EOW Reflections: Mutual understanding

Next week we are publishing our Guide to a …. Contract.

Some businesses applying to join the Fair Payment Code (FPC) don’t have written contracts. Where there are written contracts, some are very long, convoluted, written in legalise even the FPC Team struggles to understand. Some contain ‘interesting’ clauses hidden in the depths of the small print. In many cases suppliers haven’t spotted them, never mind mutually agreeing to them, and often haven’t understood the ramifications of signing up to them.

Mutually agree and understand how you’ll work together and put it in a written contract. If I agree to do a piece of work for you, we may get into a wrangle along the way. If there’s nothing in writing, there’s nothing to prove what’s been agreed and we may each ‘remember’ different conversations. The written contract sets out how we will work together between work starting and goods or services being delivered. It can be referred to in the event of a disagreement or misunderstanding. However, everyone involved needs to have a mutual understanding of what the language used and the various clauses mean or the business tool is flawed. Keep it simple, make sure everyone understands the same thing, and build trusting working partnerships.

When firms apply to the FPC we want to see the written contact and in particular the payment terms. We’ve discovered various spins on those terms. If customer and supplier aren’t clear about what 30 days, 60 days etc and ‘standard terms’ means someone is may struggle to manage their cashflow. Unless language is clear it’s not a useful communication tool. We can’t accept payment terms of 30 days end of month or 30 days net masquerading as 30 days. The reality could be much longer. The supplier may not understand that or have agreed to it. Suppliers often assume ‘standard’ terms to mean 30 days but that may not be the case. We need contracts to be clear.

I’m also reflecting on other tricks of the trade we’ve seen buried deep in written contracts. One contract, on the face of it appears to promise payment in a reasonable time yet later on, when all but the most resolute would have given up and simply scanned the remaining pages, it says the contract is subject to a 2.5% discount. Discount for what, on what, when? I assume the customer who has drawn up the contract means they will expect the supplier to give them a discount when they pay or in order to get paid on time. Is that fair, clear and collaborative?

If you want an Award from the Fair Payment Code, we will ask for evidence that you are treating your suppliers fairly, the terms of trade are clear and understandable, and you are working collaboratively. A simple written contract that everyone involved understands the same thing by, and they all agree to, is the evidence we need.

The FPC is meant to make people think about how they work together with their suppliers and other partners. I was on a panel two weeks ago with someone who said they’d really benefited as a business from going through their processes and changing them in order to achieve an FPC Award. Customer and suppliers benefitted from the mutual understanding of fair, clear and collaborative ways of working set out in written contracts. It can take time and money in some cases to achieve an Award. The reward is a more resilient and sustainable supply chain. The FPC is an aspirational code that aims to drive continuous improvement. Your peers are applying and working with us to get Bronze, Silver or Gold. Perhaps you’d benefit from doing the same.