Contract Savings: When CPI is Your Friend

One Monday, I was asked to review a contract renewal. In it, the vendor had proposed a one year extension of services with a 4% increase in pricing. As the client had used the vendor’s services for a few years, and earlier analysis showed the pricing and product to be in line with the market, the client had intended from the start to renew at least twice. My review was a sanity check.

My initial thought was that doubling the renewal term was a safe bet and would reduce the cost increase by half. I also noted that the 4% increase seemed reasonable on the surface, but it wasn’t so great in light of the current economy. Flipping back through the original contract, I highlighted the clause I had originally included which limited price increases to 5% or CPI, whichever was lower. A quick check of the tables showed that CPI was definitely the better option at 1.7%.

Had this been a $100k contract, here’s how it would have broken down:

Original Renewal Request:

–          1 year @ 4% = Two-year total cost of $212,160

Revised Renewal Agreement:

–          2 years @ 1.7% = Two-year total cost of $203,400

That’s a savings of $8,760 for five minutes of review (and a well-written original contract). What could your company do with a 4% cost avoidance?

To find out more ways to save money on your contract portfolio, contact GHS today!

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