Death By Unit Pricing

CNNMoney reported this week that your weekly dry-cleaning bill may be in line for a dramatic increase. The reason? Hangers. Hangers represent a significant share of the average dry cleaner’s cost of goods and it seems that a large part of the hanger supply used by American dry cleaners comes from Vietnam. Last week, the United States imposed a series of new trade penalties which will impact hangers imported from Vietnam.

The ripple effect on pricing is obvious. What might not be so obvious is the reason you should care.

Many of the bids and contracts that cross my desk contain some contingency for unit pricing. Whether the entire contract is based on unit pricing or unit pricing is only to be used in the event of a change in scope, the prices to be used are hard wired into the contract.

The problem, as exemplified by the Vietnamese hanger situation, is that the cost of goods fluctuates while unit pricing in contracts often does not. Take the case of 3Hanger Supply Company which warns that pricing will soon almost double from 5 cents to 9 cents per hanger. If unit prices for these particular goods comprised a significant part of your contract, now only would the unforeseen event of new tariffs cause your profit margin to vanish, but, depending on the contract, the tariffs could turn your contract into a company killer.

So what do you do?

In any contract containing unit pricing, absent your ability to stockpile all necessary supplies in advance, you must build in a few escape hatches.

First, the pricing should have some date restrictions. The contract should state very clearly that pricing is based upon acceptance and a start date no later than a certain specified date. 

Second, the pricing should have an end date. The contract should provide that the pricing is only valid until a date certain.

Third, there should be an escape hatch which will allow re-pricing upon the occurrence of an event beyond the parties’ control such as the imposition of a tariff or the enactment of trade restrictions, to name two. 

Over the course of my career, I have seen parties activate contracts months or even years after the proposing party had long since thought the project was dead. I have litigated these matters and companies were placed at risk, all for the absence of expiration dates.

So…take a lesson from your local, neighborhood dry cleaner, and don’t let your unit prices hang around forever.

(Admit it…you thought I was going to go for the obvious pun of “don’t get taken to the cleaners,” didn’t you?)

This entry was posted on Tuesday, June 5th, 2012 at 10:04 am. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.