In practice, true costs of entering a commercial contract only emerge after the contract begins operating, when additional work is requested, or the relationship ends earlier due to a dispute.
For Malaysian SMEs, these hidden costs often originate from contractual clauses that receive less attention during negotiation, and below are some of the most common hidden cost triggers that get overlooked.
Unclear scope
Commercial disputes often begin with a simple question: What exactly was included in the deal? This is because many contracts describe deliverables in broad terms without clearly defining:
- the scope of work
- performance standards
- responsibilities of each party
- acceptance criteria
When the scope is unclear, additional work may be treated as “outside scope”, allowing one party to charge additional fees.
No variation clause
Even when the scope of work is clearly defined, commercial projects often evolve. Contracts should therefore include variation clauses to manage adjustments during the course of the project.
These provisions typically determine:
- when additional work may be requested
- how changes must be approved
- how additional costs are calculated
When properly drafted, variation clauses provide a structured mechanism for managing changes without disrupting the overall project. However, poorly drafted variation clauses may allow changes to be introduced without clear cost-control mechanisms.
Overlooked termination costs
Another common hidden cost arises when a contract ends earlier than expected. While termination clauses usually address the right to terminate, they often say little about the financial consequences that follow, for example:
- Must prepaid amounts be refunded upon termination?
- Must the customer pay for work that has already been partially completed?
- Is transition assistance required, and if so, is it chargeable?
The financial impact of termination may be significantly greater than anticipated when the contract was first signed. SMEs often focus on the operational aspects of a deal but overlook the financial implications that arise if the relationship ends early.
Liability exposure
If a contract does not properly limit liability, a business may face financial exposure that far exceeds the value of the contract itself. In such cases, the real cost of the agreement may only become apparent when something goes wrong.
This is why commercial agreements should include provisions such as:
- limitation of liability clauses, which cap the maximum amount recoverable under the contract;
- indemnity provisions, which allocate responsibility for specific risks (such as intellectual property infringement or third-party claims); and
- exclusion of indirect or consequential losses, which prevents liability from expanding beyond foreseeable commercial exposure.
These provisions are intended to ensure that the financial risk of the agreement remains proportionate to its commercial value.
Dispute resolution costs
Finally, hidden costs can arise from how disputes are resolved. The contract may require disputes to be resolved through:
- court litigation
- arbitration, or
- alternative dispute resolution such as mediation
Each method carries different cost implications, and these costs may be difficult to estimate in advance. Legal fees, administrative costs, and procedural requirements may vary depending on the dispute resolution mechanism chosen. The appropriate mechanism should therefore match the nature of the transaction and the subject matter of the dispute.
Let ELP tailor your commercial contracts
Commercial agreements should not only reflect the commercial deal but protect businesses from hidden risks and unintended financial exposure. If you require assistance in reviewing or drafting commercial agreements, we can help ensure your agreements are tailored to your business needs.
