Procurement Contracts: Everything You Need to Know
Procurement contracts are legal documents between buyers and sellers in a transaction. 3 min read
Procurement contracts are legal documents between buyers and sellers in a transaction. These documents govern the purchasing of materials, supplies, services, and other items necessary for the business to operate. The terms of a procurement contract define the parameters and provide a framework for the relationship between the parties. This is so important that sometimes the word purchasing is used in place of procurement in the name. In simplest terms, procurement contracting is the umbrella term for purchasing.
What to Look for in a Procurement Contract
Some of the topics you should expect to see in this type of contract are:
- How vendors are selected
- Payment terms and conditions
- Strategic vetting
- The selection of products
- How contracts are negotiated
- How goods are ordered, paid for, and delivered to the business
Why are Procurement Contracts Important?
The procurement contracting process is critical because, to maximize profits, a business needs to buy quality materials and services at the best possible price in the necessary quantities. Those products must arrive at the right location within a reasonable delivery time. A sound procurement management process helps the business find the best supplier or contractor for the job and negotiate the best deal. No matter how large or small, managing the procurement process is a necessity that every business has to deal with eventually.
Procurement contracts are also important because it's often more cost-effective and efficient to enter into a contract with a vendor than to make a component or perform a task yourself. Business owners should always ask if it is cheaper to make this good or do this task themselves, or if can they get better pricing from a vendor. Also, procurement may be the better route if you can purchase a good or service from a vendor at a deep discount.
Why Do I Need a Procurement Contract?
Cost is not the only reason to engage a contractor. Companies often do this for tasks they can't do themselves due to a lack of appropriate equipment, expertise, or capacity. An example of procurement contracting for a service is engaging a consultant to help you analyze a particular part of your business for possible improvements.
A trustworthy procurement contracting process is also good for business-to-business relationships. Companies can share opportunities, take advantage of each other's strengths and expertise, and buy goods and services from each other at competitive rates.
Fixed Price Procurement Contracts
No concrete rules exist to tell you which type of procurement contract is right for a particular job, so managers must consider all the factors carefully to make the best decision. Since the procurement contract sets out the structure of the relationship for the duration of the project, it's critical to get it right. A wrong decision can be expensive. A very commonly used type of procurement contract is the fixed price contract.
Clear Terms: Fixed price contracts are also called lump-sum contracts. The main advantage of a fixed price contract is that the terms of the project are clearly defined and well known to all parties from the start. Once the contract is signed, the seller is bound by the agreement to deliver the expected good or service in the expected time for the established price. This helps the buyer make sure the work is done on time and doesn't leave him guessing about how much the output will cost. That makes fixed price contracts the simplest to manage. Outsourcing and turnkey procurement contracts are often fixed price on a deliverables basis.
Cost Control: As long as the parties agree on the scope of the work, costs can generally be managed well with a fixed price contract. However, fixed-price contracts can be risky for the seller as he is bound to provide the work as set out in the agreement. Sellers must bear the burden of any unexpected cost increases in his own process, so as a result, they must be leery of changes in the scope of work. Experienced contractors can use this to their advantage by submitting the lowest bid on a project and making it very expensive to make changes, thereby generating additional revenue.
If you need help with setting up or enforcing procurement contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.