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The Essentials of Vendor Agreements

November 4, 2020 5 min read

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essentials of vendor agreements

Vendor Agreements are everywhere. From ongoing suppliers to one-time contracts. For most businesses, vendors are used to purchase products or services that are critical to operations. Whether it’s your office supplies, equipment repair and maintenance, internet and phone services, or even raw materials for your products, your business depends on different vendors fulfilling their promises and expectations.

Some vendors use standard contracts with their customers, others negotiate specific agreements with each client. In any case, knowing the fundamental elements of a Vendor Agreement can protect you from unnecessary disputes and issues later on. This can be crucial when it comes to protecting your operations and also strengthening the delivery of your products and services.

What is a Vendor Agreement?

Simply put, a Vendor Agreement is a business contract between two parties covering the exchange of goods or services in return for compensation. Vendor Agreements establish the business relationship conditions and include details on each party’s obligations under the contract. These agreements allow parties involved to understand what is expected and the consequences if those expectations are not met. 

If you were to host an awards banquet, for example, you would need a furniture vendor for your tables and chairs. The Vendor Agreement would likely include:

  • the type of furniture your vendor would provide (color, style, size)
  • when the furniture would be delivered
  • the time for its retrieval

In return, you would agree to:

  • pay a specific price for the use of the furniture
  • agree to make sure it remains undamaged during use
  • ensure the vendor is provided with the necessary access for deliveries and retrieval of the furniture

There would also be information in the agreement that outlines what would happen if the furniture was damaged or not returned. 

Types of Vendor Agreements

Vendor Agreements run the gamut from goods to services and typically everything from day-to-day operations to one-time activities and events. Typical Vendor Agreements include:

Fixed Price Contract

The buyer and seller agree to one fixed price for a “well-defined product” regardless of possible overruns, delays, market fluctuations, or other factors that might impact the cost or value of the product. Typically used for low-risk situations with well-established vendors. 

Cash Reimbursable Contract

The buyer and seller agree that in addition to a standard fee, the seller will also be reimbursed for any work associated with the contract’s fulfillment. Typically used when there is more risk and uncertainty associated with the product or service. 

Time and Materials Contract

The buyer and seller agree to a specific hourly rate and time-frame. Typically used with third-party vendors, consultants, freelancers, and other outside contractors. 

Letter Subcontract

The buyer and seller agree that a percentage of work will be completed during a “subcontract” phase (usually under 40% of the total project or product). Typically used when all the contract details cannot be finalized before the project needs to start (usually large projects with lots of variables).

Indefinite Delivery Contract

The buyer and seller agree to a flexible contract with an undefined quantity of goods, or alternatively an undefined time of service. Instead of very specific deliverables, a range is used to identify the minimum and maximum expectations. Typically used when multiple projects are worked on simultaneously with a master agreement that defines the overall project. 

Distribution Agreement Contract

An agreement between a distributor and the vendor that includes how, when, and where a product will be distributed. Distribution Agreements give a distributor the right to sell and usually profit from the vendor’s products. Typically these agreements also outline if the distribution relationship is exclusive or non-exclusive.

The Essential Elements

The first step towards ensuring your Vendor Agreements protect and enhance your business is to make sure you understand the most important parts within them. It’s essential that you enter into your Vendor Agreements with full knowledge of your rights and responsibilities.

Most Vendor Agreements will include the following basic elements:

1) Scope

A Vendor Agreement will describe the products or services included in the contract and how those products or services will be delivered. In relation to this, scope is about each party’s duties and expectations. Specificity is key: by clearly defining what each party expects from the other many mistakes can be avoided. 

2) Timing

Vendor Agreements should also clearly establish when the vendor will be paid, when the goods or services will be delivered and when the business relationship will end. Including details of when particular deliverables can be expected decreases the likelihood of issues arising due to miscommunication and misaligned expectations.

3) Price and payment

Vendor Agreements should clearly establish the price (consideration) paid in return for the vendor’s performance. Equally important is how that price will be paid — whether via cash and currency, an in-kind contribution, forgiveness of debt, or any other financial arrangement. Many agreements include payment methods as well (i.e., check, wire transfer, electronic payment, etc.). Other considerations include: late fees, finance charges, and whether any deposit upfront is required. A timetable of expected payments and due dates can be useful here.

4) Termination

A Vendor Agreement creates a business relationship, but it should also include how and when that business relationship will end. While most vendor contracts will consist of an end-date, it’s also essential to establish the steps either party can take to complete the contract early and what consequences may kick in if an agreement is terminated before the agreed-upon date. 

5) Consequences

Vendor Agreements will also detail consequences should either party not fulfill their duties and obligations under the contract. This establishes how parties can settle any disagreements that arise while also ensuring awareness of ramifications if they do not fulfill their terms of the contract. For example, a Vendor Agreement might have a clause that discusses what will happen in the event of a clear breach of contract. It could include how to fix the breach and/or alternatively, what to do when the breach cannot be rectified. Vendor Agreements may also include information on indemnity, mediation, and arbitration procedures.

How to optimize your Vendor Agreements

Here are some final tips to help optimize your vendor contracts:

  • Be clear about dates: deadlines, milestones, project length, due dates, etc. 
  • Clearly establish all roles and responsibilities as well as how performance will be measured and success determined.
  • Use a pillar approach to your contract framework by establishing a master contract covering the entire project with smaller agreements to protect individual vendor relationships or phases during the project. 
  • Establish a monitoring process or review schedule with periodic check-ins so that all the parties can touch-base and ensure the project or event stays on-track. 
  • Clearly outline the resources and support necessary for all the parties to fulfill their duties under the contract (this includes funding, equipment, staffing, etc.). 

The importance of Vendor Agreements

Vendor Agreements may not be at the forefront of your mind when you are creating or growing your business. Yet, these agreements build the foundation of business relationships and ensure operations continue without interruption. Conversely, if things don’t go according to plan, an unevaluated Vendor Agreement can halt business operations — sometimes placing an entire business in an extremely vulnerable position. Being conscious of the essential elements within Vendor Agreements ensures you are building a strong foundation for your business to operate smoothly upon.

More about Ironclad

Ironclad is the leading digital contracting platform for legal teams. By streamlining contract workflows, from creation and approvals to compliance and insights, Ironclad frees legal to be the strategic advisors they’re meant to be. Ironclad is used by modern General Counsels and their teams at companies like Dropbox, AppDynamics and Fitbit to unlock the power of their contracts data. Ironclad was named one of the 20 Rising Stars as part of the Forbes 2019 Cloud 100 list, the definitive list of the top 100 private cloud companies in the world. The company is backed by investors like Accel, Sequoia, Y Combinator and Emergence Capital. To learn more, visit our homepage.

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