1. Multi-Year Contract Definition
2. Benefits of Multi-Year Contracts
3. Avoiding Pitfalls

Multiyear contracts are service or product provision contracts that last for longer than a year.

Multi-Year Contract Definition

In simple terms, a multi-year contract is a contract for a product or service that lasts for more than twelve months. Multi-year contracts might make provisions that continued performance of the contract into the second and any subsequent years of that contract will be contingent on the appropriation of funds. A contract of this nature might also allow for a cancellation fee to be paid to the other party if funds cannot be acquired to continue performance of the contract in question.

Every party involved must commit to performing under the contract as outlined in the contract terms and any related administrative documentation for the entire duration of the proposed term, regardless of how many years it might extend for. Multi-year contracts can, however, be amended throughout the duration if all parties involved agree to make a change.

Benefits of Multi-Year Contracts

When you're involved in a process such as a request for proposal with the intent to fulfill a specific need for your business, one of the most important things to consider during the negotiation process with your shortlist of suppliers is how long the contract is going to last. There are two categories that the length of a contract will be broken into:

  • Single-year contracts
  • Multi-year contracts

There are a number of benefits to securing a multi-year contract, such as:

  • If prices go down in the future, the contract is potentially locked in at the price when the contract was enacted.

This is particularly beneficial for the supplier. However, if prices go up, the client stands to benefit due to the following:

  • Higher supplier discounts for the client
  • Safeguarding both parties involved from price volatility
  • Allowing for the development of a strategic partnership with suppliers
  • The potential to get suppliers to commit to making continuous improvements
  • Saving time, resources, and efforts in the long run

Getting good discounts from suppliers is one of the biggest reasons that multi-year contracts are chosen. This is largely due to the fact that it's in a supplier's best interest to secure fixed volume business as well as repeat business. One common tactic when it comes to negotiating contracts with good price benefits is to inquire about whether or not the supplier has any discounts available for multi-year contracts. This can be helpful even when you're dealing with suppliers who are not open to negotiating on price. When faced with the possibility of securing long-term business, most suppliers are suddenly very willing to talk about pricing terms.

In some scenarios, a supplier may actually demand a multi-year contract, with no other option for you to consider. This is especially true in situations that require the supplier to make any kind of up-front investments, such as in co-manufacturing contracts. When this happens, the supplier needs to have the kind of guarantee, that only a long-term contract can provide, that ultimately they'll be able to profit from their initial investment. Investments of this nature could apply to things like:

  • Technology
  • Machinery
  • Providing a workforce
  • The time required for the initial setup

In scenarios such as this, it's quite common for a supplier to insist on a multi-year contract.

Avoiding Pitfalls

It's a good idea to attach an early termination or "break-away" clause to key performance indicators (KPIs) in the service-level agreement (SLA). This can be used to establish benchmarks for expected performance, as well as to address potential issues that may arise related to the supplier's specific performance. It's also not a bad idea to take the Total Cost of Ownership (TCO) into consideration for the entire duration of the contract and not simply the annual costs when deciding whether or not to award the business to a specific supplier.

Make sure you have done a request for proposal exercise through to completion and determine a supplier's responses as a method for qualifying them for the contract. This is important because it can be quite difficult to switch from one supplier to another between contracts, so it's best to make every possible effort to make sure you're working with a supplier that you want to work with in the long term.

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