Supplier contracts drift if you don't manage them

Supplier contracts drift if you don't manage them

The Centre for Advanced Procurement and Supply documents a phenomenon it calls “contract value leakage” — the gradual erosion of the value locked into a signed supplier agreement through passive management, failure to exercise contractual rights, and market movement that the contract does not capture.

In fleet operations, the most common site of contract value leakage is the fuel supply agreement.

The mechanism

A fuel supply contract is signed. The rate is competitive at the time of signing. Over the life of the contract:

• Fleet size changes. If volume increases by more than 15%, the volume tier the operator should qualify for typically changes — but only if the operator actively requests renegotiation. The distributor has no incentive to initiate this conversation.
• Market rates move. New entrants, infrastructure changes, and upstream pricing shifts create opportunities for rate improvement that only materialise if the buyer is actively monitoring the market.
• Review clauses go unexercised. A 2022 study by the Chartered Institute of Procurement and Supply found that 61% of commercial contracts with renegotiation clauses had never had those clauses triggered — not because the conditions weren’t met, but because the buying organisation was not monitoring for them.

The compound effect of three years of passive contract management on a $600,000 annual fuel supply agreement is documented in CIPS research at 8–14% annual overpayment relative to what an actively managed equivalent agreement would have achieved.

On a $600,000 contract, 11% is $66,000 per year. A contract filed and forgotten is a contract that costs money.

Sources

Centre for Advanced Procurement and Supply contract value leakage research; Chartered Institute of Procurement and Supply contract management study (2022); fuel distribution market pricing data.