Claims & Disputes: An increase in contention
IACCM research identified a 20% increase in the frequency of claims and disputes last year. The reasons for this are becoming steadily more apparent.
The ‘boom and bust’ cycles of the economy are inevitably reflected in business behavior. Anyone in Contract Management or Procurement is only too well aware of the swings between laissez-faire pursuit of growth and the stringent push for tight controls and cost reduction.
But current conditions are different. Past downturns in the economy have typically been accompanied by relatively short-term measures. The prolonged nature of this downturn – now into its fifth year – is resulting in more sustained action. Businesses face the twin challenge of maintaining or growing revenue and maintaining or growing margin. The former points to the need to enter new or more risky markets; the latter depends on a combination of cost reduction and extracting greater value from existing contracts.
As highlighted in previous blogs, these conditions have led to a new level of appreciation for the importance of contract and commercial management, both buy and sell. One area for particular focus is post-award contract management. The old perception of ‘administration’ is fast giving way to a far more proactive – and aggressive – pursuit of value.
In the case of Procurement contracts, this may mean either ensuring that anticipated savings are realized, or alternatively a greater focus on decommitment in situations where needs have changed. For those overseeing Sales contracts, there is particular pressure to protect and grow revenue, which means preventing no-charge scope creep and seeking compensation for changes.
The potential for conflict and disagreement is obvious and therefore the greater frequency of claims and disputes should not be a surprise. The real question is therefore ‘What next?’ Will organizations continue to invest in confrontation, or will they start to explore ways to avoid the need for claims and disputes?