The New Disruption Playbook
– Play 3 –
Every coach knows defense is just as important as offence
Play 3: Contractual plays
Coaches talk about defensive alignments, and in the new world of tariffs, it makes sense to consider how well aligned your contracts are with the new operating environment. We recommend that some new plays should be considered.
When importing goods from overseas, contracts should always be reviewed with a tariff lens. It is important to note that different tariffs may apply to distinct elements within a commercial agreement, which can be influenced by factors such as the type of input materials used and the origin of goods based on where value addition occurs. Most modern agreements include price indexation clauses and price control mechanisms designed to ensure that neither party is penalized by circumstances beyond their control. When these adjustments cascade through the value chain — from raw material suppliers to distributors — they ultimately affect the end customer. The principle behind indexation remains sound: to avoid paying a premium during periods of market volatility.
Many contracts were written before tariffs became a major concern, so their impact wasn’t always considered. Today, tariffs are front of mind, and businesses have reviewed or have renegotiated terms to manage this risk. One important part of these contracts is the use of international commercial terms (Incoterms), which set out who is responsible for transport, insurance, and duties in global trade. Understanding the distribution of Incoterm usage is critical because these terms determine which party is responsible for tariffs and compliance obligations, making the choice of term a key driver of cost and risk management.
- DDP: ~10–15%, seller is responsible
- FOB: ~40–50%, buyer is responsible
- CIF: ~20–25%, buyer is responsible
- FCA/EXW: ~10–20% combined, buyer is responsible
Historically, only about 10–15% of contracts used Delivered Duty Paid (DDP), where the seller takes on import duties. In practice, even under DDP, sellers often build tariff costs into their pricing or seek to recover them later. Most contracts use terms like free on board (FOB) or cost, insurance and freight (CIF), which generally leave the buyer to handle duties. This approach made sense when tariffs were low and trade was relatively free, but today it requires much closer attention—simply “moving the problem” does not make it go away.
The question does arise as to whether these arrangements should change, and to ask: who is best positioned to mitigate the additional cost of imported goods, and will these changes drive long term sustainable changes to supply chain networks that are commercially more resilient? And what is the preparation needed to best position a company for a negotiation? If the supplier has a more advanced supply chain capability, are they better placed to manage the tariff situation?
Renegotiated or new contracts should have mechanisms that allow for tariff-induced price adjustments. Tariff contingency clauses should outline how tariff-related costs will be handled and shared between parties.
Another potential approach is to develop a cost-sharing model with suppliers to share the burden of increased tariff-related costs. This strategy should reflect the nature of your supplier relationship: if it’s a strategic partnership, then collaborate on solutions that preserve mutual value. If the supplier relationship is more transactional or commodity-based, consider whether alternative sources or competitive bidding might deliver better outcomes. Any cost-sharing arrangement must be balanced against the supplier’s ability to absorb these costs and the duration for which they can sustain this support.
In some cases, a different lever may be more effective—such as negotiating long-term contracts that lock in prices and provide a buffer against sudden tariff increases. These agreements can offer stability, but they should align with your category strategy and overall supplier relationship objectives to ensure they deliver both resilience and commercial advantage.
Why Contracts Need a Tariff Lens
Many existing contracts were drafted during a period of tariff stability, when the emphasis was largely on logistics responsibilities and the point of title transfer rather than on who ultimately bore tariff costs. With new duties emerging across sectors and geographies, these agreements now warrant closer scrutiny. The objective isn’t to shift risk unilaterally but to create shared mechanisms that enable both parties to adapt to changing conditions.
Price Control Mechanisms: A Fairness Framework
A tool to be utilized by procurement functions is the effective use of price control mechanisms. These pre-agreed methods allow for price adjustments when external factors like tariffs change. These mechanisms don’t aim to eliminate risk, but they can ensure that neither party unfairly “wins” or “loses” due to events outside their influence.
Tariffs form a critical component of total landed cost and should be integrated into price control mechanisms. Indexation clauses, for example, can be linked to tariff schedules or broader cost indices, enabling transparent, formula-based adjustments that maintain commercial balance. When applied consistently across the supply chain, these mechanisms help prevent risk from compounding as costs flow through multiple tiers and ultimately reach the end customer of a tariff-impacted product.
Tariff Contingency Clauses: Planning for the Unplannable
Contracts should also include tariff contingency clauses that define how new or increased duties will be handled. These clauses can outline cost-sharing models, pass-through logic, or renegotiation triggers – whatever best suits the commercial relationship and supply chain maturity of the parties involved.
Collaboration Over Confrontation
The best contracts are not defensive plays, they’re collaborative frameworks. They recognize that suppliers with advanced supply chain capabilities may be better positioned to mitigate tariff impacts. And they allow buyers and sellers to co-create solutions that are resilient, not rigid.
In a world where tariffs are uncertain but inevitable, contracts must adapt to the commercial environment, be smarter, fairer, and more flexible.
What can Procurement Do?
Procurement teams are uniquely positioned to lead the charge in building tariff-resilient commercial frameworks. Here’s how:
- Use Data to Inform Strategy: Track tariff trends and exposure across categories and geographies. Use this insight to prioritize which contracts need attention first.
- Audit Existing Contracts: Review current agreements through a tariff lens. Identify where risk is concentrated and whether existing terms (e.g., Incoterms, pricing structures) reflect today’s realities.
- Engage Cross-Functionally: Collaborate with legal, finance, and supply chain teams to develop contract templates that include tariff-responsive clauses and pricing mechanisms.
- Negotiate for Flexibility: Push for contract terms that allow for shared risk and adaptive pricing. Avoid rigid long-term pricing models that assume tariff stability or force suppliers to build in risk premiums to their pricing.
- Leverage Supplier Capabilities: Where suppliers have more mature logistics or customs operations, consider shifting responsibility for tariff management – provided it leads to better outcomes for both parties.
- Evaluate Alternatives: For commodity categories or non-strategic suppliers, assess alternative sources or competitive bids to reduce tariff exposure and maintain cost competitiveness.
- Educate Stakeholders: Help internal teams understand that tariff volatility is not just a cost issue. Rather, it’s a strategic risk that needs proactive commercial planning.
Real Play: an Australian telco
This client recently experienced high financial and reputational impacts, caused by unforeseen supplier risks. The client’s risk management framework, and risk monitoring capability needed a more formal, consistent, efficient and modern structure.
We designed a new supplier management framework. A framework that was enabled by technology, and easily allowed for high-value data to be provided. We provided all the key elements required to bring the new framework to life.
This made risk more visible, allowed for much more proactive management, better decision-making and meant that supplier risk management was now sustainable on an ongoing basis.
In the next play, Play 4, we discuss how innovation has the potential to change the game.
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