Expecting a contract extension? Why you should prepare for your rebid anyway

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Don’t delay your rebid preparations on the expectation of a contract extension

Expecting to get a contract extension and then being surprised by an announcement from the customer that the official rebid is starting has happened to more incumbents than it should. And the resulting lack of rebid preparation wastes many of the advantages you should have as the incumbent and puts your successful rebid at risk.

Even if you are being given messages from your customer that you will get an extension, don’t assume that this will happen and delay the start of your rebid preparations because you expect not to need them yet. Things can change at the last minute. Or the customer contact you are getting your information from might not be the decision maker or really have a full insight into the process.

Start your rebid preparations early, whether you expect a contract extension or not. Don’t count on an extension until you have the customer’s signed official confirmation that the extension has been granted.

Use your rebid preparation process to inform your contract extension negotiations  

As we’ve set out in our articles on Recapture Planning, your rebid preparations should include 4 general streams of work:

  1. Reviewing your existing contract
  2. Building better and broader customer relationships
  3. Understanding what changes the customer will put into the next contract
  4. Creating an outline solution for the new contract

All of these streams will also help you in your conversations with the customer about getting a contract extension:

  • Understanding how you have performed and what has happened on the contract to date will support (assuming you have delivered well) your argument that an extension is warranted
  • Those making the extension decision won’t just be those managing your contract day to day. By building a better relationship with these people you are more likely to get a positive response to the idea of an extension
  • By understanding the customer’s future needs you can put conversations about an extension into the context of these (see below)
  • Having an idea of how you would meet these needs can be one way to offer something new or improved in the extension period (see below also)

Use contract extensions to put in place changes that will help your rebid

Extensions are often an opportunity to renegotiate elements of the contract. Sometimes the customer will ask for a cost reduction, perhaps you will ask for a price increase to cover inflation over the additional period. Usually a compromise is agreed.

But you can also use the extension as an opportunity to agree changes to how the contract is delivered that move it in the direction the customer may be thinking they want for the next contract period. This gives you a chance to test the new way of working and gives you credibility of being able to deliver the new ways of working and examples of working in this new format for the rebid. It may encourage the customer, if they are getting closer to the service they are looking for in the future, to postpone the rebid even further and give you more extensions.

Your early rebid preparation should give you a view of what changes the customer is looking for in the next contract. Taking a proactive stance and offering to test these changes with the customer during the contract extension period could give you a real advantage at the rebid. And might be the tipping point that means they grant the extension. Depending on the extension options the customer has you may also use this approach to get a full extension for the longest period possible, rather than a series of shorter extensions.

If you can show that the transition to the new way of working needs to be in place for a period of time to show its full benefit you may be able to get this longer single extension. This will give you (and your staff) more certainty for a longer time. Having an updated contract delivery in place that is closer to the customer’s future needs also means that your transition risks and costs for the new contract are likely to be lower. As will the customer’s risk of choosing you to deliver the next contract.

A note on price

Some contracts can increase their profitability over time from a market competitive margin at the bid to a significantly higher margin in the later stages of the contract. Indeed this is one of the aims you will most likely have been working to over the contract period. However, if you are making significantly higher than market rate margins on your contract as the rebid approaches you face a potentially difficult choice: it is unlikely that you will win the rebid if you attempt to retain this margin in your bid (most incumbents who try this as they feel this is the ‘right’ margin and don’t want their margins to fall in the next contract lose their rebid). But simply making a significant reduction in price in your offer for the next contract by cutting your margins can lead the customer to question your focus on delivering them value for money over the previous period. And therefore whether you will do so during the next contract. This can be difficult to explain in a rebid. And it can cost you a lot of credibility with the customer.

If you anticipate you might be in this position you could use the extension periods to start to bring down your price to closer to the market rate by offering the customer increasing price reductions for longer extension periods. This would mean that by the time you got to the rebid your margin and price is closer to the market rate. And so is less likely to be significantly and embarrassingly undercut by your competitors thus making your own rebid offer more credible. It also gives you a stronger story to tell the customer in the rebid. Showing how you have been proactively delivering value for money improvements over (at least) the latter period of the contract.

Of course this is a difficult commercial decision to take. There is the possibility you still won’t win the rebid.  In which case you have given away profit now for no future return. However the other possibility is that without this offer to reduce margins you would not get the extensions (thus making the additional income over the extension years you may not have done if the rebid had been held earlier). And your future income stream from the new contract won at the rebid could also be lost due to the dissonance the customer experiences when seeing an unexplained steep drop in price from you at the rebid. Only you know what the right balance is for your business and contract circumstances. But do be aware that a number of incumbents have lost rebids on this point.

Summary

Don’t get caught out by assuming you will get an extension to your contract, and as a result delaying the start of your rebid preparations. You might not get the expected extension. In which case you have lost a lot of time and opportunity to prepare, and put your rebid success at risk.

And by taking the actions you would do anyway in preparing for your rebid early, you are also doing the things which will support your negotiations about, and chances of, getting an extension. So your work won’t be wasted. And it could be the thing that leads to an extension being granted.

See how we can help you win your ‘must win’ rebid here