A Vendor Contract: Why, What, and How

Say, you are crafting bags for first-aid kits on the large scale. You need timely and reliable shipments of a specific fabric, furniture, etc. How do you ensure everything’s high quality and delivered exactly on time? After all, this is life-critical. 

A vendor agreement is your go-to. Organizations across industries regularly use vendor contracts and have 90% of their annual profits presented in these legal documents. Let’s discover how vendor contracts can protect you and what benefits they bring to your business.

What is a vendor agreement?

A vendor contract is an agreement between the parties specifying how a vendor provides services or goods to a buyer in return for compensation. In this legal document, the parties write down the conditions to ensure convenient and safe work. They also address the consequences of violations to avoid misunderstandings and conflicts.

All contracts share some basic elements that we’ll consider later. Still, depending on the method and type of compensation and other conditions, we can distinguish several types of vendor contracts:

  • Fixed price contract. A buyer pays a specific price for certain goods or services.
  • Cost-plus contract. A vendor is paid a fee in addition to the project cost. The vendor can have a fixed price or charge extra once they satisfy certain customer requirements: achieve metrics, meet tight deadlines, or reduce project costs.
  • Time and materials contract. A client covers the cost of materials and the time spent by specialists on their project.
  • Subcontract agreement. A vendor acts as a subcontractor and performs only part of the project’s tasks. As a result, the vendor is responsible only for particular outcomes, not the entire project.
  • Indefinite delivery contract. The parties agree on a range of goods or services the supplier shall provide over a designated period. They can also define the scope of services without a specific execution time.
  • Distribution agreement. The parties agree on the conditions of product distribution and the profit that the distributor shall generate. Sometimes, the seller may grant exclusive distribution rights to a particular company.

As you can see, businesses use vendor agreements in all kinds of situations. But do they really need them? Especially when the vendor and the buyer trust each other? Yes, absolutely! And here’s why.

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What does a vendor agreement give you?

You are wrong if you think that a vendor contract only burdens you with extra work. By signing an agreement, you reap great benefits.

A more efficient workflow

A vendor contract describes all the aspects of a forthcoming project: its scope, deadlines, tasks, product features, and deliverables. It serves as an outline for your collaboration. So, you can create a more efficient workflow by having all the details written down and all issues clarified.

Minimized risks and fewer misunderstandings

By signing the contract, the parties agree to fulfill their obligations. For example, they commit to meeting the deadlines and not disclosing confidential information. If they fail to comply, they will have to deal with legal, financial, and reputational consequences. You can reduce the risk of losses by thinking through the potential problems and how to compensate for them.

On top of that, it’s too easy to miss or misinterpret something during calls or back-and-forth emails. A properly drafted vendor contract prevents misunderstandings as the parties hash out the details and set them in writing. 

Trustworthy business relations

Your willingness to negotiate terms and secure commitments with a legal document shows that you are a reliable partner who cares about their reputation. 

Look at it from a different angle too. When you have guarantees that the other party shall pay you in time, it’s easier for you to trust them. A thoroughly discussed and well-defined contract is a foundation of a trustworthy relationship. It lets each party do their share without worrying that their business partner will back down. 

Still, all these benefits will work only if you draw up the contract correctly and consider the finer points. Let’s see what you need for this.

How to draft a vendor agreement

No matter what type of contract you create, the process is the same. 

Pre-negotiate conditions

Save yourself the hassle of editing and re-drafting: discuss the key terms with clients or vendors before putting them on paper. The details might differ even if you create a typical contract using an approved draft.

You must clearly define all the terms to avoid misinterpretations. For starters, you have to clarify the legal names of the customer and the vendor, especially if the party is a subsidiary of a large corporation.

Determine conditions

This part usually takes the bulk of any vendor contract as it lays out the details of cooperation, including:

  • Scope. Description of products and services the vendor provides.
  • Time limits. The total duration of the project or milestone due dates.
  • Payment details. The price of goods or services, as well as payment methods.
  • Intellectual property rights. This part is necessary if the vendor develops a product that requires intellectual work.
  • Non-disclosure terms. Description of the categories of information that the vendor and the client must keep confidential and not transfer to third parties.
  • Termination conditions. Terms whereby the contract can be terminated and the procedures the parties must follow.
  • Additions. Description of other legal documents that set the terms of cooperation or lack thereof.
  • Flexibility to changes. Conditions whereby the parties can change the contractual details.

We highly recommend covering all these details before adding any other terms specific to your case. 

Highlight the сonsequences

Your customer or vendor might violate any contractual conditions, so the consequences for such actions—financial reimbursement, public apologies, or any other—must be clear. This part of the contract usually includes limited liability and force majeure clauses.

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Double-check, edit, and sign

Before signing the document, you should double-check all the details with the other party and make last-minute changes if necessary. Now you are good to go! 

Thinking back to the beginning of the process, you might wonder if any samples are available to build on. The answer is yes. On the Internet, you can find many vendor contract examples, like this one from PACE University, and tailor them to your needs. 

Or you can delegate this task to professionals. For example, AXDRAFT CLM will be happy to create templates for your typical contracts so you can draft them in minutes. 

The process of creating vendor agreements seems lengthy, but in most cases, it can be reduced to just a few minutes by using these two strategies: pre-drafting and managing the contract lifecycle. Both of them need expertise, effort, and CLM software help.

What is vendor contract management?

Managing a vendor contract is a complex, multi-level process that can be time-consuming if poorly organized. This is the case because a contract’s lifecycle consists of nine stages, and each of them must be managed differently:

  • Contract requesting
  • Drafting
  • Discussing 
  • Approving
  • Signing and executing
  • Managing obligations
  • Amending
  • Auditing and reporting
  • Renewing and terminating the agreement

Any contract goes through these stages, but the vendor agreement has features that take more time at some phases. Take manufacturing companies, for example. They have multiple suppliers of raw materials, and one of the key stages is the analysis of each contract’s performance. 

If the supplier doesn’t fulfill their obligations or puts too high prices, the manager should notice this and request terminating the contract and finding another supplier. Decisions like these have to be backed up by data and numbers, which takes much time if a manager analyzes them manually.

Without workflow optimization and contract analytics, vendor contract management may take loads of time. But if you use software, you’ll complete all these stages in minutes. We encourage you to learn what each step involves and how to optimize them to create your vendor contracts faster and easier.

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Conclusion

A vendor contract is your protection against misunderstandings, conflicts, and risks of failed cooperation. But to make it work, you need to design it correctly and include all the necessary clauses and details. This process doesn’t have to take too much time, and it’s better if you cut it down to minutes. AXDRAFT can help you reach this goal without losing quality.

Our experts can create customized templates for your drafts and automate the process of creating vendor agreements to save you time and minimize errors. Try our demo and learn more about the AI-powered contract lifecycle management (CLM) system. 

FAQ

What types of vendor contracts are there?

Vendor agreement formats and terms differ, and so do contract types. You can choose among the following:

  • Fixed price contract: a customer pays a specific price for goods or services.
  • Cost-plus contract: a vendor is charged extra on top of the project’s costs.
  • Time and materials contract: a customer pays for specialists’ time and material spent on their project.
  • Subcontract agreement: a vendor completes a part of the project as a subcontractor.
  • Indefinite delivery contract: a vendor agrees to provide a specific amount of goods or services within an unlimited period or unlimited services within particular time limits.
  • Distribution agreement: a company grants a distributor the right to sell its goods under specific conditions.

What is the difference between an SLA and a contract?

The main difference between contracts and service level agreements (SLAs) is the description of parties’ responsibilities. A contract outlines the obligations of both the client and the vendor, while an SLA covers only the vendor’s performance and level of service.

What is vendor contract management?

Vendor contract management is a complex process ensuring that a contract successfully completes its lifecycle and benefits the parties. It includes an agreement drafting, signing, monitoring of its obligation fulfillment, and analyzing its profitability. To this end, the manager must also arrange for an appropriate document storage system to easily find, check, or compare contracts.

What is a third-party vendor contract?

A third-party vendor contract is a type of agreement that outlines the conditions when a third party can join the project to help one of the parties fulfill its obligations.

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