Attrition Clause

Definition:

A contractual provision that allows a buyer to reduce the quantity of goods or services purchased without penalty if certain conditions are met.

Example:

Acme Corporation signed a contract with Oasis Hotels for a conference, reserving 100 rooms. The contract includes an attrition clause that allows Acme Corporation to reduce the number of rooms by up to 20% without penalty if they notify Oasis Hotels at least 30 days in advance.

Why is an Attrition Clause important to Procurement?:

An attrition clause is important to a procurement team because it provides flexibility and risk mitigation when entering into contracts for goods or services. The key benefits are:

  1. Flexibility in uncertain situations: Attrition clauses allow the buying organization to adjust their commitments based on changing needs, such as market fluctuations, business strategy shifts, or unforeseen events. This flexibility is particularly valuable when future needs are difficult to predict.

  2. Financial risk management: By providing a mechanism to reduce quantities without penalty, attrition clauses protect the buying organization from financial losses due to over-commitment. This helps manage financial risks in the supply chain and can lead to cost savings.

  3. Negotiation tool: In some cases, the ability to include an attrition clause in a contract can be a useful negotiation tool for the buying organization. However, the impact on negotiation outcomes may vary depending on factors such as the supplier's willingness to accept the clause, the overall bargaining power of each party, and the specific terms of the clause.

Example: Acme Corporation, a large tech company, plans to host a series of training events for its employees over the next year. The procurement team negotiates a contract with Oasis Hotels to reserve a block of 100 rooms per event. Due to the uncertain nature of the tech industry and potential changes in the company's training needs, the procurement team proposes an attrition clause that would allow Acme Corporation to reduce the number of rooms by up to 20% without penalty, as long as they provide at least 30 days' notice.

During negotiations, Oasis Hotels expresses concern about the attrition clause, as it could lead to reduced revenue for the hotel. As a compromise, the two parties agree to an attrition clause that allows for a 10% reduction in rooms without penalty, with a 45-day notice period. While this outcome may not be as favorable for Acme Corporation as their initial proposal, it still provides some flexibility and risk protection.