Don’t terminate the contract – it’s too expensive.

Tuesday, July 24th, 2012

Today’s risk is prompted by an articles ‘BBC saves money by giving staff a chauffeur – driven car’, see Sunday Mail 22nd July 2012. It reported, ‘The BBC is spending an estimated £130,000 over two years on a chauffeur-driven car rejected by its chairman Lord Patten because it would ‘incur costs’ to terminate the contract’. It then said ‘But the spokesman refused to give details of how it was cheaper to keep a contract rolling rather than pay a cancellation fee: ‘Quite!

There is a procurement risk whenever contracts are terminated. The detail should be gone into prior to placing the contract. Typically, negotiation will be needed, otherwise the supplier will make the costs of cancellation prohibitive. Here are some factors to consider:

Negotiate a right to terminate for the buyers’ convenience

Negotiate a right to terminate for a material default and detail what this term means

Recognise that a cost may be incurred for early termination and set out what the basis of the cost calculation shall be.

Reserve a right of audit to prove the costs.

Agree what happens to assets at the point of termination.

Agree when payment will be made by the buyer for agreed costs.

Meantime, why not check your contract for termination rights and consequences?