Contract Negotiation Strategies for Nonprofits
As a nonprofit, every dollar you spend on operational costs is one you can’t spend on fulfilling your mission to help others. When business costs begin to get in the way of that end goal, it’s time to reexamine what’s eating away at your budget.
Some of nonprofits’ most common hidden cost culprits are contracts. Here are some cost-reduction strategies that can help you conquer them.
Contract Costs Hurt Your Bottom Line
Nonprofits are passionate about their causes, and passions make it easy to commit to business agreements without realizing just how much those commitments might cost.
These contractual commitments are a major chunk of your operating costs. Most nonprofits work with suppliers on street or commercial accounts, which tend to be the highest-margin contracts because of nonprofits’ small volumes. If you don’t have the proper information to negotiate quality contracts, it could be having a major impact on your organization’s bottom line.
Hidden costs can sneak up on you because contracts can be tricky to navigate. Nonprofits tend to commit to a variety of contracts, such as exclusivity agreements, single-term agreements, and continuing agreements.
But it’s less important to focus on the type of contract and more important to focus on the details within them. It’s all about the risks and obligations to each party. Does the contract pose any regulatory risks such as questionable tax exemptions? Does it stipulate a formalized process for arbitration? What limitations does it place on working with similar suppliers? As you might suspect, you’ll need to look deeply into the details of each contract to discover its true costs.
Particularly if you don’t have an experienced supply chain staff expert on staff, it’s vital that you revisit existing contracts to establish a clear supply chain or procurement strategy.
How to Reassess Your Contract Costs
Reevaluating your contracts can help you reduce operating costs, increase revenue, improve efficiency and ultimately address your mission more effectively. With a few key tricks up your sleeve, you can rework your contracts for cost savings and improve your ability to serve:
- Remember that everything is negotiable. Read every document thoroughly, and don’t settle if something doesn’t seem fair — even if you’re told it’s a “standard provision.” Ask for what you want, and be prepared to walk away from the deal if they’re unwilling to negotiate. Once you’re happy with all of the provisions in the contract, sign it — just remember that it’s difficult to negotiate for more after the contract is already signed.
- Consider outsourcing. Difficulties managing contractual supply costs can quickly compound when you don’t have a supply chain expert on staff. Good labor is hard to come by, and nonprofits especially struggle with attracting quality talent because most can’t afford a seasoned veteran with years of experience in operations and supply chain management. Consider group purchasing organizations (GPOs) to help you manage costs. GPOs can keep you stocked with the supplies you’re already purchasing at a much lower cost.
- Seek nonprofit incentives. As a nonprofit, your goal is to help others, not make a quick buck. Many suppliers — and state laws — recognize that commitment with discounts and tax incentives. It never hurts to investigate further, especially when you could save a chunk of change.
- Ask the right questions. Familiarize yourself with the most important components of the contract, and make sure you clearly understand each party’s obligations and the risks associated with the contract. At the least, know enough to know when you need to ask for help, and if you’re uncertain about something, consult tax or legal advisers.
- Avoid ambiguities. The most important aspect of any contract is that it’s clear and unambiguous — the best contracts should speak for themselves and should not require additional explanation. Litigation tends to arise when a contract is unclear, and litigation can cost you tens of thousands of dollars. Revise a contract until both parties are comfortable with its clarity.
Nearly all businesses — nonprofits included — encounter contracts in some capacity. Knowing how to successfully negotiate and manage these contracts is key to operating efficiently, and having a few simple negotiating skills under your belt can help reduce business costs and allow you to focus on your mission.