What Is an Open Book Agreement

Competition allows “rules-based” trading that is not based on open-book breakdowns to result in a good market price, as the multilateral negotiation process leads suppliers to declare their market price truthfully. You can find more information about this process here and here. A closed-book contract involves overhead costs spread across several operational areas, making it difficult to identify the actual costs of each area. In addition, some general contractors may include a percentage of overhead in the terms and conditions in the case of closed-led contracts to reduce the overall appearance of overhead. This can be done intentionally, as people often leave with the lowest offer. Of the number of customers who negotiate open-book contracts in the field of logistics, few actually query the information or carry out regular audits of suppliers once the contract has been concluded. The buying client often underestimates the time, expertise and effort required to properly manage the relationship. This is the classic riddle: Control vs. The cost of control. Although we are currently well beyond the era when open-led contracts were considered the “holy grail” of procurement, many companies are still actively working with suppliers on an open-book basis as part of their procurement process and cooperation model.

2. Variable fixed costs: When fixed costs (overhead) are listed as a percentage in an open-book contract, many buyers overlook the fact that they have to convert them into a fixed amount, resulting in a “margin leak”. Improved delivery frequency can increase distribution costs, but improve sales. The use of dedicated vehicles could again increase distribution costs, but reduce packaging costs and product damage. A detailed understanding of supply chain costs is essential to manage them and ensure overall operational optimization. There`s a saying that you only get out of life what you`ve put into it, and that certainly goes for managing “open book” contracts. 2. If there is a business rule for having open-book breakdowns with suppliers, ask for the breakdown only to the winning supplier AFTER the negotiation. Keep in mind that if you had asked the open book for an RfQ price of 100 and the supplier would have reported its outage with a profit of 10%. If the supplier now wins the rules-based negotiation process with a price of $85, it will struggle to deliver a credible open-book outage without losing face.

1. “Reasonable bandwidths”: Costs are often checked in a “reasonable bandwidth” (by cost engineers), allowing providers to add 5-10% per cost factor as long as they remain within a “reasonable” range. Doing this for all cost drivers allows suppliers to “exit” an additional 10% profit without raising red flags. Cost engineers use reference information based on non-negotiated values, which are usually already significantly higher than the rates negotiated by the supplier for a cost driver. Suppliers often know what the white spots are for their customers when it comes to understanding cost drivers so that they account closely or more closely to the reality of cost factors where the customer has very good ideas and data points and hides more margin in areas that are less visible to the buyer. First, we need to briefly clarify what an open book contract is and what it does. Therefore, it is always useful to better understand the complications and pitfalls that can arise when a company enters into open book contracts with its suppliers. In the case of an Open Book contract, the Supplier will invoice the Customer in its simplest form for the actual costs incurred for each type of service plus the agreed margin.

This type of agreement is sometimes referred to as a cost-plus contract. Due to the profit maximization paradigm, the supplier will feel the need to declare low profit margins in an open-book contract. The supplier may fear a renegotiation of its price if it declares the high margin it achieves and therefore has to hide the margin in certain cost categories in order to present a lower profit margin in the breakdown to arrive at the same total price. So what happens once everyone agrees on the cost of a project, everything else is added, and the price is settled? The following two options are the most common actions: Under these circumstances, open books can certainly have their place and merit (for example. B, check technical skills), while some companies simply have a rule that requires buyers to have open books. Effective cost management means having the right solution and managing both unit costs and productivity. Simply checking the contractor to ensure that the passed-on costs have been incurred does not answer the question of what realistic unit costs are, what is a reasonable level of productivity, or whether operation is the most efficient solution. .