Vendor Contracts: The 5 Essential Elements

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.

Knowing the fundamental elements of a vendor contract can protect you from unnecessary disputes and issues later on.

In this article, we’ll cover what a vendor contract is and how to create them to protect your business operations.

A vendor contract (otherwise known as a vendor agreement) is a business contract between two parties covering the exchange of goods or services in return for compensation. Vendor contracts establish the business relationship conditions and include details on each party’s obligations under the contract.

The purpose of a vendor contract is to allow all parties involved to understand what is expected in terms of deliverables, payment, etc. during an exchange of goods or services and the consequences if those expectations are not met. Companies are also better able to mitigate their risks by negotiating vendor agreements at the start of any business/vendor partnership.

Vendor contracts run the gamut from goods to services and typically everything from day-to-day operations to one-time activities and events. Typical vendor contracts 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 timeframe. 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. This is 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.

Vendor contracts and supplier contracts are similar in that they both involve agreements between a business and an external party that provides goods or services. However, there are some nuanced differences:

1. Scope

• Vendor contracts typically cover a broader range of goods or services, often including both products and related services.
• Supplier contracts usually focus more specifically on the provision of raw materials, components, or finished products.

2. Relationship duration

• Vendor relationships are often more long-term and may involve ongoing services or regular product deliveries.
• Supplier relationships can be more transactional and may be shorter-term, though long-term supplier relationships also exist.

3. Customization

• Vendor contracts might include more customized terms to fit specific business needs or projects.
• Supplier contracts tend to be more standardized, focusing on product specifications, quantities, and delivery terms.

4. Services provided

• Vendors often provide additional services beyond just supplying goods, such as installation, maintenance, or customer support.
• Suppliers typically focus primarily on delivering the specified products.

5. Integration level

• Vendor relationships may involve deeper integration with the business, potentially including access to systems or on-site presence.
• Supplier relationships are usually more arms-length, focusing on the exchange of goods.

6. Payment terms

• Vendor contracts might have more complex payment structures, including service fees, subscription models, or performance-based payments.
• Supplier contracts often have simpler payment terms based on product delivery.

7. Industry usage

• The term “vendor” is more commonly used in retail and service industries.
• “Supplier” is more frequently used in manufacturing and production contexts.

It’s worth noting that these terms are sometimes used interchangeably, and the specific differences can vary depending on the industry and company. The key is to clearly define the terms and expectations in any contract, regardless of whether it’s called a vendor or supplier agreement.

Say you were to host an awards banquet. 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. 

Vendors and customers form contracts in many ways and formats. Yet most written vendor contracts include the same legal provisions and usually in the same general order:

1. Scope

The contract will describe the products or services included in the contract and how those products or services will be delivered. By clearly defining what each party expects from the other many mistakes can be avoided. 

2. Timing

Vendor contracts 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. 

3. Price and payment

The contracts should clearly establish the price paid in return for the vendor’s performance. It should also cover how the vendor will be paid—whether via cash and currency, an in-kind contribution, forgiveness of debt, or any other financial arrangement. 

4. Termination

A vendor agreement creates a business relationship, but it should also include how and when that business relationship will end, as well as any steps either party can take if they are to complete the contract early.

5. Consequences

Vendor contracts 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. 

Creating a vendor contract most often requires the help of an attorney to ensure the contract aligns with the proper legal provisions and adequately protects all parties involved. While exact details will vary, most contracts follow the same general order:

Step 1: Specify business terms

The first part of each vendor contract usually outlines the business terms including:

• Name of the customer
• Name of the vendor
• The specific obligation of each party, with details around the good, the service, or the license
• Price
• Payment terms

Step 2: Outline legal concepts

This section usually begins with the representations and warranties section. The contract parties use this section to make promises about the quality of the products and services, their rights to sign the contract, and their compliance with applicable laws. This also includes any confidentiality and indemnity provisions. 

Step 3: Address consequences

The last part of the vendor contract then describes what happens if things go wrong. The contract will talk about when each party can terminate, whether they’ll use litigation or arbitration, what law will govern the dispute, etc.

Managing your vendor contracts doesn’t have to be complicated. Contract lifecycle management (CLM) can help save you time and headaches when it comes to creating, sending, and tracking contracts with vendors.

Tracking vendor contracts

There are many benefits to tracking your contracts with CLM software. These benefits include quick and efficient contract creation, improved collaboration and negotiation, and instant access to your contract data in real-time.

Amending vendor contracts

There will often be renewals, amendments, or addendums that need to be added to your vendor agreements. Contract management software makes it easy to maintain relationships with vendors, update your contracts, and remain compliant with the latest regulations.

Taking control of the vendor contract process can transform your business from the inside out. With the right contract management solution, your marketing, sales, and contract procurement teams can all be on board and have the tools they need to manage vendor contracts with ease.

Save time in your business

Contract management software provides you with the data you need to make better-informed business decisions, the automation capabilities to save time in your business, and peace of mind knowing your business is protected.  

Discover new opportunities

Ironclad’s Data Repository empowers you to capture and secure your agreements, leverage contract data to reduce risk, automate your business, and discover new opportunities all within a single dashboard.  

Design your workflow

Streamlining your vendor contract process also means designing custom workflows that work best for your business—from contract generation to team collaboration to approval. Send, sign, and track contracts in just a few minutes – not after weeks or months. Creating a contract is simple as uploading a template, completing relevant fields, and adding approvers and signers.

Vendor contracts may not be at the forefront of your mind when you are creating or growing your business, yet these contracts ensure operations continue without interruption. Being conscious of the essential elements within vendor contracts ensures you are building a strong foundation for your business to operate smoothly upon.

Want to create vendor contracts with ease? You can simplify your vendor contract process, from creation to execution, with Ironclad. Sign up for a consultation here to be one step closer to streamlining your vendor contracts.