Lessons · Lesson 5 of 6
The price of a validity period
Price the sentence at the bottom of the quotation that says how long the price stands, and find the version of it that costs nothing.
Lesson 5 of 6 · 18 min
Ninety days, written without a thought
Zaouali sends its quotation for RS-812 on 12 March 2027. At the foot of the page sits a block of standing conditions the merchandiser has never edited. One line in it says:
This quotation is valid for ninety days from the date above.
Ninety days from 12 March is 10 June 2027. Vardo places purchase order VR-90118 on 24 May. That is day seventy-three, comfortably inside.
Everybody is pleased. The desk has won an order at the price it wanted. Nobody has noticed yet that the quotation contained a second product, given away free: a seventy-three-day option on Zaouali's costs, written by a merchandiser who was thinking about the price and not about the calendar.
What moved while the buyer decided
Three of the lines behind USD 12.43 did not stay still.
| Line | At quotation | At order | Movement | Per set |
|---|---|---|---|---|
| Coated shell, a metre | 1.62 | 1.72 | 6.17% | 0.24 |
| Seam tape, a metre | 0.049 | 0.052 | 6.12% | 0.06 |
| Making, a set | 2.96 | 3.13 | 5.74% | 0.17 |
The shell moved because Bekalta Coating's own quotation to Zaouali had been valid for twenty-one days and was long expired. The tape moved with it. Making moved because the national minimum wage rose on 1 May. That rise was announced in February, and it was on nobody's cost sheet in March.
Add the right-hand column: USD 0.47 a set. Zaouali's cost is now USD 12.90 and the price is still USD 13.95. So the margin has gone from USD 1.52 to USD 1.05, or from 10.9% of the price to 7.53%.
Across the order that is USD 11,280.00, which is 30.9% of the margin the quotation was written to earn. Nothing went wrong. Nothing was late, nothing failed, nobody made a mistake. The factory simply held a price for seventy-three days in a market that moves.
Can you not just withdraw it?
This is where a great many factories find out that the line at the foot of the page was a promise and not a courtesy. Whether you can withdraw it depends on a question their quotation does not answer.
Under the UN Convention on Contracts for the International Sale of Goods, which applies by default to a great many cross-border sales, an offer cannot be revoked if it shows that it is irrevocable — and stating a fixed time for acceptance is one way of showing that. A quotation saying valid for ninety days is doing exactly that. Under English common law the answer is the opposite. A bare promise to hold an offer open is not binding, because the buyer gave nothing for it, and the seller may withdraw at any time before acceptance.
Same sentence, same order, opposite answers. Which one applies turns on the governing law, which is course 14.2's subject and is very often the clause nobody negotiated.
Three ways to stop paying for it
Zaouali's own record says how often this exposure actually bites. Of seventeen orders placed against quotations over two years, 6 were placed more than sixty days after the quotation went out — 35.3%. So the expected cost of the ninety-day window on RS-812 is 35.3% of USD 0.47, which is USD 0.17 a set.
That is the number every remedy has to beat.
Shorten the validity to thirty days. Vardo placed on day seventy-three, so a thirty-day quotation would have lapsed and Zaouali would have re-quoted. That is cheap in desk time and not cheap in outcomes. Of eleven quotations that lapsed and were re-quoted, four did not come back — 36.4%. At the quarter's average contribution of USD 27,342.86 an order, the expected cost of a lapse is USD 9,942.86. A short validity is the most popular answer to this problem and it is the worst one.
Add a contingency to the price. Put the USD 0.17 into the number and quote USD 14.12. Read that off lesson 4's curve and the chance of winning moves from 0.46 to about 0.40. Expected contribution falls from USD 14,904.00 to USD 14,592.00. So the protection costs USD 312.00 more than the risk it removes. This is the answer that feels obvious, and it is quietly a losing one.
Make the price conditional on its inputs. Quote USD 13.95 and add a line: this price is based on a coated shell at USD 1.62 a metre and on wage rates in force at the date of this quotation; where either has changed at the date of your order, the price will be adjusted for that change and evidenced. The chance of winning is unchanged at 0.46, because the headline number has not moved. Expected contribution is USD 16,780.80, which is USD 1,876.80 better than doing nothing, and the clause costs one sentence.
| The remedy | What it costs | What it leaves you with |
|---|---|---|
| Shorten the validity | 9,942.86 in expected lost orders | a price that lapses before the buyer decides |
| Price the contingency in | 312.00 worse than doing nothing | a higher number in a comparison you may lose |
| Make the price conditional | one sentence | 1,876.80 better than doing nothing |
The honest half
A clause the buyer refuses is not a clause. Zaouali offered the conditional wording on fourteen quotations. Nine buyers accepted it without comment, and five asked for a firm price instead.
Those five got one, at 1.2% more: USD 14.12 a set. Which is, to the cent, the price the contingency route arrives at.
That is not a coincidence and it should not be read as one. It is the market saying the risk is worth about what the arithmetic says it is worth. What the conditional clause buys is not a lower price. It is the choice of who carries the risk, made openly, with the buyer's eyes on it. And the nine buyers who accepted it are nine quotations that stayed at the sharp price on the comparison sheet.
Check yourselfYour mill's own quotation to you is valid for twenty-one days. Yours to the buyer is valid for ninety. What is that gap?Show the answer
It is an open position on your own account for sixty-nine days, and you are carrying it for nothing. The cleanest fix is to make the two match. Ask the mill to hold its price for the period you are holding yours, and expect to pay for it, because that is what you are giving the buyer for free. Where the mill will not, the gap is exactly the exposure the conditional clause is written to cover, and you now know how many days of it you are carrying.
What to do on Monday
- Read the standing conditions at the foot of your own quotation. Find the validity period and the date it was last edited.
- Take your last twenty orders and measure the days between the quotation and the order. That spread is your real exposure, not the validity you wrote.
- List which of your cost lines actually move over that period, and by how much. Usually it is two or three, not the whole sheet.
- Add a conditional clause naming those lines with the figures you priced them at. Do not write a general reservation; it will be refused.
- Compare the validity you offer with the validity your own suppliers offer you. The gap is a position you are carrying, and somebody should have decided to carry it.