities are also clearly defined. Minimum performance criteria should be included along with agreed targets. One of the most common complaints of clients is the failure of the contractor to provide good account management and reporting.
- Give careful consideration to the pricing method to be used. Where possible the pricing system should require the contractor to meet minimum performance standards and achieve good utilisation of resources rather than reward simply for the provision of people and equipment. The pricing system should also be able to cope with likely changes in the operational profile without the need for a major renegotiation of the charges.
- Ensure that all charges are clearly identified and documented together with any agreed exclusions.
- In addition to agreeing the pricing method, it is essential that the make up of the contractor’s costs are understood and agreed. This is important not only to agree future inflationary increases/decreases but also to negotiate revised charges in the event of a fundamental change within the operation.
- Whilst the main body of the agreement covers the usual legal points a suite of schedules should be used to address operational, financial and service matters.
- Whilst a lawyer can complete the main body of the agreement, it is essential that those responsible for operating the agreement give sufficient time to the content of the key schedules which are likely to include the following:-
- Definition of the distribution task
- Services to be provided by the contractor
- Minimum performance standards
- Activity costs
- Implementation plan
- Ensure that responsibilities and obligations for managing change are clearly defined and there is a process for managing disagreements without involving lawyers.
- Consideration should be given to appending the Standard Operating Procedures to the legal agreement and the contractor is obliged to not only adhere to them but also to keep them current.
Whilst a good legal agreement will not ensure that a poor contractor will perform well, it will provide a stable foundation upon which to build a sound professional relationship that is fair to both parties.
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