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5 Key Contract Management & Procurement Terms

Whether you're buying a pack of gum at the grocery store or a CLM software platform for your company, every purchase comes with an implicit or explicit contract. The larger a business grows, the more purchases you'll be making and the more vendors and service providers that you'll need to rely on.

Before you enter into a partnership with a new vendor, or purchase a new product or service, it's highly important to draw up and sign a vendor contract. Below, we'll discuss five of the most important terms that you should include when drafting a contract in order to make your next vendor relationship a successful one.

1. Goods and Services

Perhaps the most important term of all, this section specifies exactly which goods and services the vendor will provide you. To avoid confusion and miscommunication later on, this description should be as specific as possible.

For example, you decide to hire a software development company to create a custom business intelligence application. In this case, it's better to include phrases such as "development, testing and support of a custom business intelligence application," rather than the vague phrase "software development services."

2. Prices and Payment

Once you delineate what you'll be receiving, you then must agree on how to pay for it. This section should address several important questions:

• What are the costs of the goods and services, in detail?

• How will you make the payments (cash, checks, credit cards, bank transfers)? Who will be responsible for receiving them?

• When are the payments due? Will you pay in a lump sum or in installments?

• What are the penalties for late payments?

3. Confidentiality and Proprietary Information

First, decide who will ultimately own the products that are created as a result of the partnership. If you want to retain control, then specify that your business will take ownership of all intellectual property created during the provision of goods and services.

Second, if you have sensitive or confidential data on hand that must be shared with the vendor, take steps to protect yourself as much as possible. The contract should include a clause that forbids sharing this information with third parties or using it for other purposes.

4. Limitation of Liability

Nearly every contract includes a variety of "disclaimers" that limit parties' ability to bring a legal claim against each other or to recover damages. Your vendors will likely want to limit their liability to the costs of the products and services that they provide you, omitting any possible indirect effects.

However, you should ensure that these clauses in your contract don't prevent you from claiming damages in the event of severe misconduct, such as fraud and gross negligence. If your mission-critical software has a fatal and egregious security flaw that exposes users' private information, for example, then you'll want to be able to seek adequate compensation for such an error.

5. Breaches and Remediation

Finally, you need to plan ahead for what happens if either party decides to break the terms of the contract. If the relationship will be long-term and ongoing, then many contracts include the ability for either party to terminate "without cause," after a certain amount of time and with an appropriate notification in advance.

Including the five terms above in your vendor contracts will be highly important in order to satisfy both parties and lessen the risk of a lengthy legal battle. Make sure that you go over the terms of the contract with a fine-toothed comb before signing and beginning your partnership.

The Master Checklist for Contract Review & Management

Tips and best practices for a successful contract management process.

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