Vendor Contracts Explained

Date
March 24, 2022
Category
Date
March 24, 2022
Author
Gary Sangha | Founder & CEO
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Like any type of contract, vendor contracts require careful drafting, diligent review, and proper lifecycle management to ensure a smooth business relationship. This article details what vendor contracts are, how they are used, and how they are best deployed. Once the basics of vendor contracts are understood, next-level solutions like artificial intelligence (AI) platforms can be implemented to decrease risk and increase efficiency.

What Is a Vendor Contract and What Is Its Purpose?

The purpose of a vendor contract is to clearly define the conditions and expectations for an exchange of goods or services. Vendor contracts document a business relationship between a seller (the vendor) and a host (the organizer). Ideally, the agreement will be drawn up on neutral terms that are fair and equitable for both parties.

What Is Included in a Vendor Contract? 

A standard vendor contract will include:

  • What goods our services will be rendered

  • Which fees or costs may be charged

  • General terms and conditions

  • What constitutes a breach

  • What recourse is available should a breach occur 

  • Where and how disputes will be resolved

U.S. vendor agreements are subject to both state and federal law, so it’s vital that both parties look over contracts carefully to understand what they are signing.

Vendor Contract Examples

Type of Vendor Contract

Description

When To Use

Cash Reimbursable Contract /

Cost Disbursable Contract

Fee incentives are paid to reimburse the seller for meeting desired objectives, such as completing a task ahead of schedule or under budget. 

Ideal when the scope of work is uncertain, multiple vendors must work together to complete a project, or there is greater risk involved.

Distribution Agreement Contract

This vendor contract type defines when, where, and how a distribution will take place as well as parameters on whether the deal will be exclusive or non-exclusive.

Ideal when a vendor or manufacturer requires a distributor to deliver goods to customers.

Fixed-Price Contract 

A well-defined product may use a fixed-price contract to specify what the good or service will cost. 

Ideal when there is little risk and uncertainty involved in what is being offered.

Indefinite Delivery Contract

This vendor agreement outlines a minimum quantity to be delivered, even if the needed quantity is unknown.

Ideal when quantity or production schedules cannot be clearly defined. 

Letter Subcontract 

A letter subcontract defines what percentage of work may be completed in the subcontract phase (typically 40% or less).

Ideal for large jobs that begin before all details are known.

Time and Materials Contract

This type of vendor contract outlines the number of labor hours and the quantity of materials required to complete work.

Ideal when hiring builders, subcontractors, experts, or outside support.

 

How Do You Review a Contract for a Vendor?

Like any contract, vendor contracts are not finalized until executed by all parties. Stakeholders should thoroughly read and review these agreements to determine whether further negotiations are needed to address any issues or concerns.

Reviewers will need to see that:

  • The project scope is clearly defined and includes all roles, responsibilities, duration, deadlines, milestones, acceptance criteria, and performance monitoring criteria. 

  • The contract is not too large. Sometimes, when one or more aspects are variable, it makes sense to divide the contract into a series of smaller agreements overseen by a Master Service Agreement (MSA).

  • Key dates are documented to ensure that the project stays on track and the team remembers to review the contract again before renewal.

  • Best practices have been followed, whether externally or internally, in accordance with the company’s legal playbook.

  • There is a clear understanding of what actions may bring about a project’s termination.

What Issues Arise When Reviewing Vendor Contracts?

Risks can be difficult to determine when parties are eager to move forward and aren’t exactly sure of what to look out for. The most common pitfalls include:

  • Failing to properly vet a vendor - Preliminary industry research and meetings should precede the signing of any vendor contract to see if the offering is in the right ballpark.

  • Ambiguous scope - Precise, clear, and specific language must be used to convey expectations and breaches.

  • Payment terms - Along with its price, the “when” and “how” of the payment must also be specified in no uncertain terms. Acceptable methods and forms of payment, including lump sums and multiple installments, must be clarified.

  • Not understanding liability - The limitation of liability provision is a key part of an agreement should a breach occur, providing the ability to recover damages if needed.

  • Lack of default and termination clauses - One would hope a breach never occurs, but language must be included to provide a streamlined process for ending an agreement and paying restitution if necessary.

  • Language acknowledging rights - Flexibility can be built into a contract and grant a party the right to review, amend, or terminate the agreement should an unforeseen circumstance arise.

  • Lack of confidentiality assurances - Data protections should be included in any standard contract, including details on who owns the data or what happens to it once the contract is terminated or expired.

  • Typos - Human errors can occur. Reviewers must be sure that all dates, durations, terms, notice periods, and contact information is accurate

Unfortunately, due diligence and concerns over liability can also lead to a sluggish review process involving multiple shareholders, legal teams, and countless back-and-forth emails between negotiating parties.

What Is Vendor Contract Management and Why Is it Important?

In the past, businesses with multiple vendor contracts tried to manage affairs through email, spreadsheets, and general-purpose document creation office software. Increasingly, tech-enabled businesses are turning to vendor contract management software to do the heavy lifting. 

Without effective contract management, companies can:

  • Lose revenue due to wasted labor, missed opportunities, redundancy, slow contracting, poor quality, and money spent on underperforming vendors.
  • Miss opportunities to renegotiate a renewal and receive a lower rate or better deal. When contracts expire, companies may need to go back to the drawing board.

  • Impede efficiency as corporate compliance standards are not met, reviewers come and go, and senior reviewers shoulder the burden and risk burnout. 

Managing the lifecycle of vendor contracts is necessary to remain competitive. By leveraging the power of contract management software, businesses can avoid the pitfalls of manual labor while saving time and money.

AI Streamlines Vendor Contract Review

AI-powered automation offers next-level vendor contract negotiation with fully automated review and redlining, 100% playbook compliance, and 33% reductions in execution times. 

Here’s how it works:

  • Upload: Legal departments begin by uploading a dozen vendor contracts into the AI platform, along with the AI Digital Playbook.

  • Review: When a new vendor contract is added, AI scans the agreement, fully redlining, reviewing, annotating, and evaluating its risks with pinpoint accuracy

  • Expedite: This process takes less than five minutes, whereas a human reviewer could take several days. Recent advances in Natural Language Processing (NLP) help to ensure high-level accuracy.

  • Focus: Basic contracts can be immediately signed and executed while more complex contracts can be escalated to senior reviewers. 

  • Compare: The software can compare documents to best practice examples, company playbooks, past signed contracts, and manually entered “if/then” automation rules.

  • Automate: Certain aspects of the contract can be automated completely, such as setting reminders for renewals or implementing solutions to common errors.

LexCheck simplifies vendor contracts by combining an AI-powered platform with cutting-edge automation and review tools. To learn more, contact us at sales@lexcheck.com or request a demo.

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