Contracts are usually concluded for a specific term. Think of your internet or gym membership, energy contract, or a leasing contract. For private contracts, it is prohibited to automatically renew with the initial duration of the contract. But for businesses, this is possible. And the majority of those contracts are automatically renewed. And that's understandable: it makes it easier for everyone to work together. Imagine if you had to re-sign every contract you have today year after year. It would give you extra work to continue a collaboration that's actually already running. But automatic renewal potentially also brings hidden costs with it.
Contract Duration
The duration of a contract can, for example, play a role. A duration of 36, 48, or even 60 months is common. The cancellation period is then often 6 months before the expiry date of the contract. Such a contract of 60 months, or 5 years, that is automatically renewed, quickly becomes a contract of 10 years. With a bit of bad luck, you're stuck with one contract, and thus one supplier, for 10 years or longer.
A long duration is also administratively a risk anyway. Who remembers after 4 years where the contract from supplier X was stored? Or worse: what the cancellation terms are? In the best case, contracts are stored in a digital tool with an automatic alert for the cancellation period. But in reality, contracts are often kept in a folder somewhere in a cupboard, or digitally in a digital folder that people barely know the existence of anymore. In the worst case, that contract is untraceable.
Rate Increases
With automatically renewed contracts, you also run the risk that rates are unilaterally increased annually by the supplier. And you're often powerless against that. Depending on the size of the supplier and the contract, this can be about thousands of euros on an annual basis. If you have more than one supplier like this, that quickly adds up to high amounts. So if possible, opt for shorter contracts and cancel them on time.
Is the Contract Still Necessary?
Maybe the contract with supplier X has also simply become superfluous. The world is changing rapidly, and so is your business. However practical automatic renewal may be, it does mean you're tied for that much longer to a contract you might not need anymore. So evaluate in time and cancel on time, so you avoid remaining tied to a contract you no longer need.
Don't get us wrong: automatic renewal certainly offers advantages under the right conditions. After all, you have less administrative work. But as soon as an agreement becomes superfluous, you'd better cancel it. Be sure to pay attention to the cancellation period stated in the contract. We bet you can save yourself a lot of hidden costs this way!
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