Inflation, Disruptions to the Supply Chain, and Labor Shortages
Earlier this year, inflation began to soar and every business and person alike were feeling the effects. Inflation has now been hovering at slightly above 5%, year on year, since May. That is more than double the 2% pace that the Federal Reserve has set as a target.
Meanwhile, supply of virtually every product has been hindered due to recurring bottlenecks in global shipping, as well as severe shortages of truck drivers and dock workers.
Lastly, labor shortages across a wide array of industries are occurring as a result of changing demographics like aging and retiring workers, as well as border controls and immigration limits, and demands for better pay and flexible working arrangements.
Generally speaking, things are tough, but what exactly does all of this mean for the DMC industry?
As we all know, DMCs strive to enter into service agreements well in advance of a program’s operation, some even being developed years ahead of the program. Consequently, a lot can change between the effective date of the service agreement and the occurrence of the meeting or event. More specifically, and as we’re experiencing presently, market conditions can change so severely that the overall profitability of a program can be diminished by the time it rolls around.
Examples of this occurring include:
The cost of food and beverage skyrocketing after proposals had been sent and contracts had been signed quoting specific amounts.
Increased costs of transportation due to soaring fuel prices and reduced fleets.
Suppliers not having enough personnel to provide their respective goods or services, as well as DMCs finding it difficult to secure reliable field staff.
As this issue continues to develop, there may be two approaches that may present at least part of the solution.
Business Approach
We likely all agree that communication and transparency are key to a healthy client relationship. Being informed and educated about this issue (and ensuring that your DMC’s personnel are equally informed and educated) is paramount to ensuring that you can eloquently convey your concerns to your client in order to begin working together toward a mutually beneficial solution.
Having some prepared language that may be inserted in your proposal (or elsewhere) that explains the situation and sets reasonable expectations may be a great first step. It likely won’t be much of a surprise to your client since almost every company and individual throughout the world is being impacted by these issues. As a result, we hope the client is sympathetic to our requests and proposed solutions.
Legal Approach
Legally, specific terms may need to be included in a DMC’s proposal, statement of work, and/or service agreement. The most relevant legal term or provision that may be helpful is an escalator clause. An escalator clause is offered to address changes in the price of materials, equipment, food, labor, etc. over the course of a project.
Let’s consider an example from the construction industry: A construction company has been hired to build a stadium that will take a couple of years to complete. If the price of concrete or steel increases during that time, the overall cost of the project will increase and it will become someone’s responsibility to cover that cost. In this example, you can be sure it won’t be the construction company that will assume such liability. By way of an escalator clause, this issue will be squarely addressed from the onset of the project to avoid any ambiguity as to who will cover costs and to what extent.
An escalator clause to include in a proposal, statement of work, and/or event service agreement for a DMC may look something like this:
This [proposal/statement of work/event service agreement] is conditioned upon the ability of DMC to operate the program at current prices for material and at the existing scale of wages for labor. If DMC is, at any time or for any reason, unable to operate the program at current prices or at the existing scale of wages for labor, or if DMC is unable to procure promptly as and when needed labor and material required for program operation, then the originally assessed program cost and/or DMC’s performance obligations shall be equitably adjusted by amendment or change order.
Such adjustment(s) may be [unilaterally/mutually] made when the price of an item of material or labor increases __% at any time after the effective date of the event service agreement and before program operation. The amount of the increase shall be capped at __% of the original budgeted price for the item.*
Now armed with this information, your DMC can more easily contemplate what the best path forward is under these circumstances. If you have any questions or would like to be involved in further discussing this issue amongst other DMCC members and proposing potential solutions to this problem, don’t hesitate to reach out to DMCC directly.
*DMCC does not guarantee that the language provided is suitable for a particular purpose, or that such language is accurate, reliable, or complete. This language is provided for informational purposes only, and should not be relied upon as legal advice.