Services and the Price

There are a number of considerations for the parties to be aware of when negotiating the clauses relating to the contract price and the provision of services. For instance, the seller must be careful how the services are described due to the potential insurance implications. Likewise the buyer will want to retain contractual flexibility given the long-term nature of the contract and the propensity for its business to change during the lifetime of the contract.

The Services

The contract must contain a detailed description of the services to be provided by the seller. The description should be on the “input” basis, which means that there is set out a list of all the tasks which the seller is to perform. His performance can then be managed against his contractual obligation to perform those services diligently and promptly. He will only be liable to the buyer if he fails to carry out those services in the way that he has committed to carry them out, or he is negligent or in breach of statutory duty. Sellers will generally refuse to sign a contract where their services are described on an “output” basis, which means that the seller guarantees certain outcomes. The prime reason why the seller will not agree an output based definition of services is that he will not be able to obtain insurance to cover the risk of failure to perform, whereas a commitment by the seller on an “input” basis is capable of insurance. The seller’s insurers will provide cover against claims against the seller for losses suffered by the buyer as a result of the seller’s fault.

The description of the services will be supported by a service level agreement (SLA) committing the seller to reach certain standards against key performance indicators (KPIs). SLA’s should be as simple and easy to manage as possible, and should reward the seller for extraordinarily good performance as well as penalise him for poor performance. In that way the buyer can be sure that the seller and his staff will be motivated to perform well.

The SLA will be monitored by key personnel appointed by each party often with the seller self recording against the KPIs and reporting to the buyer.

Given the fairly long duration of security contracts – most are over 12 months and often 3 years long – each party tends to ensure it protects its own position:

  • As the buyer’s business is likely to change shape and the buyer’s requirement for security services will change there should be a robust change control mechanism in the contract.
    • Require the seller to change the services, by serving a notice on the seller setting out the changes required.
    • The contract should provide for consultation, and then for fair adjustment of the price based on the change.
  • The seller will have relied upon the turnover in the contract over its whole term to arrive at his price, and will not welcome the buyer reducing the services under the contract.
    • Agree that the length of notice of the required reduction vary according to the percentage reduction of services, ie a substantial reduction requires 3 months notice.
      • This will enable the seller to do his best to consult with his staff, redeploy them as necessary and avoid the expense of redundancy.
    • Agree that in those circumstances the seller will be compensated for any redundancy payments that he cannot avoid.
    • The parties should also be aware that reduction of the services may involve reduced staff facing safety risks, and this should be taken into account.

Sellers will also object to any attempt by the buyer to restrict the seller from providing security services either within a geographical area or to competitors of the buyer whether named or otherwise. In sensitive situations the seller will offer assurance to the buyer of ring fencing staff on the buyer’s contract, and of confidentiality.

The Price

At the outset of any long term contract the seller will incur significant expense in:

  • risk assessments
  • preparation of assignment instructions
  • price calculations and
  • management time in negotiating the contract

Frequently the seller will seek to defray this upfront cost by requiring a reasonable term of the contract, for example 3 years.

The seller will object to the buyer’s request to be able to terminate for convenience on say 3 months notice but in my experience ultimately the seller will be prepared to allow that term, relying on his own ability to perform the contract to the buyer’s satisfaction and thereby avoid early termination.

The seller’s calculation of the price, especially in manned guarding contracts, will be based on the employment information provided to him by the outgoing provider. He will seek the right to a price adjustment to the extent that the employee information is wrong.

Buyers ask for prices to be “benchmarked”. This can be done in two ways:

  1. the seller agrees to price match any less expensive competitor; or
  2. the seller agrees to treat the buyer as his most favoured customer in other words he will not charge the buyer a higher price than he charges any of his other customers.

These clauses are objected to by sellers for obvious commercial reasons. However, their objection can be justified on the ground that these arrangements are anti-competitive: for example their indirect effect include dissuading competing suppliers from reducing their prices since they know that those reductions will be matched by the seller. The competition authorities frown on these clauses.

Over say a 3 year contract the seller may be prepared to agree his prices to be fixed across the term, by self forecasting any increase in cost he anticipates. Alternatively he may agree his best price at the outset of the contract on the basis that it will be capable of adjustment in the event of an increase in his costs caused by inflation or for example by a change in the law, such as the move from licensing of individual security officers to licensing of security companies.

Cash flow is always an important consideration for both buyer and seller. The seller will try to agree with the buyer that he may invoice at the beginning of each month, the invoice to be paid at the end of the month. This means that he is giving little credit to the buyer. But if for example the buyer insists on payment 90 days from the end of each month, the seller is having to carry 90 days of the buyer’s cash flow.