Monday, April 11, 2011

Amortizing One Time Costs into the Price

In some situations as part of the price and payment arrangement I’ve seen groups want to
amortize costs into the price, which impacts payments. For example, rather than pay non-recurring expenses for the development of something, you agree that those costs will be spread or amortized over future purchases. Amortizing expenses requires you to commit to purchase a certain volume so the cost is fully liquidated or you need to assume liability for any un-liquidated costs.

The more important aspect of negotiating the amortization into the price is to make it clear what is being amortized and for how long or how many units to ensure that the amortization amount is backed out of the price once the expense has been fully liquidated.  

There are a number of Suppliers who are willing to amortize costs into their price for two simple reasons. One is it locks you into using them for those volumes or be subject to any cancellation penalty for un-liquidated costs.  The other reason is it presents additional profit opportunity for them. Many times Buyers may change and if the new Buyer is unaware that the price included an amount being amortized , they would be negotiating future pricing against the wrong benchmark. If the amortization period is complete the benchmark for any negotiation should be the price less the amount being amortized.

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