Wednesday, February 16, 2011

Negotiation - Thoughts on Negotiating Effective Dates

In negotiating the effective date of the contract, what you are negotiating is when the terms of the contract will apply to the Products or Services purchased.  The effective date of the contract doesn’t need to be the date you sign it, it can be any date the parties agree upon. 

There may be times when you may want the effective date to be retroactive to a date prior to the actual signing of the Contract. This would be to ensure that Product and Services purchased in contemplation of the Contract are covered by the Contract terms, and any prior volumes count toward related commitments in the Contract.

If you enter into a contract in which purchases will not be delivered until some time in the future, setting an effective date in the future would only make sense if something like the term of the contract or some obligation is linked to the effective date.

In negotiating the effective date of a change or amendment you always need to take into account the total life cycle cost impact of the date. A friend of mine managed a procurement group and one of his people had negotiated a price reduction but agreed to have it take effect three months into the future. That made my friend furious and the Buyer didn’t understand the problem.  The amount of the reduction seemed small, only $.50 per unit. The problem was that within those three months about a half a million units would be purchased and by agreeing to have the change be effective three months later they effectively gave away a quarter of a million dollars.    

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