4 questions to ask before signing a vendor contract
Have you ever felt confused about the language in a vendor contract and wondered whether you're getting the best deal? If so, you're not alone. We've met with executives and their staffs across the country, and we've noticed that many share the same concern.
At Expense Consulting, we've reviewed a great many vendor contracts. We're rarely surprised at what we find embedded in agreements that pass over our desk.
Here's a typical scenario: A client brings us in to see whether we can find additional savings above and beyond what they were capable of achieving on their own. So we roll up our sleeves and start our analysis only to find that the already-signed agreements have limited our ability to provide additional opportunities and savings. With those lessons learned, we're providing a few of the most critical questions to ask before signing a contract, as a public service.
What is your out?
We recommend that any multi-year agreement has an “out” provision after the first year. Standard agreements allow for termination for cause after giving vendors a chance to rectify a problem within a set timeframe. Without a simple “out” clause, the process for terminating a relationship can be drawn out and costly to your organization.
How long is too long?
Along the same lines, we suggest never having an agreement with a term longer than five years (three years for technology-based services). New competitors, new products, new billing methodologies and regulatory changes ensure that the technological world remains dynamic and, therefore, contracts become outdated.
Who is signing what?
We also recommend a review of your contract-signing authority. Organizations lose control when they allow anyone on staff to make commitments on their behalf. Have a strict policy that states who can sign and, more importantly, who can't sign, and ensure that this policy is communicated to employees as well as vendors. Creating and maintaining proper controls may take a little time to establish but that investment will pay-off repeatedly.
Are you keeping it simple?
When getting into the specifics of pricing within agreements, we recommend following the motto of “keep it simple.” Remember, complexity often favors the vendor. Simple agreements are easier to understand by everyone and are less prone to overbillings because they're easier to audit.
When unit pricing can fluctuate, be sure to spell out the conditions and the parameters so that there is a way to go back and audit. Many times, vendors will attempt to put in language that sounds good on first reading but that creates a situation where it is nearly impossible to confirm the math — access to the data referenced is not readily available.
Consider using expert assistance for contract negotiations. When you need medical advice, you tap into the experience of a doctor, right? As with anything else, negotiating is a skill that can be learned very quickly but that can take a lifetime to master.
There's a lot more to purchasing than just getting three quotes and choosing the lowest one. And when you're face-to-face with a sales representative, you are dealing with someone who has negotiated the same product or service with hundreds of businesses while you're focused on many other matters. It just makes good business sense to make sure that you have an advocate who is looking out for you.
Stephen Carrabba is principal of Expense Consulting, which he founded in 2009. After graduating from Babson College in Wellesley, MA, Carrabba established a specialty manufacturing company while investing in real estate. Gaining experience in controlling expenses to maximize profits, he developed protocols and procedures that he believed were translatable to other industries and organizations. Carrabba and his team have negotiated thousands of agreements. He lives in Connecticut.
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