Negotiating exit clauses without triggering MFMA Section 116.
Service-level failure with an incumbent ICT supplier is common. Replacing the incumbent without breaching the contract, without triggering an irregular-expenditure finding under MFMA Section 116, and without disturbing the entity's preferential procurement scorecard, is uncommon. Each constraint pulls in a different direction. Five sequenced steps make the transition manageable.
1. Diagnose first, document second, decide third
The most common mistake is deciding to replace the supplier before the diagnostic work is complete. The supplier is underperforming on visible metrics, the operational team is frustrated, and a procurement decision is made to terminate. Then the diagnostic produces results showing the underlying causes are partly supplier and partly client-side process. The replacement supplier inherits the same client-side process and the same failure pattern recurs.
The disciplined sequence is diagnose, document, decide. Spend six to eight weeks understanding why the contract is failing. Document the findings, including the client-side contribution. Then decide whether replacement, recovery, or renegotiation is the right response.
Often the diagnostic produces a recovery plan that the incumbent can deliver if held accountable. The cost of a recovery plan is a fraction of the cost of a procurement re-run, and the entity retains continuity. The diagnostic earns its cost ten times over in these cases.
2. Use the contract's exit clause; don't invent a new one
Most ICT services contracts include a termination clause. The clause specifies the grounds for termination (typically including material breach, insolvency, change of control), the notice period required, and the post-termination obligations of both parties.
The entity considering termination should read the clause carefully and then ensure the grounds for termination are documented in writing before notice is served. Material breach needs evidence: which service-level targets were breached, on what dates, with what impact, and which remediation notices were issued and ignored.
An entity that invokes the exit clause without the documentary foundation invites a counter-claim from the supplier. The supplier argues the termination was wrongful, claims damages for the unexpired contract term, and the dispute moves to mediation or litigation. The entity wins many of these disputes on substance but loses time and goodwill defending them.
3. Manage the B-BBEE knock-on
If the incumbent is a Level 1 contributor that scores the entity meaningful procurement points, replacing the incumbent with a lower-rated supplier has a direct B-BBEE consequence. The entity's own scorecard reflects the change at the next verification. For an entity with B-BBEE-linked transformation targets in its strategic plan, the consequence can be material.
The strategy is to require equivalent or better B-BBEE recognition in the replacement procurement specification. The new procurement event explicitly weights B-BBEE recognition heavily, the entity does not allow itself to be backed into a position where the only credible bidders are lower-rated, and the transition timeline accommodates the search for an equivalent-rated replacement.
4. Run the re-procurement while the incumbent is still delivering
Many entities terminate first and re-procure second. The result is a service-coverage gap that the entity then fills with emergency procurement, often a deviation from the supply chain policy, which itself becomes an irregular-expenditure finding.
The better sequence is to run the replacement procurement event while the incumbent is still under contract. The incumbent's notice period is timed to align with the award of the replacement. The handover happens during a planned overlap rather than during a gap.
This requires a longer overall timeline (typically 9 to 14 months end-to-end) but produces a transition that AGSA reads as planned, not as emergency. The Section 116 risk is significantly reduced because the procurement event was a fresh tender, not an extension of an existing arrangement.
5. Hand over with formal sign-off; don't run parallel forever
The transition between suppliers needs a defined end. Parallel running while both suppliers operate the same service is expensive and creates confusion in accountability. The entity should specify a transition window in the contract (typically 60 to 120 days), produce a written handover plan with named milestones, and obtain formal sign-off from both suppliers at the conclusion of the window.
A common failure pattern: the entity finds the transition harder than expected, extends the parallel running, and ends up paying both suppliers for the same service over several months. Each month of parallel running is irregular-expenditure exposure in its own right.
MFMA Section 116 traps to avoid
Section 116(3) and (4) of the MFMA limit how a contract may be modified after award. Three patterns trigger findings most often: extensions to a contract that has reached its original termination date (an extension is a fresh procurement event in substance, even if it is documented as an amendment); changes to the contract value that exceed 20 percent without supply chain re-approval; and changes to the contract scope that introduce a new category of service.
The conservative reading is that any material modification should go through supply chain adjudication and be approved on a fresh basis. The risk-tolerant reading varies by entity. The Auditor-General's interpretation has historically been conservative; the safer practice is to align with it.
This piece summarises practice from supplier transition engagements Sgananda Group has supported. Specific MFMA and PFMA decisions should be confirmed with the entity's legal counsel and with National Treasury guidance.
