Don’t delay your rebid preparations on the expectation of a contract extension
Expecting to get a contract extension and then being surprised by the official rebid 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’re getting messages from your customer that you will get an extension, don’t delay the start of your rebid preparations because you expect not to need them yet. Things can change at the last minute. Your customer contact 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 (connected) streams of work:
- Reviewing your existing contract
- Building better and broader customer relationships, influencing the new contract and procurement
- Understanding what changes the customer will put into the next contract, and why
- 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’ve performed and what’s 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 the right people you’re 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’ll 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. Changes to 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’re looking for in the future, to postpone the rebid even further and give you more extensions.
In some markets it could even mean you can influence the customer to give you a new contract without competing, through a direct award or appropriate framework.
Your early rebid preparation should give you a view of what changes the customer is looking for in the next contract. Being proactive 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, it could get a full extension for the longest period possible, rather than a series of shorter extensions.
If you can show 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’s closer to the customer’s future needs also means 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 may have been working to over the contract period.
However, if you’re making significantly higher than market-rate margins on your contract as the rebid approaches you face a potentially difficult choice:
It’s unlikely you’ll win the rebid if you attempt to retain this margin in your bid. Many 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’ll do so during the next contract.
That 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. You could do that by offering the customer increasing price reductions for longer extension periods.
Turn margin into investment in the future
Or you could take an alternative approach – use the extra margin you’ll make in the extension to invest in the future of the contract: offer the ‘new’ services you’re putting in place to fit the next contract requirements at a lower price – bringing the customer’s perception of your overall price down – while giving the customer the services they want in the next contract, showing how innovative you are.
So, by the time you get to the rebid your price is closer to the market rate. It’s less likely to be significantly and embarrassingly undercut by your competitors, making your own rebid offer more credible.
It also gives you a stronger story to tell the customer in the rebid. Showing how you’ve been proactively thinking of the future, innovating, anddelivering 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’ve 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’ll 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’ve lost a lot of time and opportunity to prepare – and put your rebid success at risk.
By taking the actions you would do anyway in preparing for your rebid early, you’re 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 what leads to an extension being granted.
See how we can help you win your ‘must win’ rebid contact us to schedule a call.
