GaBio - Georgia Bio

10/21/2019 | News release | Distributed by Public on 10/21/2019 09:48

Dirty Laundry: How to negotiate a “clean” uniform contract

By: Peter Frey, National Director, Biotechnology Innovation Organization (BIO)

Don Henley released his song 'Dirty Laundry' in 1982, which was a huge success after the 1980 break-up of the Eagles. A verse from the song goes:

You don't really need to find out what's going on You don't really want to know just how far it's gone Just leave well enough alone Eat your dirty laundry

Unfortunately, what Don describes above is exactly what many life science companies experience when working with suppliers in the uniform industry. Contracts are full of unfavorable clauses and costs and, by the time a company find out what's really going on and just how far it has gone, they come to realize that their uniform program (either industrial or cleanroom) has cost them far more than they were promised it would.

That being said, I'd like to bring to your attention to five key areas that you really need to be focusing on to avoid having to 'eat your dirty laundry'!

Contract Expiration Date & Contract Term The contract renewal date, sometimes referred to as the 'CXD,' is the date when an initial contract with a supplier expires. This is a critical date that many companies don't fully understand, leaving them locked into a much longer contractual obligation than they expected (or were promised).

These days, standard uniform rental or customer service agreements run 5 to 8 years. That is not a typo! Pricing pressures in the uniform industry have lengthened the average contract term from 3 to 5 years (in the early 90's) to the 5 to 8 years we see today. So, be sure to check your contracts for their expiration date before signing to avoid locking yourself in with a supplier for longer than you intended to or expected.

Now that you're aware of your contract expiration date, be sure to check your contract for a clause that obligates you, the customer, to provide written notice of 'non-renewal' to the uniform supplier. The advance notice requirements do vary by uniform supplier but generally range from 30 days to up to 180 days in advance of the CXD. You may also be required to send that notice by certified mail to the General Manager of the uniform supplier. 180 days - that's 6 months advance notice! If this 'non-renewal' notice window is missed, the uniform contract automatically renews for another 5 to 8 year term.

For example, if you signed an initial 5-year contract for lab coats and floor mats, and you missed the non-renewal advance notice window, you are contractually locked into another 5-year contract. Uniform suppliers will strongly enforce this contractual obligation and often even use early termination penalties as leverage to back up enforcement.

Do NOT underestimate the seriousness of the CXD and advance notice requirements. I have heard from countless procurement professionals over the years who have claimed, 'Oh, I can get out of my uniform agreement anytime I want.' From my experience, you CANNOT get out of a standard uniform agreement anytime you want. TRUST me! If you try to terminate early, it will cost you in financial penalties in addition to time spent haggling with the supplier over legalese and transitioning. No procurement professional wants to have to ask their Director of Finance or CFO for additional unbudgeted funds because of a missed deadline.

Annual Price Increases Also known as the 'API'. Uniform suppliers have standard language in their contracts that allows them to raise prices for the services they are providing you at least once a year. The API normally ranges from 3 to 10 percent. Uniform suppliers can also raise pricing outside of the API as a means of increasing their profitability. Just how they do this is worth paying attention to… Uniform companies generally have to provide their customers a written notice of price increases outside of the API. These non-API charges can range from 2 to 5 percent on average and happen without most decision makers' (procurement or finance) knowledge. How do they get away with this without customers objecting? The weekly invoice! They'll drop an innocuous note on the weekly invoice that states that weekly pricing has been increased. Because these invoices normally go directly to a company's accounts payable department for processing and payment, the note on the weekly invoice never gets to the decision maker, or the person who signed the contract with the supplier, and the price increase slips through unnoticed. The uniform supplier has technically complied with the contract's notification terms without explicitly telling the customer. The API and non-API increases impact all elements of the uniform program; garment rental, cleaning charges (if broken out separately), replacement charges for garments and allied products (such as floor mats and towels), ancillary fees and set up fees (like prep charges and name and company emblem charges), etc. As with interest, these increases compound over time, building to far greater costs very quickly.

Loss & Ruin Also known as L&R. This area of my analysis highlights the REAL pain for the customer. It is not uncommon for L&R charges on a customer's invoice to range from 20 to 30 percent of the weekly invoice total. What that means is, for every dollar charged for normal processing and rental of garments, there is an additional $0.25 that is added for L&R. For some uniform companies, this L&R line is a profit center, plain and simple.

What is also not well publicized is that the L&R charge for garments is billed to the customer at the 'then current replacement rate,' not at a depreciated replacement rate. So, garments may have been in service for several years (and heavily depreciated), yet the uniform company will charge the current replacement rate. There is a great deal of latitude with how and why L&R fees are applied by uniform suppliers. These charges too are often buried along with the other weekly charges on invoices. Doesn't exactly seem fair, does it?

Ancillary Fees Ancillary fees go by many different names including service fee, delivery fee, environmental fee, energy fee, fuel surcharge fee, and miscellaneous fee. All uniform suppliers charge at least one of these, but most charge multiple fees. Normally, these fees are a percentage of the weekly invoice (sound familiar?). So, as your demand for uniforms grows, so do your ancillary fees. To add serious insult to injury… Remember the lost and ruin charges I discussed above and how they are included in the weekly invoice total? Ancillary fees will be calculated on these charges, as well.

Minimum Weekly Stop Charge As uniform suppliers have had to continually deal with downward pricing pressures, alternative measures have been implemented to help offset this profit squeeze impacting the industry. One measure is the implementation of a fixed 'minimum' weekly stop charge. Essentially, if your weekly order is $27 and your minimum weekly stop charge is $50, your company will pay $50. It is not uncommon to see minimum weekly stop charges for industrial uniform deliveries be between $50 and $75 per week. The cleanroom uniform deliveries are even higher at $150 to $250 per week.

So, my point is that it really pays to read the small print in a rental or customer service agreement. I'd imagine that if you're reading this, you probably already have an existing uniform rental or customer service agreement. Here are a few steps you can take to help transition yourself into a better agreement:

1. Pull your uniform rental or customer service agreement and 2 or 3 of your weekly invoices, preferably over multiple contract years.

2. Find the CXD and the date for notification of non-renewal and set an Outlook calendar appointment for both these dates, setting a reminder for two weeks in advance. When your non-renewal date notification pops up, send your supplier a notice of non-renewal even if you intend to renew with this supplier. This will provide you some valuable leverage for securing the best terms in for renewal and affords you the luxury of being able to shop around.

3. Review the invoices to find the APIs, non-API increases, loss and ruin charges, ancillary fees, and the weekly minimum stop charges. Invite your sales representative into your office and have them explain each charge to you in detail. Let them know you are in the know!

4. Let your colleagues in AP know to check each invoice for these charges going forward. Ask them to discuss these charges with you before approving any invoices. Contest any charges that do not seem fair and let your supplier know you intend to negotiate these in the next renewal, if not sooner (if they want to keep your business).

Uniforms are a necessity in the life sciences industry and, let's be honest, few companies have the resources to wash each and every garment and floor mat in their facilities. If you need help reviewing your uniform rental or customer service agreement and are a member of the Biotechnology Innovation Organization (BIO) or a participating state or regional biotechnology association, we have experienced resources who can help you navigate and negotiate. Call (888) 246-1728 or email [email protected] for assistance. Don't settle for eating your dirty laundry!

About the author:

Peter Frey has over 30 years of B2B sales and sales management experience. He has over 12 years of experience in the uniform industry (both industrial and cleanroom), including sales and operational management experience. He holds a BS in Accounting from Illinois State University, an MBA (Sum Cum Laude) from California State University at Long Beach and is a CPA (inactive status).