An evergreen clause priced on one supply contract: the renewal price, the market price, the term, and the switching costs it only defers.
Missing the notice window on an auto-renewing contract costs the gap between the renewal price and the price the buyer could have obtained elsewhere, multiplied by the volume bought over the whole renewal term, less only the time value of the switching costs it defers. On an illustrative supply contract of 40,000 units a year at 52.00, renewing for 24 months with a 5 per cent uplift when the market is 6 per cent cheaper costs 457,600 undiscounted, or 446,842 net of the deferred switching costs: 10.5 per cent of what the buyer will spend over the renewal.
Worked in full in Contract Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An evergreen or automatic renewal clause extends the agreement for a further term unless one party gives written notice a set number of days before expiry. Three variables decide what a missed date costs: the length of the renewal term, the price it renews at, and the notice period, which sets how early the buyer must have its alternative ready. Supplier drafts often make them long, at an uplift, with a notice period of 90 days or more. Buyers sign them because at signature the expiry is years away.
The clause is a price term. It decides what the buyer pays for the term after the one it negotiated, and it should be priced before signature like any other.
| Input | Value |
|---|---|
| Current contract price per unit | 52.00 |
| Units a year | 40,000 |
| Annual spend today | 2,080,000 |
| Renewal term | 24 months |
| Price uplift on renewal | 5.0% |
| Market price from a retender, below current | 6.0% |
| Notice period before expiry | 90 days |
| Retender cost, and supplier transition cost | 25,000, 60,000 |
| Buyer's cost of funds | 7.0% |
The market price is the one figure the buyer has to estimate. It should come from a benchmark or a recent quote, not from hope; a retender that only matches the incumbent saves nothing.
Step 1, the two prices. Renewal price: 52.00 × 1.05 = 54.60. Market price: 52.00 × 0.94 = 48.88. The gap is 5.72 a unit, 11.0 per cent of today's price.
Step 2, the cost per year. 5.72 × 40,000 = 228,800. Of that, 124,800 is the market gap the buyer was already paying and 104,000 is the uplift.
Step 3, the whole term. The renewal binds for 24 months, so the cost is 228,800 × 2 = 457,600, undiscounted.
Step 4, the switching costs. The 85,000 of retender and transition costs are not saved by renewing: they will be incurred at the next exit instead. Deferring them by two years is worth 85,000 × (1 − 1 / 1.072) = 10,758 in present value, so the net cost of the missed date is 446,842.
Cost of a missed notice = (renewal price − market price) × annual units × renewal years − switching costs × (1 − (1 + cost of funds)−renewal years)
= 5.72 × 40,000 × 2 − 10,758 = 446,842
Excel: =(P*(1+Uplift)-P*(1-MktDisc))*Units*Term/12-Switch*(1-(1+CoF)^(-Term/12))
| Uplift on renewal | 12 months | 24 months | 36 months |
|---|---|---|---|
| 0% | 124,800 | 249,600 | 374,400 |
| 3% | 187,200 | 374,400 | 561,600 |
| 5% | 228,800 | 457,600 | 686,400 |
The term matters more than the uplift. Cutting the renewal from 24 to 12 months at the same 5 per cent removes 228,800 of exposure; removing the uplift entirely on a 24-month term removes 208,000. A clause redrafted to renew for 12 months at the unchanged price exposes the buyer to 124,800, saving 332,800 against the clause as signed. That is the figure to have in hand when the supplier says the renewal wording is standard.
The 48.88 is an estimate, and a buyer who doubts it can still use the calculation. Read the 0 per cent uplift row as the exposure that comes from the market gap alone, and note that the missed date costs nothing only if no credible alternative beats the renewal price itself. If no credible quote is expected to beat 54.60, the notice date is worth little and the effort belongs elsewhere. If quotes in the last year came in below the current 52.00, it is worth the whole table. Either way the incumbent should know the buyer has done the sum before the notice window opens, because its leverage is greatest while the notice can still be served.
A missed renewal notice is worth the price gap times the volume over the renewal term: 457,600 gross and 446,842 net here, 627 for every day of the renewal. Price the renewal term and uplift at signature, as part of the total cost comparison in how to compare two supplier bids on total cost, and put the notice date, not the expiry, in the contract register. The clause calculators and the continuity and exit working document are in the free companion files for this book.
A clause that extends the contract for a further term unless notice is given a set number of days before expiry. In the worked case it renews for 24 months at a 5 per cent uplift with 90 days' notice, so a missed date commits the buyer to 54.60 a unit against a market price of 48.88.
Whatever the clause says, commonly 30 to 90 days or more before expiry, and in writing to the address in the notices clause. With 90 days' notice the retender must be complete a quarter before expiry; missing it here costs 228,800 for every year of renewal.
A shorter renewal term, no automatic uplift and a shorter notice period. In the worked case a 12-month renewal at the unchanged price limits the exposure to 124,800 against 457,600 for the 24-month renewal at a 5 per cent uplift, a saving of 332,800.
This article is one calculation from Contract Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: business operations: cost, contracts, pricing and supply chain → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.