Of all the things lawyers are known for, being good with numbers isn’t one of them.
In one of my first lectures at law school, the lecturer looked around the room and said ‘many of you are probably here because you’re smart, but you can’t stand the sight of blood and are no good at numbers’! (Inspiring, I know)
And I can’t be the only one who’s seen lawyers pull together 10-page tables in Word, instead of using Excel.
But, along with the scope, pricing is the most important part of any contract. A) because the vendor isn’t normally doing the gig just for a laugh, they want to be paid, and B) because misunderstanding the pricing is a huge source of friction in contracts.
So, how do you review the pricing schedule in a contract?
The basics.
- Is it clear how the pricing works? E.g. if it’s a software subscription, is the fee paid monthly or annually, is it paid upfront or in arrears?
- Is there a separate order form or pricing schedule? If so, does it match the pricing clause in the T&Cs?
- Grab that calculator. Do a quick sanity-check that the items add up to the total (after updating the schedule a bunch of times, errors often creep in!)
- Is the price inclusive or exclusive of tax?
- Assume you need to calculate the first invoice amount – can you do it from the pricing schedule? Does it even make sense?
- How are expenses, like travel, dealt with?
- If the parties are in different countries, what currency are payments made in, and how will currency fluctuations be handled?
- Does the pricing schedule match the SOW? E.g. are there assumptions in the pricing table that conflict with what the SOW says will be delivered?
If you’re the customer:
- Are the payment terms too short for you to meet?
- Can the supplier increase the pricing during the contract term? If so:
- What happens if you don’t accept the increase?
- Do you need to limit how pricing can be increased? E.g., tying to CPI or a fixed %.
- Does the service/product you’re buying form part of what you sell to your customers? If so, make sure the contract doesn’t allow the supplier to increase the price in a way that would make you lose money under your customer contracts.
- Does the pricing give you enough flexibility to change course? E.g., if you’re buying 20 software licences, can you decrease that during the term if you need to, or can you only vary upwards?
- If it’s important to the deal, does the contract lock in rates for additional services? E.g., for additional software licences.
- If the fees are being paid upfront, is that reasonable for the deal? Should a portion be held back until after delivery to guarantee performance?
If you’re the supplier:
- How long is your pricing locked in for? Can you increase your price if your costs increase (e.g. in line with CPI)?
- Are there limits on how a customer can reduce the scope? (E.g. making sure purchased quantities don’t drop below feasible levels, or making it clear that any volume discounts disappear below those levels)
- Do you need a mark-up on any expenses passed through to the customer, like travel?
In short:
The pricing schedule is your friend!
During negotiations, we spend so much time worrying about the clauses that govern what happens when things go wrong. But if you get the pricing and scope right, chances are you’ll never have to read that limitation of liability clause again!
