How much should I spend to get it right?

At Devant, one of our big client commitments is that we won’t spend our time and your money doing work that doesn’t deliver value to you. The trouble is, it’s not always easy to see how that works in practice. Here I’m going to explore this in a bit more detail, to help you figure out what you should be spending on your contracts, and to help us decide how to meet your needs in a way that delivers great value for money.

And while they’re very different topics, you might find this helpful when dealing with mechanics and plumbers too ☺

The big questions

To figure out what’s a reasonable sum to spend on your contract, you need to consider the following:

1. what’s the value of the deal to us?
2. how much could it cost me if the other party doesn’t do what it’s supposed to?
3. how much could it cost them if we don’t do what we’re supposed to?
4. how much time, effort and expertise will it take to create a contract to mitigate the risks of us or them not doing what we’re supposed to?

How do I judge the value of the deal?

This is your potential ‘upside’. It should be considered not just in terms of the actual cash sum to be paid to you, but also taking into account 

• how much profit it will generate
• what other knock-on benefits it will create (e.g. keeping engineers in work, creating access to other markets, maintaining an existing relationship)
• whether this is a one-off deal, or one that will be repeated multiple times (either with the same customer or with lots of different ones)

If the value of the contract is £50, of which £10 is profit, you might say it’s not worth spending more than £5 on the contract at most. But if you’re creating standard terms for a sale that you’re expecting to repeat many thousands of times, with many hundreds of clients, that’s a different conversation altogether.

Similarly, if you’re negotiating a one-off £100k deal that will enable you to build skills or tools that will create opportunities in a new sector for you, you might consider investing more in making sure this deal goes right.

What will it cost me if they mess up?

This is a big driver when choosing a mechanic or a plumber. The potential for having your ceiling fall down because the plumber did a bad job installing a water tank in the loft could motivate you to pay a bit more to ensure a good job is done. Similarly, if you’re having your brakes changed, you want to be confident that the mechanic’s done a good job. 

(Aside: I once had to push a motorbike 3 miles from ferry to bike shop, because the brakes had seized up during the ferry crossing. The mechanic had failed to grease the moving parts after replacing the brake pads. Unfortunately, the mechanic was me…)

In terms of your contract, you need to consider what the impact will be if your supplier/client/partner doesn’t do what they’ve agreed to do. Will it be a minor inconvenience? Or could it potentially bring your business to its knees?

If you’re buying a service that’s of relatively low value, but which could have serious repercussions if it was delivered badly, you’ll want to (a) choose a quality supplier that you trust, and (b) make sure that the contract protects you in the event disaster strikes.

Similarly, if you’re selling something that depends on the client providing essential information, could you find yourself having to do lots of extra work at your own expense if they fail to do their bit? How likely is this, bearing in mind your previous experience?

Managing changes and client dependencies well can contribute hugely to the financial success of a deal, and your contract can be a great help in this area. Failing to tackle it properly can swiftly erode whatever profit you expected to make.

Could a failure on the part of your counterparty create big legal risks for your business? For example, if they’re supplying email addresses for you to market to, and haven’t complied with their data protection obligations, you will be vulnerable to fines. Your contracts should help keep you safe here.

What could it cost them, if we don’t meet all of our obligations?

Sometimes, the cost of our product bears little or no relation to the consequences for the purchaser if it fails to perform. Imagine you sell a bag of rivets for £5, and your customer uses them to fix the fuselage to an aircraft. If the ‘plane falls out of the sky because your rivet fails, the losses could be massive.

Where this is the case, you want to be sure you’re not taking on more than your fair share of risk. Part of the job of a good commercial contract is to help you balance your risk and your reward, in a way that’s fair to the other party and in line with the law.

What will it take to create a contract that addresses all of these factors? 

This is where our job gets difficult. Unfortunately, drafting a contract that properly explores the practicalities of your commercial relationship, and allocates risk in a fair and reasonable way, takes time. Getting to understand exactly what you do, and how you do it, takes time – without which, your contract could be as much use as the proverbial chocolate teapot.

Occasionally, the time taken to do a good job of this is completely out of whack with the value of the relationship the contract is intended to govern. 

You might ask your commercial contracting specialist to create “something simple – a one-pager – that just covers the basics, and is written in friendly, plain-English, not legalese”.

As with many things, it takes more time to create something short, simple and effective than to draft a fully-leaded contract with a number of standard-form clauses. There’s a quote that’s been attributed variously to Cicero, Mark Twain and others that illustrates this beautifully: “I’m sorry for writing such a long letter, but I didn’t have time to write a short one!”

What options do I have?

It’s up to you to decide how much you should be investing in each of the contracts your business enters into, and you should do this by weighing up your answers to each of the questions above.

Do it myself!

If you feel that:

• the contract value is low
• the risk to you of the other party breaching its obligations is low
• the impact on them of you breaching is also low

– then you might decide to proceed without a written agreement at all, on their standard terms, or using something simple you’ve written yourself to describe what each of you will do. 

Sometimes people plagiarise other documents they’ve found online, for businesses similar to theirs, to create a cheap set of terms. This brings its own risks – you’ll be breaching the other company’s copyright, which they may well complain about. Also, you have no guarantee that their terms are actually any good! Just because they’re on the internet, doesn’t mean they’re well written, and would work for your business. And, of course, there might be some specifics of your business or your customers that differ from theirs, and reduce the value of their terms to you. 

But if you’ve ticked all the ‘low risk’ boxes above, you may well decide that this low-cost path is absolutely fine for you.

Do it on the cheap!

If you feel that:

• the contract value is low
• the risk to you of the other party breaching its obligations is low
• the impact on them of you breaching is significant enough that you want to try to protect yourself against it

– then you might want to have something in writing, even if you don’t want to spend much money on it. 

There are a number of online services selling template agreements for very little money. You might even be entitled to something free as a result of a professional organisation you belong to, where they may have some template terms you are allowed to use.

A template that doesn’t reflect your business won’t create as much commercial, operational and legal protection as one that’s drafted with how you work in mind. But it could be better than nothing, if it’s from a reliable legal source that you trust, and if you’ve worked through it to check that it doesn’t conflict with what you do and how you do it.

Do it properly!

If:

• the contract is of high value, taking into account the knock-on benefits it could have, and any repeat use you’ll get from it; and/or
• there’s significant risk to you of the other party breaching its obligations; and/or
• if you breach your obligations, it’s likely to cause a significant impact on the other party

– then you might consider having something drafted specifically for you. Talk to Devant (or whoever you use for contract support), to get an idea of a likely budget.

If the likely price is higher than you’re prepared to spend, you might want to think about whether this deal is actually something you should say no to. After all, if a deal is going to create significant risk for your business, and isn’t worth enough money to fund the exercise of managing that risk, is it a deal worth doing?

Where you’re venturing into new markets where the contract values are significantly higher than you’re used to, the likely impact of errors, delays or problems also grows. This is often the point at which businesses decide it’s worth investing in getting some tailored terms that support them in delivering great outcomes to clients, while managing their own risk. 

What’s next?

If you’re not sure which of these applies to you, give us a call. You can trust Devant to give you unbiased advice as to which route might be best for you and your business, right now. Ultimately it’s your call – only you can decide how much risk you’re prepared to accept, and what it’s reasonable for you to spend. But we’ll share our experience honestly and openly, so you can be as well informed as possible.