Where Suppliers Hide Margin

Suppliers know most businesses focus only on the unit rate. That’s their opportunity. They pad profit through “standard” clauses that push costs back onto you. If you don’t scrutinize, you’ll pay later. The headline rate may look competitive. The contract terms are where they win.

• Volume tolerance traps: Penalties for using too much or too little power.
• Pass-through flexibility: Open-ended charges for non-commodity costs.
• Termination penalties: Punitive exit fees if you need to adjust or consolidate contracts.
• Change-in-law clauses: Supplier-biased terms that shift 100% of regulatory risk to you.
• Opaque reconciliation: Year-end adjustments buried in fine print that destroy budgets.

Every one of these looks minor until it hits. Then you’re stuck explaining to the board why costs exploded when “the rate was competitive.”

The Real Cost of “Standard” Terms

Suppliers love the phrase “market standard.” It’s code for: “We want you to accept what benefits us.” In reality, there is no universal standard—only precedent. If enough buyers accept punitive terms, suppliers normalize them. Your job is to break that cycle.

• Budget instability: Pass-through clauses make budgets impossible to hold. Every adjustment becomes your problem.
• Risk loading: You pay penalties for consumption swings – even when they’re operationally unavoidable.
• Reduced optionality: Exit penalties lock you in, eliminating leverage for future negotiations.
• Governance exposure: Signing contracts with avoidable risks looks negligent when uncovered later.

The hidden cost of weak contracting isn’t cents per kWh. It’s millions in margin leakage and credibility loss over time.

Clauses That Should Raise Red Flags

Any clause that shifts asymmetric risk onto you needs scrutiny. These are the worst offenders:

• Volume tolerance +/-10%: Too tight for most businesses. True market terms are broader – or penalties are waived.
• Pass-through for all network costs: Without caps or transparency, this is a blank check.
• Auto-renewals: Rollovers lock you into uncompetitive pricing. They exist purely to trap distracted buyers.
• Take-or-pay structures: Forcing you to consume minimum levels regardless of business changes.
• Force majeure exclusions: Some contracts deny relief even in extraordinary events. That’s pure supplier opportunism.

Every one of these should trigger a challenge. If you don’t push back, you’re paying for complacency.

How to Challenge Non-Market Clauses

Suppliers expect pushback from sophisticated buyers. If you don’t push, you mark yourself as an easy target. Here’s how to counter:

• Use benchmarks: Show evidence that peers negotiated broader tolerances or removed penalties entirely.
• Shift accountability: If a charge is within supplier control, insist it remains their risk – not yours.
• Normalize terms: Line up competing offers clause-by-clause. Use the outlier against itself.
• Frame governance: “I can’t present this to the board – it’s not defensible.” Put suppliers on notice that weak clauses won’t survive scrutiny.

The goal isn’t to nitpick. It’s to strip suppliers of asymmetric advantages and ensure contracts are fit for governance and budget stability.

Case Example: Manufacturing Group

A multi-site manufacturer was offered a rate 8% below benchmark. It looked like a win. But the contract included a ±10% volume clause. In practice, their usage varied ±25% seasonally. Result: $1.2m in penalties across two years. The “cheap” contract was the most expensive decision they made. Only after The Energy Consultant intervened did they renegotiate – widening tolerances and eliminating penalties. Savings: $900k in avoided costs. Lesson: clauses matter as much as rates.

Embedding Clause Scrutiny Into Procurement

Clause review shouldn’t be an afterthought. It should be embedded into procurement governance. Build it into your process:

• Pre-bid: Define non-negotiable terms upfront. Don’t let suppliers set the baseline.
• Evaluation: Score contracts not just on rate, but on clause exposure.
• Negotiation: Tackle clauses early – don’t leave them as “tidy-up” items.
• Sign-off: Require board-level assurance that terms are market-aligned, not just rates.

This elevates procurement from tactical buying to risk management. That’s what boards expect: control, not surprises.

Boards Don’t Forgive Clause Negligence

When budgets blow up because of clauses, excuses don’t matter. The board won’t care that “everyone signs these.” They’ll care that you didn’t challenge. Governance demands contracts that are resilient and defensible. If your supplier contract collapses under board-level scrutiny, so will your credibility.

Smart leaders see clauses for what they are: margin levers. Neglect them, and you’re not in control of your spend – you’re in control of nothing.

Hidden Non-Commodity Costs

Supplier Offer Traps

Supplier Negotiation Tactics