6. Make contract agreements

Finally, it is important to think about the revenue models of different parties. It is easier to accomplish circular ambitions if there are financial incentives for all parties that encourage circular performance.

The agreements made will appear in a contract. That contract confirms the relationship that you conclude in the procurement process. Take trust and cooperation as a starting point in this phase too. What do you need to agree with one another to ensure that products work well and that you can accomplish your circular ambitions?

6.1 Difference between business model and revenue model

Circular business and revenue models are often mentioned terms. There is a difference between the two:

  • A business model broadly outlines how a business creates, delivers and retains value.
  • A revenue model is part of this, but provides an understanding of how a business generates (financial) value by mapping revenues and costs.

6.2 Circular revenue models

In a circular revenue model, the supplier remains (partly) responsible for its product. This creates a financial incentive to design and produce products that are, to name a few, durable, easily adaptable and require little maintenance. A circular revenue model thus contributes to the transition to a circular economy.

There are four circular revenue models that are widely used:

  • Pay per use
    This involves a user paying to use the product. To deploy this revenue model, you need to be able to measure usage accurately, as with lighting (Signify) or seating comfort (Vepa and The Green House).
  • Rental
    Here, the supplier retains ownership of a product. The supplier must also be willing to look after the financing itself. This model is already used for products like jeans (Mud Jeans) or temporary furniture solutions (Alvero).
  • Buy-back scheme
    Here, the supplier sells the product, and buys it back at the end of its service life. Examples include carpet tiles (Interface) or office furniture (Gispen).
  • Lease
    With this model, the user purchases the product in instalments, spread over its entire service life. A ‘financial lease’ involves an external funding provider. Here, the circular incentive is rather limited. Examples include lifts (Mitsubishi M-Use) or forklift trucks (UniCarriers).

The examples have been further developed in a guide for businesses.

Be wary of opting for just any old (circular) business model. Renting or leasing a product does not immediately make it circular as that depends on what actually happens to the product once it has been returned. Discuss the different models with your supplier, taking into account the whole service life of the product.

It is also important to remember that public organisations can borrow money more cost effectively than private parties. Therefore, a model that requires a private party to do some kind of pre-finance (e.g. with rental or pay per use) can be more expensive for a public organisation in the long term than a regular purchase with the option of returning the product at the end of its service life. As an example, when renting or leasing furniture, the break-even point is at around 3 or 4 years. After that, renting or leasing becomes more expensive.

6.3 Establish KPIs for circularity

To ensure that circular ambitions are also translated into performance, it can help to include KPIs (key performance indicators) for circularity in the contract. Take the time to specify these clearly as well. You could, for example, agree on a growth model; this would give the supplier an incentive to introduce improvements during the contract term. Examples of KPIs are:

  • The environmental impact of material production
  • The percentage of recycled content
  • The quantity of reused versus newly delivered products during a contract term

Beware of perverse incentives, such as KPIs that work against one another. An example would be a guarantee of a maintenance-free period (during which the product must function) versus reusing existing products (which may require more maintenance).

6.3.1 Reward KPIs that are achieved

You can link a reward structure to the achievement of KPIs. Such as like this:

  • Make a part of the (financial) reward dependent on performance on KPIs. That way, you create an extra incentive to perform on the basis of sustainability.
  • Link an extension of the contract to the score on sustainability KPIs. In that case, you only extend the contract if the sustainability KPIs are achieved to a sufficient extent.

Tip: many suppliers would rather be awarded a contract extension than a bonus. After all, an extension offers continuity, which is what most organisations prefer to focus on.

6.4 Opt for a long contract term

Concluding a long-term contract suggests confidence. It expresses your desire to work with the supplier for a long time. A long-term contract also allows the supplier to make investments with a longer payback period, such as investments in quality. These often cover the circular performance in a contract.

Under tendering laws, you are permitted to extend the maximum term of a framework contract (4 years). You must provide proper justification. Circular performance over a longer period of time can serve as valid justification. Tenders for office furniture have shown that a maximum term of ten years is not unusual. The term is usually made up of several periods with interim extensions. For example, 4+4+2 or 4+3+3.

6.5 Engage a legal specialist early on

Engage a legal specialist in your procurement process early on. Share your ideas and ambitions behind the procurement and the principles of collaboration that you have applied in the process. Then, look together at how to translate this into a short and concise contract based on mutual trust between parties.

6.6 Contract management

The relationship between the client and supplier really begins once the contract has been concluded. The contract manager plays an important role in contract management. As such, they must be involved early on in the procurement process. That way, the contract manager will know what ambitions are in the request, and what offer the market party has made to achieve them.

Ask the contract manager to continue working intensively with the supplier, even after the contract has been awarded. This can ensure that the supplier actually realises the requested ambitions. Ensure that you are flexible with arrangements, as it’s not always possible to have oversight of everything at the time of contract award.

In practice, contract management often receives too little attention from internal clients and after award, there is no intensive relationship between the client and the supplier. There are opportunities however, and if you take a professional approach to contract management, you can succeed in achieving circular performance.

Further information about contract management is available on the website of PIANOo.

Points for action

  • Go in depth into circular revenue models, but do not specify a specific revenue model.
  • Determine the KPIs for circularity and specify them in the contract.
  • Conclude a longer-term contract.
  • Engage a legal specialist and a contract manager early on in the procurement process.

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