PurchTips edition #364

Some contracts have a fixed expiration date. Sometimes, a fixed expiration date can be inconvenient because your organization and the supplier are working together productively and it’s a pain to have to deal with renewing the contract.

So, other contracts contain a clause like this: “The term of this Agreement shall be one (1) year. The agreement will automatically renew for additional one (1) year increments unless either party gives ninety (90) days prior written notice to the other that it does not intend to renew the Agreement.”

These auto-renewing contracts have disadvantages, too. For example, say that you have the foregoing clause in a contract with a supplier. And say that, 75 days prior to the expiration of the current term of the agreement, you decide or realize you don’t need or want to do business with the supplier. Guess what? Because you’re not able to give at least 90 days notice to the supplier, you can be stuck with it for the remaining 75 days of the current term PLUS the entire next year! That’s especially painful if it’s a service contract with monthly fees due whether or not you use the service.

So, be proactive when negotiating contracts with the potential for auto-renewal clauses. If your organization is diligent about managing contract expirations, you can negotiate for the unilateral option to extend. Or persuade the supplier to agree to the period for which the contract is auto-renewed to be shorter, like a quarter or even a month.

Already in an auto-renewal situation? Rather than pay for a year’s worth of unneeded service, you may want to negotiate:

• A waiver of the auto-renewal, if the supplier has mercy;
• A reduction in the term of the auto-renewal; or
• A “buy out,” where you pay a smaller amount than you would have paid during the full renewed term in exchange for an earlier exit than the contract provides for you

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Recommended Reading 

• Contract Review Checklist
• Contract Termination Letter
• Eliminating the Pain Out of Contract Management
• Is Contract Management a Critical Process?
• Multi-Year Contracts: What’s In It for Procurement?

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