This contract tip is about provisions covering customer forecasts.
Customer forecasts are planning reports submitted to the vendor that identify how many units or users of the product the customer will need over time.
These forecasts are typically required by a vendor that sells expensive or custom-manufactured goods. Vendors rely on forecasts to plan their production and bind the customer to purchase goods before the vendor makes them.
When I represent vendors, I'm always looking to make the forecasts stronger and ensure the customer is bound by them. After all, my client is investing in building a product and faces a lot of financial risk if the customer later decides not to buy.
When I represent customers, I'm always looking to add more flexibility to the forecast provision. Customers usually prefer to delay their commitment until they are ready to issue purchase orders. Things are always changing and binding forecasts can result in the customer having to buy product it doesn't want or can't use or resell.
Here are three core concepts to evaluate when you review forecast provisions.
1. Is the forecast binding? - This the most critical. Does the customer have to buy everything in the forecast? I don't just say “binding” or “non-binding.” I always restate that concept in a complete sentence. My goal is to pre-empt any future argument by either side about what binding or non-binding means.
2. If binding, are there any outs? - Vendors prefer binding forecasts, while customers typically want more flexibility. Sometimes customers include the right to reduce its obligation by 10% or 20% each month or to push out delivery a few months. Another pro-customer technique is to include the right to buy less under specific factual circumstances, such as a high number of warranty claims or if the customer's sales have dropped below a certain number.
3. Is a forecast required? - Some deals require the customer to provide a rolling 12-month forecast every month. This means every month, the customer has to recalculate the forecast and share that with the vendor. When I represent the customer, I make sure that our team is able to commit to that schedule.
One last thing to mention. If you are a customer, consider whether you should include a corresponding vendor obligation to sell what is in the forecast. After all, if the customer is promising to buy a certain quantity, shouldn't the vendor also be obligated to sell that amount?
What other advice about forecast provisions would you add?
