Introduction to Vendor Contracts
Vendor contracts are agreements your business enters into with service providers, equipment lessors, raw material suppliers and/or product distributors. These contracts commonly are the foundation of the relationships you have with these necessary parties. They bind you to the contract terms in ways that hopefully are beneficial to you, and border on critical to your business sustainability, profitability and ability to meet your end customers’ needs .
But vendor contracts rarely are standard or one-size-fits-all. Every facet of your relationship with your vendors is unique, and the contract must be carefully tailored to each circumstance to best serve your interests.
In addition to basic identifying information, vendor contracts typically include:
Consider the following when negotiating and drafting your vendor contracts.
Key Vendor Contract Clauses
The heart of a well-negotiated vendor contract is the provisions that anchor your commitments and your vendors’ commitments. In our experience, the following clauses should be included in almost every service vendor contract. The contract terms in a given case can be more or less complicated depending on the nature of the engagement. While this guide focuses on the contracts for higher education clients, it is equally applicable to corporate users.
Scope of Work. This section describes in detail what services are being provided by the vendor. It is critical to set forth very specific deliverables from the vendor. This section also describes any services that are part of the project, but may be excluded from the contract. This will occur, for example, if your team will be performing some of the project work (developing content for an online course), but the vendor will still be involved in the project (developing and maintaining the Learning Management System on which the course will be taught). The scope of work should also include any assumptions you have about the process, as well as your acceptance criteria for the completed work. Make sure you understand what the vendor will be providing, and make sure the vendor understands what you will be providing, so that there are no surprises as you proceed through the project.
Pricing. This section details all costs associated with the vendor’s services under the contract, including licensing fees and any incremental costs – for example, if the vendor will charge overtime rates and license fees for using their software.
Confidentiality. Most vendor contracts include a confidentiality clause. This section generally obligates the vendor to keep your information confidential unless either party discloses confidential information to a third party. You should also include language letting your team know that they are prohibited from disclosing confidential information, and giving your legal department the right to determine when disclosure is appropriate.
Termination. A contract termination provision describes when you or your vendor can terminate the agreement, and is often influenced by the length of the agreement. For example, a one-year agreement has different "for cause" remedies than a five-year agreement.
Vendor Contract Negotiation
Negotiating vendor contracts can be a complex process, particularly given the extensive number of moving parts involved in these types of agreements. In most cases, the negotiation phase is led by the purchaser, who aims to secure the most favorable terms and conditions for its company. There are a number of strategies that buyers can use to achieve mutually acceptable outcomes during the negotiation period. First, it is important to display a willingness to walk away from the transaction. Vendors typically put a great deal of effort into proposing contract terms and ensuring that they will be able to meet the purchaser’s needs. However, even though vendor companies have invested time and resources into the development of a proposal, they may be willing to negotiate. It’s important to demonstrate that you are willing to find a different vendor if your needs are not being met. Second, do not wait until the negotiation process to determine what you consider as "deal breakers" – points of contention in the agreement that will prevent you from moving forward with the contract or force you to consider termination at a later date. Before negotiations begin, discuss the deal breakers with your team and prepare to open a candid dialogue regarding these issues. Such transparency may help you to prevent future friction with the vendor if the agreement is signed. Finally, keep in mind the negotiating leverage that you have during the process. Although it’s vital to maintain a good relationship with the vendor, this should not impede your ability to get the best deal for your company. A key part of successful negotiation of business contracts is a strict focus on the needs of your business. That way, you will be able to make decisions from a position of power, without worrying about the relationship with the vendor.
Managing Vendor Relationships
Managing Ongoing Vendor Relationships
After entering into a contract with a vendor, most companies tend to focus on the implementation of that contract rather than its maintenance. However, the best practice is to take an active role in ensuring the proper working relationship with the vendor to make sure the contract is followed and to foster communication between the parties. Sometimes it’s the little things that can result in a huge problem down the road.
Vendors are an important source for expertise that benefit your company. They may also have information that is quite sensitive or confidential to your company’s business operations. Thus, it is very important that the relationship with the vendor be managed properly. That is, employees must be diligent in complying with the contractual provisions so that the vendor fulfills its obligations. For instance, if a vendor is required to submit to performance reviews at specified time intervals, then that obligation should be noted in the company’s calendar. It is important to stay on top of all obligations under the contract. Sometimes a company can forget about performance or compliance reviews until a problem arises.
By taking a proactive approach to the contract, efforts can be made to ensure the proper relationship with the vendor. This should include, but is not limited to, the following:
A commitment to being hands-on with vendor relationships is important. By maintaining a positive working relationship, both the company and the vendor can benefit from the relationship.
Vendor Legal Risk
While vendor contracts can seem straightforward in nature, legal risks are often lurking just under the surface. As a vendor, you want to ensure that the provider of any products or services is on solid legal ground. That’s because if you don’t have the right protections in place, you could open yourself up to massive lawsuits.
So what do you need to look out for regarding vendor contracts? Contractual disputes The fact is that contractual disputes with providers are commonplace and can arise over multiple issues, including liability for damages, scope of liability, compensation, time allocated to a particular project and quality of work. As such, it is important to understand each obligation in a vendor agreement and how any ensuing disputes will be resolved.
Liability caps, for instance, can limit your potential exposure. If such a cap is not part of the agreement you signed with a vendor, it is in your best interest to negotiate that protection as soon as possible.
You also should be wary of arbitration clauses Arbitration clauses typically require the parties to forgo filing a lawsuit in court and instead pursue an alternative dispute resolution. This is a major factor to beware of when entering an agreement with a vendor — because a traditional litigation process could be more beneficial in the long run.
It is advisable to explore paying higher costs for a vendor who does not require arbitration, which is often favorable to the vendor and could make you vulnerable to its tactics.
Intellectual property Intellectual property rights also become a major component of vendor contracts. While intellectual property legal risks are often associated with technology , the reality is that any third party whose work is reproduced by a company could have ownership over that work’s subsequent use.
Therefore, it is vital to know how intellectual property agreements address proprietary information. You also need to understand how a vendor contract defines an organization’s intellectual property assets, as well as whether the contract thoroughly explains how those assets can be used by outside contractors or employees of the organization.
Confidentiality Additionally, it is essential to prioritize confidentiality and data security. Foremost, it is critically important to ensure that the agreement addresses the confidentiality of sensitive information and data, such as records that fall under the Health Insurance Portability and Accountability Act (HIPAA).
A confidentiality agreement will address how confidential information is defined, how the information can be shared, recourse if the confidentiality agreement is breached, and how long third parties must keep the information confidential.
Compliance Compliance risk is often another top factor to consider when entering into a vendor contract. For example, if a hospital chooses to partner with a vendor that fails to comply with federal laws, this could put the healthcare organization itself at significant risk of non-compliance. This is especially true under regulations like the Federal Trade Commission’s Red Flags Rule or nuisances that demand compliance from any company that handles sensitive customer data.
In addition to understanding how to protect you from privacy issues, you need to be aware of the best methods of destroying protected information. This is especially relevant for vendors who offer hard-copy or electronic data shredding.
Technology Vendor Contracts
Technology plays a big role in the negotiation, approval, execution and management of vendor contracts in today’s digital age. Contract management software systems offer centralized contract repositories, contract lifecycles, and vendor relationships tracking. One contracted party can send out contracts for signature which can be e-signed by the other party through the same system. Cloud-based systems allow for remote accessibility, so version control and approvals can be easily tracked throughout the lifecycle of the relationship. Many contract management software systems even offer some level of integration with your organization’s ERP or accounting systems.
Today, digital signatures have also become an accepted means of signing contracts. A widespread regulatory framework exists around digital signatures that relies on universally accepted signature, identification, authentication technologies, all underpinned by a public key infrastructure. Centralized contract management systems usually offer a choice between a variety of e-signature options. Whether a traditional "wet" signature or a digital signature is acceptable, the contract management system can track the execution of the executed documents.
Vendor Contract Renewal and Termination
No matter how great a relationship your company has with its vendors, it is natural to want to renew or to terminate relationships. For example, a renewal may be considered if the vendor has a favorable price, terms or conditions, or the relationship is apparently working out very well. In contrast, you may consider terminating a contract based on the vendor’s failure to perform as expected, or if the vendor crosses the line in its interactions with your employees or customers. Or, upon completion of the contract, you may simply consider letting the contract expire.
If you wish to consider renewal before the term of the contract expires, you should be mindful of the applicable provisions of the contract. If it is a preferred vendor, unlimited term contract, you may be able to renew the contract by paying a fee for the renewal term. For contracts that could expire or terminate, you should have the option to notify the vendor in advance of the expiration or termination of the contract about your desire to renew the contract. Best practice is to provide for the contract to renew a pre-specified number of times automatically so long as no party submits a termination notice . A formal amendment could be required for renewal.
Termination of a contract should also be considered and may be appropriate under specified circumstances. Most contracts will have specific termination provisions. It is a best practice to have an early termination provision that can be invoked without penalty by either party so long as a specific notice period (which may vary by type of contract) is followed. For example, any party could terminate a contract by providing a minimum of 60-days’ written notice of termination to the other party. However, most contracts do not have such a provision, and the result may be that you must fulfill the entire term of the contract.
Termination is sometimes allowed without notice (such as for a material breach). A declaration of termination may therefore be necessary prior to the expiration of the term. To avoid all or part of the contracted payment from being due to the vendor in the event that you declare a material or otherwise permitted termination, you should consider requiring the vendor to contribute and/or to provide an accounting and/or support documentation for the amount of the contracted payment that is triggered by the declaration of termination.