FM underperformance and an inflation claim
A university has a five-year facilities management contract worth £6m a year, with 18 months remaining. Cleaning KPIs have been missed for three consecutive quarters; service credits average £8,000 a month. The supplier now requests a 12% price uplift, citing wage inflation, and says it may withdraw the catering add-on if refused. The contract is fixed price with no indexation clause, but it allows variations by mutual agreement. The relationship is adversarial: monthly meetings are minuted as disputes, and the supplier's account manager has changed twice in a year. The estates director wants to issue a breach notice and re-tender immediately. The finance director is worried about a £720,000 annual cost increase and disruption during term time. Mobilisation of a new FM contract is estimated at nine months.
1. Advise the university on preparing for the negotiation, including its BATNA and the contractual levers available.
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Prepare before engaging. Clarify the contract: fixed price, no indexation, variation only by mutual agreement, service-credit mechanism, termination and exit provisions. Build a fact pack: credits incurred, KPI trends, cost-to-serve, benchmark labour rates and the supplier's open-book claim. Define BATNA: re-tender or insource, with nine-month mobilisation, transition cost and term-time risk. That BATNA is weak in the short term, which strengthens the supplier, so avoid bluffing.
Set the negotiation range: a 12% uplift is not accepted as a starting point; seek a phased, conditional settlement tied to productivity, KPIs and a longer commitment only if it delivers value. Separate the performance dispute from the price claim so concessions are not traded against missed cleaning. Use contractual levers: require evidence of wage inflation, apply service credits, reserve rights, and offer a variation only with a written business case and approval. Consider a capped, non-retrospective increase in exchange for a firm improvement plan, open-book review and exit assistance. Document all offers.
2. Recommend how to handle the performance failures alongside the price claim, and what supplier relationship approach to use for the remaining term.
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Treat performance and price as linked but distinct workstreams. Issue a performance improvement plan with root-cause analysis, named owners, measurable milestones and a review date; apply the service-credit regime consistently and reserve the right to terminate for persistent breach. Convene a joint improvement board with the supplier's regional manager, not just the account manager, and use a shared dashboard.
Move from a transactional to a managed relationship: monthly contract management, quarterly executive reviews, a risk register and an escalation route. The relationship is adversarial because meetings are minuted as disputes and account management is unstable; reset the governance terms and require continuity from the supplier. If the supplier claims the price is unsustainable, test it through open-book cost review. Do not simply accept a 12% rise to stop complaints; that rewards poor performance. A conditional uplift linked to verified cost increases and KPI improvement may be commercially sensible if the alternative is disruption. Start market sounding for contingency.
3. Set out the risks of immediate re-tender and the conditions under which an exit would be justified.
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Immediate re-tender is high-risk because mobilisation takes about nine months, the current contract has 18 months to run, and term-time disruption would affect students. A re-tender also costs money and may attract the same supplier or weaker bids if the market knows the incumbent is in dispute.
Before exit, secure leverage: robust performance records, credits, a remediation plan and a contractual exit plan with data, TUPE information and asset lists. Test the market informally for interest and price. Justify exit if there is a material breach that is not remedied, if the supplier refuses a reasonable improvement plan, or if a whole-life business case shows a better option after transition costs. Otherwise, use the remaining term to stabilise service and prepare a competitive replacement.
Do not issue a breach notice as a negotiating tactic unless the university is ready to follow through; empty threats weaken the relationship and may be challenged. Align the estates director and finance director on a single mandate.