Advanced Strategies for Forex Management in Pricing
In January I described a few key steps to significantly improve how to mitigate Forex (currency exchange rate) risk on longer term projects. In this post I’m going to expand on the reasons why those steps are important and the benefits (beyond just managing risk) that proper Forex management can provide your organization.
Step 1 - Include language in your customer contract templates allowing for price adjustment for significant Forex fluctuation.
Without this step you don’t even have the opportunity to adjust a contract for Forex in the first place. Ideally this language describes the methodology and reference sources for calculating adjustments. While it’s common to also include the frequency of review and a percentage threshold over which an adjustment actually applies, these are not always necessary or even desirable, depending on a wide range of factors specific to your organization (materiality to backlog, finance staffing, etc.).
Step 2- State the baseline Forex rates in project agreements.
You’d be surprised how many companies diligently follow Step 1 but rarely, if ever, actually state the applicable Forex rates in their contracts. Then, when it’s time to apply an adjustment, in the best case scenario staff have to scramble to find what actually applies and convince the customer what was assumed in the original pricing. The customer may simply take the ball and find the most advantageous rates from the contracting period that works in their favor, and you’re stuck with those for the contract duration.
Step 3- state the amount of project fees subject to the various Forex rates.
If most companies are diligent in steps 2 and 3, very few follow through with step 3. Say you have a 5m€ services project spread across the United States and Europe, signed one year ago. The Euro has weakened ~12% against the US Dollar since then, but how much of the 5m€ contract value should this fluctuation be measured against? If you don’t state it upfront in the contract, it becomes a negotiation down the road in a scenario where you have little leverage.
Step 4- Automate steps 2 and 3 in your pricing tool outputs.
Without this automation, step 3 in particular becomes a calculation nightmare that will result in delays and confusion amongst your pricing, finance, and contracts staff.
By incorporating standard language in your contracts and templates, and then automating the outputs staff use to complete those templates for new contracts, your organization will protect its project revenues from Forex headwinds in a manner that’s simple for staff to adopt and transparent for customers to understand.