CMI (Other exams): The loss-making anchor contract

Decompose the loss before negotiating it. Three distinct drivers are producing one number, and each has a different remedy:

• Wage inflation of 11% with no indexation - a contract design failure. It cannot be recovered through performance; only through a price variation or a term reset.
• Informal 22% frequency increase - a change-control failure. This is recoverable now if there is documentation, because the trust has received a service it did not contract for.
• Fixed price - a risk-allocation failure that will repeat next year unless the terms change.

The forensic task is to quantify how much of the £310,000 is wage, how much is scope and how much is genuine operational underperformance. If Ade cannot split the number, the trust will treat the whole loss as inefficiency.

Options, with their real costs:

1. Hold and cross-subsidise - only viable if the division's other contracts can carry it, and it sets a precedent for every loss-making contract.
2. Renegotiate mid-contract using open-book evidence and the change-control clause - highest value, requires trust cooperation.
3. Exit or novate - must include exit costs, TUPE exposure, stranded overhead and reputational damage in a public sector market.
4. Buy the extension with the security bid as a loss leader - this converts one problem into two.

Essential information: cost-to-serve by site, activity data proving the frequency increase, the contract's variation and termination clauses, the trust's procurement rules, the division's overhead absorption if the contract ends, and whether the security contract is profitable on a stand-alone basis. Without these, Ade is negotiating from assertion.

Separate the three decisions. The extension, the repricing and the security bid are being bundled by the sales director for relationship reasons; commercially they should be handled on their own merits.

With the trust, request a contract review meeting before the tender deadline. Bring a one-page open-book summary: the wage index movement since award, the activity data showing the 22% frequency increase, and what the service now costs. Offer a menu rather than an ultimatum: retrospective recovery for documented scope changes, indexation from next year, a service redesign that protects outcomes at lower cost, and a two-year extension in exchange for repricing. Framing matters - this is a partnership conversation about sustaining a service, not a threat.

On the security contract, bid only if it clears margin on a stand-alone basis. The temptation is to use it to buy goodwill while the core contract is renegotiated; that trades a recoverable problem for an unrecoverable one, and the trust's procurement team will not treat the two as linked anyway.

With the regional director, be direct: the 6% target cannot be achieved on current terms by any credible operating plan, and pretending otherwise would require assumptions that will not survive audit. Present the target against three routes - repriced, exited, or unchanged - with the margin and risk of each, and ask for a decision on whether Ade is authorised to serve notice if the trust refuses.

Deadline discipline. Two weeks is enough for one meeting and a written proposal, not for a full renegotiation. Set the decision point in advance.

The failure is systemic, so the fix must be too. This contract was lost at bid stage and again at contract management, and no single control caught it.

Contract terms. Standard clauses for indexation (CPI, RPI or a wage index), priced change-control rates, volume bands, benchmarking, termination for convenience and a wage-shock mechanism. These are commercial decisions, not legal boilerplate, and should be reviewed by finance, not only legal, before signature.

Bid governance. A margin floor that requires divisional or regional sign-off to breach, a risk register for each bid, and a post-implementation review at 6 and 12 months comparing actual margin with the bid model. Sales incentives should reward margin retention, not just contract wins - the sales director's instinct here is a symptom of what is measured.

Contract management. A named contract manager, quarterly reviews with the client and finance, and a dashboard covering margin, hours delivered against contracted hours and scope changes. Set an early-warning trigger - any contract below 2% margin enters a formal recovery plan - so that a 3% loss is caught in year one, not year three.

Behaviour and capability. Train contract managers in commercial negotiation and change control so informal client requests are converted into variations at the point of request. The 22% frequency increase did not appear overnight; it was accepted repeatedly by people who wanted to be helpful. Helpfulness without documentation is how a £450,000 loss is built.