How to Write Winning Contracts with Your Vendors
8 contract components you want to get right
I’ve reviewed and negotiated a lot of vendor contracts and have found that the best ones are clear, complete and mutually beneficial. However, most contract documents are originated by the vendor and are written specifically to protect their interests.
Starting with a vendor's standard contract is fine to do, but it doesn't mean the language is written in stone. It's extremely important that the customer's interests are incorporated into the contract to ensure it both benefits and protects all parties.
Outlined below are eight components of just about any contract that you want to get right. You’ll not only start your vendor relationship off on the right foot, but you may also sleep a little better at night.
1. Term and Termination
The term of your contract is always negotiable. Many vendors will offer better pricing with a longer term, but that also means you’ll be locked into that relationship for a while. This can be a good thing with proven vendors, but is always a risk with a new vendor relationship.
In your contract be sure to define the term but, more importantly, be very specific about how the contract can be terminated and the penalties, if any, for early termination. You don’t want any surprises down the road if you do need to get out of a contract.
Some vendors use a lot of jargon, oftentimes specific to their industry or company. Some of this jargon can affect the interpretation of important clauses in your contract. Make sure your contract clearly defines all key terms and ambiguous language, especially as it relates to products, pricing and services.
3. Scope of Products, Services and Support
These clauses can oftentimes be grey areas, and can lead to conflicting expectations and additional costs. Ensure language is specific to the products and services covered under the contract, and to the level of support the vendor will provide. This is especially important if your contracted pricing is on only a core list of products and services; be sure to document exactly what is ‘on’ and ‘off’ contract. Also, be sure to include service level expectations (and potential penalties) if the vendor provides mission critical products or services.
The pricing section is simply the documentation of your business negotiations, and should reflect everything that you’ve agreed to in those negotiations including:
- Pricing of ‘on-contract’ products/services and, if applicable, ‘off-contract’ products/services
- Length of time the pricing will remain in effect
- Protocol for pricing adjustments
- Required minimums to receive contracted pricing, if any
- Handling of special or project pricing, if applicable
5. Ordering, Delivery, Invoicing and Payment
This section (or sections) should define expectations of how you buy, receive and pay for the goods or services with the vendor. While there is typically not much here to negotiate, it is important to document expectations. Here are a few things to consider:
- Some vendors provide contracted pricing only if you order online or through a local branch. Be sure to define this if it is applicable.
- If the vendor has retail locations and has agreed to provide contracted pricing for purchases made at those locations, document that as well.
- Document any agreements you’ve made with regard to timeliness of delivery (i.e. next day, etc) and cost of delivery (i.e. free delivery if more than $XX). The same holds true for out-of-pocket expenses for professional service contracts.
- Document the frequency and format of invoices, especially if you have multiple locations.
- Document the form of payment accepted by the vendor if required to receive contracted pricing. For example, some vendors will honor special pricing when paid by credit card while others will not.
6. Account Management and Reporting
If you are going through the process of contracting with a vendor it likely means this is a high cost or high importance area of operations. If that’s the case, make sure your contract is specific with regard to how your account will be managed and the level of reporting that is available to you. Key items to consider include:
- Will you have a dedicated account manager or will you be a ‘house account’?
- Will your vendor provide you with regular business reviews to help with ongoing cost management, and to identify ways to better leverage their products and resources?
- What type of spend reports will be available to you and how can you access those reports?
7. Title, Risk of Loss and Warranty
This can be the most important component of the contract, especially if the contract is for services for the development of a system, product or involves the collection of data. In this section you want to be very clear on who owns the work product and/or data associated with the contract. In the vast majority of cases, YOU want to own the product and the data. Be sure to get your legal counsel involved in approving this section of the contract.
8. Cover Yourself (Legal)
Every vendor contract will include a section of stuff that no one wants to read, but is as important as every other section of the contract. If your organization uses standard language for ‘the legal stuff’, use it when you can. Chances are your vendors will have their own language, and you may need to negotiate some of these sections. If you don’t have standard language, get your legal counsel involved. Here are the key areas you will likely want to be sure to cover (in no particular order).
- Force majeure
- Governing law
- Limitations of liabilities
- Relationship between parties
- Responsibility for compliance with laws
- Successors and assigns
- Transferability and assignment
- Use of marks and press
Always remember - solid pricing is only one component of a great contract. Be sure to address all eight components to keep your risk low and create something of real value for you and your organization.
Tom is Founder & CEO of Vendor Centric, a consulting firm that helps organizations adopt a risk-based approach to vendor management. Connect with Tom on LinkedIn or drop him a note at email@example.com.