A successful business typically has good vendors to depend on to provide products and/or services that contribute to its overall operations. From cleaning services used to the raw materials needed to produce the company’s products, vendors play an important role in keeping things running smoothly and efficiently.

When establishing new businesses, owners should devote time to executing good vendor contracts. Well-written agreements will protect both parties and clearly outline expectations for both vendors and the business. Having an early understanding of this contract type will help to ensure that a new business owner is set up for a harmonious and profitable working relationship with vendors.

What Is a Vendor?

A vendor is an entity that makes goods and services available to other companies. An individual person can also be a vendor. The vendors are paid for the goods and services they provide to a company. A wide range of services can be completed by vendors and they sell to large and small companies alike. Large companies such as Target, Walmart, and Toyota depend on many vendors to provide the products they sell to consumers.

Sometimes people confuse a vendor with a supplier. A supplier is the entity that originated the product. A vendor would just purchase that product they created and then resell it.

There are many examples of vendors. An example of an individual vendor is a photographer commissioned to take promotional pictures for a company or a freelance writer contributing content for a company website.

If a company decides to put on an event for their employees, more than likely many vendors would be involved, such as a food caterer. If the company decides to transform the office space by redecorating, then the decorator would be considered a vendor.

Type of Vendors

Not all vendors are alike. For new business owners, knowing the type of vendor they’re dealing with can help determine what contract terms need to be included. There are five main types of vendors:

Manufacturer: These vendors take raw materials and turn them into finished goods. These goods are then sold to wholesalers and retailers.

Wholesalers: These vendors will buy things in bulk and then sell them to retailers. In some cases, they will sell directly to the consumers. Another name for this vendor type is wholesaler-retailers.

Retailers: These are companies that buy products from vendors and then sell those products to consumers. An example of this is Target.

Service Provider: This vendor offers services to a consumer or a business. These typically perform everyday tasks such as cleaning, transportation services, landscaping, etc.

Independent Vendor/Independent Contractor: The first would be an individual who sells goods they’ve made to a business. An independent contractor would be someone paid to complete a certain service for the consumer or a business.

What’s in a Vendor Contract?

Vendor contracts are business agreements that help define the terms of the business transactions. These contracts should cover very in-depth details about the provided goods and services to be provided and should include:

• Contact information for both parties
• Expected product delivery time or length to complete the services
• Description of goods and services
• Price and payment method
• Terms for ending the contract
• What the consequences are for a breach of contract

This information will make the terms and conditions of the contract clear to both parties. When creating such an agreement, it’s important to have an attorney to help draft it because of their knowledge of applicable laws and case history, as well as an ability to write clear legal terminology that protects both the business and vendor.

Different Types of Vendor Contracts

Contracts for vendors differ based on the goods and services involved. Sometimes, companies will have different contract terms for the multiple vendors they work with. For example, a business may have one contract that covers vendors who provide daily operations and another for vendors it uses only once.

Fixed Price Contract: Here, the parties to this contract will agree to a fixed price for the job. The price will not change, even in the event of delays, overruns, or market fluctuations. The price will be agreed upon by both parties. This is commonly used for low-risk jobs or vendors with well-established relationships with the company.

Cash Reimbursable Contract: Under the terms of this contract, the parties will agree to a standard fee and reimbursement for any costs associated with the completion of the job. This can be good for a risky job that needs to get done. An example of this would be an unstable market for a product that is required for the job to be completed.

Time and Materials Contract: Both parties in this contract will agree to an hourly rate and a timeframe for the work will be done. This is best used for outside contractors, freelancers, and other third-party vendors.

Indefinite Delivery Contract: This flexible contract will be agreed upon by both parties. The agreement can be over an undefined amount of goods or a service with an undefined completion time. In the contract, a specific range for maximum and minimum will be used to determine the expectations for the project. This is a good choice for a vendor working on multiple projects at the same time.

Distribution Agreement Contract: This contract will be between a vendor and a distributor. The agreement will include where a product will be distributed, and when and how it is distributed. The contracts give a distributor the right to sell a vendor’s product. They will typically detail if the relationship between the vendor and distributor will be exclusive or non-exclusive.

Why Should Vendor Contracts Be Done with an Attorney?

Whatever agreement owners want to make with a vendor, it should be created with an attorney. An agreement must be detailed and cover all aspects of a contractual relationship between the company and vendors. Getting legal representation to draw up a vendor contract can be a huge benefit to business owners. These benefits include:

• Avoiding the likelihood of future litigation: Lawyers can help to foresee pitfalls within a contract. When they spot them, they can offer expert advice to help you avoid them. Two common pitfalls include:

1. Unclear defending of rights and responsibilities: A contract should be as straightforward as possible. When discussing the rights and obligations of vendors and companies, the roles should be unambiguous. An ambiguous agreement means the contract is open to more than one reasonable interpretation. When this happens, the courts will decide on what interpretation to enforce, which each party then has to agree to.

2. Poorly stated or missing termination clauses: Although contracts are made with good intentions, problematic situations can arise. A contract must include a clause stating how/when both parties can terminate the contract. Having a termination clause can save owners time and money. For example, there are a number of reasons why a contractor may decide to cease working on a project, from lack of funds distributed from the other party to a major weather disaster that prevents work from continuing. A good contract will account for all sorts of possibilities and describe how business will proceed under these circumstances. If your contract does not explicitly state how, when, and why a contract can be terminated, it may end up in a court battle.

• Leveraging their expert negotiating skills: When a lawyer sees a one-sided contract, they can negotiate better terms and conditions. An example of a one-sided contract is automatic vendor renewal. It can seem convenient, but it gives the vendor the upper hand; the vendor doesn’t have to work to win your contract again. An annual price increase is another potential one-sided condition in a contract. It gives vendors the right to increase prices yearly, even if there isn’t inflation in the industry. An attorney can review, flag, and address such potential contract issues.

• Having an enforceable contract: A new business owner might be somewhat knowledgeable of state and federal laws. However, an attorney will know more and create a vendor contract that can be enforceable by law in case of a legal dispute. An enforceable contract needs to be agreed upon by both parties. The company must make an offer to the vendor, and the vendor must accept the agreement. All contracts must include consideration from both parties. Once signed, the contract will become enforceable.

• Reviewing contracts from the internet: Internet contracts can entice new business owners. However, most of the time, these contracts are meant to be starting points. All too often, new business owners use internet contacts as a final product, but contract terms should cover the specifics of each business and vendor scenario. Another issue is that these contracts don’t always consider differing state laws. If a contract is made in contradiction to the company’s state law, it may be unenforceable. Even if you use an online contract as a starting point, hire an attorney to review, and if necessary, amend it.

The benefits of seeking legal representation for a vendor contract are both subtle and obvious. A business owner will save time and money by hiring an attorney. Moreover, a well-drafted vendor agreement can protect a business if problems arise with the products or services to be provided. If you are a new owner that doesn’t know where to start in this process, don’t worry. At Rosenblum Law, our experienced attorneys will review your individual situation and create a vendor contract designed to address all of your business needs. Give us a call at 888-815-3649 for a free consultation.