A lot of unnecessary money is spent on vendor contracts. In fact, KPMG stated in a 2019 report that 40% of a vendor contract’s value can be lost if contracts are not managed properly. Considering the recession and market shifts, losing money on trivial, unimportant aspects of contract management is the last thing you want.

What you need is an effective vendor contract management system that centralizes documents and optimizes workflows to help you see significant improvements in outcomes, resulting in the potential for more lucrative and sustainable vendor relationships.

What is a vendor contract?

A vendor contract, also called a vendor agreement, is a business contract that establishes the details of a purchase. This contract covers areas like:

• The product description
• Cost and payment structure
• Terms and conditions
• Warranties, and much more.

Types of vendor contracts

Vendor transactions come in different shapes and sizes, each addressing a unique purpose. So, it makes perfect sense to have different vendor agreements for each category of vendor transactions.

Let’s look at some of the most commonly used ones.

#1 Fixed-price vendor contracts

As the name suggests, a fixed-price vendor contract sets a firm price for the product or service in consideration. Once both parties reach an agreement, the price will stay the same no matter what happens. 

This means that even if there are potential overruns, market fluctuations, delays, or other factors that typically affect pricing, the buyer will pay the price already set in the agreement.

This form of contract is best suited for low-risk transactions with established vendors.

#2 Indefinite delivery or undefined quantity agreement

This form of vendor agreement is useful for situations where the exact quantity of goods or the timeframe for a service delivery can’t be determined upfront. It allows the contracting parties to set minimum and maximum expectations.

This is more suitable for projects with fluctuating demands or long-term partnerships that require flexibility.

#3 Cash-reimbursable contract

Parties in vendor agreements often prefer a cash-reimbursable contract when there are risks or situations where the scope of work is uncertain.

Also known as a cost-reimbursable contract, this agreement allows the vendor to be reimbursed for any extra costs incurred by the vendor during the delivery of the product or service.

#4 Distribution agreements

Distribution agreements are used between vendors and distributors to specify how, where, and when a distributor can resell a vendor’s products. It also specifies the exclusivity of this partnership. That way, the distributor is either limited to the vendor’s products or allowed to distribute other vendors’ products as well.

#5 Time and material contracts

This type of contract is often used with consultants, freelancers, and third-party vendors. Here, the buyer agrees to pay the vendor based on the time and materials required to deliver the expected product or service.

What is vendor contract management?

Vendor contract management is the process of managing the entire lifecycle of a company's contracts with its vendors or suppliers. It involves creating a standardized and efficient process that covers everything from contract creation and negotiation to storage, tracking, and renewal.

At the heart of vendor contract management are the "four Rs": risk, revenue, renewals, and relationships.

• Risk management involves identifying potential liabilities that may arise from vendor agreements and mitigating them through clear contract terms and effective communication with vendors.
• Revenue management is about ensuring that contracts are structured in a way that optimizes revenue recognition and compliance with accounting standards.
• Renewal management involves tracking contract expiration dates and making informed decisions about renewals based on factors such as vendor performance and market conditions.
• Relationship management is a critical component of vendor contract management. By establishing and maintaining healthy relationships with vendors, businesses can ensure that they are getting the best possible value from their contracts and minimize the risk of disputes or other issues.

Overall, vendor contract management is an essential process for any business that works with vendors or suppliers. By creating a standardized process that covers all aspects of the contract lifecycle and emphasizes risk, revenue, renewals, and relationships, businesses can streamline their operations, reduce costs, and improve vendor performance and satisfaction.

The challenges in vendor contract management

On paper, managing vendor agreements may seem like a straightforward task, but the reality tells a different story. Here are some of the most common challenges business teams face when handling these contracts.

• Supplier risks: Working with suppliers always comes with its share of uncertainty. A supplier might fail to deliver on time or turn up with products that fall below quality expectations.
• Data management: Between contracts, invoices, and compliance documents, managing vendor information can quickly spiral out of control. Without a proper system, you risk wasting time searching for critical details or, worse, losing track of them entirely. This is why businesses turn to tools like SpotDraft to stay on top of things.
• Managing multiple suppliers: Handling a large pool of suppliers isn’t easy, especially when each one has its own payment terms, delivery schedules, and quirks. Trying to keep everything organized without dropping the ball can sometimes feel like a logistical nightmare. Without a system, it becomes easier to lose track of things.
• Contract compliance: Staying on top of compliance responsibilities can be challenging, especially when the volume of vendor contracts is on the rise. You have to carefully scrutinize every contract to ensure there are no loopholes. Without a way to streamline this, it can get exhausting.

Processes in vendor contract management

Vendor contract management typically falls into two main phases: the pre-signing and the post-signing phases. Building and scaling a portfolio of solid vendor contracts means nailing every detail, regardless of what stage you’re in.

Here’s what each phase entails:

Pre-signature

This is where the groundwork is laid. It involves identifying the right vendor, drafting the initial contract, reviewing and negotiating terms, managing approvals, and producing a final, signed document that captures everything both parties agree to.

Post-signature

Once the ink is dry, the real work kicks in. This post-signature phase is where you keep tabs on performance, monitor compliance with relevant policies, resolve disputes, and manage renewals if applicable.

What does a vendor contract include?

While vendor contracts come in different shapes and sizes, they share considerable similarities in the way they’re written and structured. A standard vendor contract includes the following:

#1 Scope

This is the heart of the contract. It spells out exactly what goods or services the vendor is providing. Think of it as the "what’s expected" section—it defines the deliverables, the standards, and any special requests that need to be met.

#2 Timing

This part lays out the agreed timelines for the delivery of the goods or services. It might include milestones for long-term projects or a recurring schedule for ongoing services.

#3 Pricing and payment terms

This is where you’ll find the costs, how they’re structured, and when payments are due. Whether it's a lump sum or staged payments, this part covers everything from payment methods to penalties for late payments.

#4 Liability and indemnity

This section talks about who is responsible for damages, losses, or breaches and the extent of the party's responsibility.

#5 Provisions for termination

Here, the vendor contract provides the rules for ending the business relationship. It covers things like how much notice the terminating party should provide and any required compensations for early disengagement.

#6 Dispute resolution

What happens when there’s a disagreement between the vendor and the buyer? This section provides guidelines for handling conflicts as agreed by both parties.

Source: Ves Marissa Kjenstad via LinkedIn

Real-life examples of vendor contracts

Say you work in a manufacturing company and need to procure steel sheets for your machinery production. You need a regular supply of these materials for the next 24 months, so you start negotiating a fixed-price contract with a steel sheets supplier.

Among other things, the contract will usually include details about quality standards, delivery schedules, payment terms, and penalties for any breaches in obligations.

Source: Lawrina

Another scenario:

You own a clothing store and need to stock up for the coming season. You get into talks with a manager from a popular fashion brand.

He agrees to supply you with exclusive designs and rights to distribute their products in specific regions.

To make this relationship work, you’ll need a distribution agreement. This contract will cover the following:

• Minimum purchase volumes
• Exclusivity rights
• Quality assurance
• Payment terms
• Delivery schedule, and more.

This ensures that both parties live up to their end of the bargain.

The importance of vendor contract management

Vendor contract management is a crucial process for businesses to ensure they have a healthy relationship with their suppliers. A contract serves as a rulebook for both parties to follow, making it easy to bring defaulters to book and terminate non-performing suppliers.

Managing contracts in one repository allows businesses to keep track of important information such as contract terms, expiration dates, and renewal options. This not only helps in effective contract management but also allows for better decision-making when it comes to vendor selection and negotiations. Additionally, a centralized contract management solution can help reduce costs, mitigate risks, and increase efficiency in procurement processes.

With an effective vendor contract management system, you can:

• Streamline the procurement process by reducing the time and effort required to negotiate and sign contracts. With clear terms and conditions, there is less room for misunderstandings and disputes, which can save both parties significant time and money.
• Ensure that vendors are meeting their obligations under the contract. This includes delivering products or services on time, at the agreed-upon quality level, and in accordance with any other terms and conditions specified in the contract. By monitoring vendor performance, organizations can identify potential issues early on and take corrective action as needed, minimizing the impact of any problems on the organization's operations.
• Build stronger, more collaborative relationships with their suppliers. By working closely with vendors to negotiate contracts and manage their performance, organizations can develop a deeper understanding of their suppliers' capabilities, priorities, and challenges. This, in turn, can help to build trust and foster a more productive, mutually beneficial relationship between the organization and its suppliers.
• Comply with legal and regulatory requirements, such as those related to data privacy, security, and intellectual property. By ensuring that contracts include appropriate clauses and provisions to address these issues, organizations can reduce their exposure to legal and reputational risks.

But what makes an effective vendor contract management tool? Let's find out!

6 tips for effective vendor contract management

Minimizing potential risk and maximizing your vendor relationships is only possible when you have a robust vendor contract management system in place.

#1 Have a system in place for managing vendor contracts

This involves creating a central repository for all vendor contracts, tracking key details such as renewal dates and contract terms, and assigning responsibilities for managing the contracts.

#2 Establish clear communication channels

It's important to establish clear lines of communication with vendors from the outset of a contract, and to maintain regular contact throughout the relationship.

#3 Negotiate contracts carefully

Negotiating vendor contracts is a crucial step in effective vendor contract management. It's important to ensure that the contract terms are fair and beneficial to both parties.

Source: Chris Koecher via LinkedIn

#4 Monitor vendor performance

Regular monitoring of vendor performance is important to ensure that the vendor is meeting the requirements of the contract and delivering the expected level of service.

#5 Be proactive in managing risks

Vendor contracts come with inherent risks, such as supply chain disruptions, cybersecurity threats, and reputational risks. A productive vendor contract management process involves proactively identifying and managing these risks.

Source: Sumaiya Siddiqui via LinkedIn

#6 Use technology to streamline contract management

There are a variety of tools and technologies that can help streamline vendor contract management, from contract lifecycle management software to e-signature tools. These can help you automate vendor contract management to free up time and reduce human error by:

• eliminating the need to manually organize contracts
• standardizing processes and reducing the amount of time required for manual intervention
• keeping track of important dates for contract renewals and terminations
• getting real-time insights into contract performance and compliance

But how can you begin automating such a seemingly complex process? Easy; in these few simple steps!

Also read: 8 Top Contract Management Software Platforms

6 steps to automate vendor contract management

Managing vendor contracts is an ongoing process that requires continuous engagement to ensure that both parties comply with the agreed-upon terms and that your relationship with your vendor remains productive in the long term.

#1 Define the scope and requirements

Before starting the automation process, it is essential to define the scope of the project and the requirements of the system. This involves identifying the types of vendor contracts (non-disclosure agreements, service level agreements, purchase agreements, etc.) that will be managed, the stakeholders involved in the process, and the key features of the automation system. 

Some of the features that may be required include document management, contract approval workflows, automated alerts and notifications, reporting and analytics, and integration with other systems.

#2 Identify the right automation tool

Once the requirements have been defined, the next step is to identify the right automation tool for the project. 

“By adopting a CLM tool, your contracts fall in place and then it becomes pretty easy to manage your procurement process, professional services, and NDAs. Once you have that system in place, people realize there is a process involved and work in an optimized manner.”

~ Nadia Louis Hermez, Legal Ops Professional, Next Insurance

There are several vendor contract management solutions out there, and it is essential to select the one that best fits the organization's needs. Some of the factors to consider when selecting the tool include the cost, ease of use, scalability, security, and customization options. 

It’s best to go for a contract management tool that can integrate with your CRM or ERP system. This can help streamline your processes and reduce the amount of manual intervention required.

At the same time, your CLM software must have data encryption, access controls, and audit trails to manage security.

Finally, select a user-friendly and easy to navigate tool. Look for tools that offer a modern, intuitive interface that makes it easy to find the information you need and perform the tasks you need to complete.

Also read: Contract Security: Hacks and tips for safeguarding your contracts

‍#3 Customize the software

Customize the software to fit your organization's contract management process. This may include adding fields to capture specific information, creating custom workflows, and integrating the software with other systems.

• Customize the fields and templates in the software to capture specific information related to your contracts. For example, you may want to add custom fields to capture vendor information, contract value, and contract terms and conditions
• Configure the workflows in the software to match your contract management process. This may include setting up tasks and notifications, defining approval workflows, and establishing contract renewal or termination workflows
• Integrate the contract management software with external systems, such as procurement or financial management systems to streamline data entry and reduce errors
• Set up security and permissions to ensure that only authorized personnel can access and modify contract data. This may include setting up user roles, assigning permissions, and enabling audit trails

Customizing the vendor contract management software may require some upfront effort, but the benefits of a customized software solution can be significant in terms of increased efficiency, accuracy, and compliance.

#4 Implement contract workflows

Automated vendor contract workflows can help streamline the approval process and reduce the time taken to execute contracts. You can customize workflows based on the organization's requirements and include multiple approval stages, automatic notifications, and reminders. 

The system can be configured to trigger alerts when contracts are approaching expiration, renewal, or termination dates.

• Start by defining the steps involved in your vendor contract management process. This may include steps such as contract creation, negotiation, approval, execution, monitoring, and renewal
• Once you've defined your workflows, customize them to fit your specific needs. This may involve creating custom fields or templates, setting up approval workflows, or defining notifications and alerts
• Before launching your workflows, it's important to test them to ensure that they work as intended. This may involve running through several test scenarios to identify any issues or bottlenecks
• Once you're satisfied with your workflows, launch them in your contract management tool. This may involve setting up automated triggers or assigning tasks to team members
• As your workflows are executed, monitor their progress to ensure that contracts are being managed effectively. This may involve tracking contract milestones, generating reports and analytics, and making adjustments as needed.

Implementing contract workflows can help improve productivity, reduce errors, and deliver more value to your organization.

Also read: Contract Renewal Process: Strategy + Best Practices

#5 Ensure compliance and mitigate risks

Automated vendor contract management can ensure compliance with regulatory requirements and mitigate risks associated with non-compliance. 

Considering that 62% of organizations have experienced a critical risk event in the past three years, you must configure the system to track key contractual obligations and deadlines, monitor contract performance, and generate reports to identify potential risks. 

• Review each contract to ensure that it complies with legal and regulatory requirements, as well as internal policies and procedures. This may involve conducting a comprehensive review of each contract, including identifying potential risks and compliance issues
• Once a contract has been executed, set up automated monitoring processes to regularly review and assess contract performance
• Generate regular reports that detail contract compliance and risk management activities via your vendor contract management software. This can help identify areas where improvements can be made, and provide visibility into the overall performance of your contract management process.

Digitisation of contract management offers the potential to improve compliance by 55%, according to Forrester and Aberdeen. All the more reason to get your hands on a robust vendor contract management solution!

#6 Train users and monitor performance

“No matter how nifty and cool the technology is, it will fail miserably if no one on your team (or in the company) uses it. This is why user acceptance is among the most critical tasks in your project plan. User acceptance is primarily the process to ensure the technology is presented – and works – in a way that people will use it, along with the training program on how to use the tool.” 

~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
“Ten Things: Buying and Implementing Legal Tech”

Once the system is implemented, it is essential to train users on how to use it effectively. The training should cover all the features of the system, including document management, workflows, reporting, and analytics. 

It is also essential to monitor the system's performance regularly to identify any issues or areas for improvement. This can help ensure that the system is meeting the organization's requirements and delivering the expected benefits.

• Provide comprehensive training to all team members who will be using the contract management tool by creating user manuals, providing online training resources, or conducting in-person training sessions
• Provide ongoing support to users to ensure that they can effectively use the system by sharing access to online resources, setting up a help desk, or offering in-person support as needed
• Set up performance metrics and tracking user activities, such as the number of contracts processed, the time it takes to process contracts, and the level of compliance and risk mitigation activities
• Offer coaching or training to address specific areas of weakness, or recognizing and rewarding high-performing team members
• Continuously evaluate your processes and make adjustments as needed to ensure that you're delivering maximum value to your organization

By training users and monitoring performance, you can ensure that your contract management system is being used effectively and that your team members are equipped with the skills they need to manage vendor contracts in a compliant and risk-mitigated manner. 

Also read: Episode 13: Deconstructing exceptional GCs, rolling with the punches, & paying it forward with Ani Bhat

How Does SpotDraft Make Vendor Contract Management Easy?

SpotDraft offers intuitive and easy-to-use vendor contract management dashboards to help businesses streamline contract data management and reporting as well as create transparency within their contracting process.

If you’re interested in learning how SpotDraft can revolutionize the contract lifecycle for your organization, request a demo to speak with our experts today.

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