Rising Input Costs

There has been a lot said about the inflationary impact of supply shortages of key materials and components across multiple industries and sectors. Most of the commentary is related to the inflationary impact and the affect this may have on interest rates that the RBA is steadfastly predicting to stay at historically low rates until 2024.

While this commentary is understandable, and quite possibly correct, there are many industries and businesses that operate on contracts that are locked into fixed prices. Many domestic supply contracts are fixed price with completion dates. Rising costs of material together with shortages of key materials, and delays in delivery, can have a major adverse impact as forecast profit margins established at the signing of the contract and cause contract completion breaches.

So, if you are supplying into sectors or operate across industries that operate on fixed price contracts you need to keep a close eye on your debtors, ensure progress claims are paid on time and you need to understand what your customers are experiencing. A ‘rule of thumb’ to apply is any Debtor that is outside of trading terms should have a ‘story’ attached to them i.e. you are speaking with them regularly and you know the reason/s why they are trading outside of your conventional terms.

In addition, standard contract wording should also be reviewed and where possible modified to incorporate rise and fall (to keep balance) clauses for critical components and obviously some revision around completion dates and delay criteria.

The countering tactic during inflationary periods is to remind prospective customers that increasing costs and shortages could have adverse consequences if they delay their purchasing decisions. Also, regularly review supply chain costs and put through price rises on a regular basis if necessary e.g. quarterly, in order to mitigate the impact of absorbing these price rises across your entire debtors listing.

Obviously, chat to a nem Partner if you would like to discuss the subject in more detail.