Sole Source Contracts: Everything You Need to Know
Sole source contracts are agreements between two parties, typically a business and a vendor. 3 min read
Updated November 2, 2020:
Sole source contracts are agreements between two parties, typically a business and a vendor. In this case, there is only one vendor that provides the items or services the business needs, so the business doesn't have the chance to shop around. Sole source contracts are different from single-source contracts.
Sole Source Versus Single Source Procurement
In a sole source contract, only one vendor is available to provide an item or service. The vendor has no competition.
There are multiple sources in a single-source contract, but the business chooses to buy from a single vendor, thus bypassing the competition. Although there may be many other suppliers that offer similar products, the business chooses to purchase from that particular vendor.
In one industry, suppliers and distributors may be different, but they usually produce similar merchandise to sell. This helps businesses that buy supplies because they have a varied pool of companies to choose from.
For example, if your company buys only Hewlett Packard computers, that's single-source purchasing. You have the option to change suppliers, but for various reasons, the company decides to go with one specific supplier. Reasons for doing so range from cost concerns to strategic policies.
Pros and Cons
Single source contracts give business owners alternatives. If owners are unhappy with one vendor, they can choose another. In addition, single sources are often open to negotiations. Vendors are usually willing to accommodate businesses — such as modifying contract terms — in order to stay ahead of the competition.
Some businesses prefer options, but sole-source contracts have some benefits. For example, it takes time and resources to contact various vendors to obtain pricing information and negotiate contracts. When you only deal with one supplier for specific merchandise, that cuts down on the time and administrative costs of sourcing it.
Because single and sole-source contracts require businesses to purchase from only one vendor, this can be a precarious position for the business. It's very dependent on that single vendor. Likewise, the vendor is in a difficult position because it may only have one customer.
If the vendor or business has some financial hardships or their relationship suffers, both of them will have trouble continuing to trade.
Sole source options provide much more limited opportunities. Your business would have to drastically change its requirements to change vendors. You don't have this problem with single-source procurement because your purchasing options are less limited, so you can find new suppliers more easily.
Possible Solutions to Sole and Single Source Contracts
The best solution isn't entering into either procurement situation to begin with. For example, defense contracts are continually awarded to various companies to ensure that the country doesn't solely depend on one enterprise for national defense and to remove the possibility of corruption.
If you're a large purchaser, you may solve the problem by simply buying out the vendor.
Single source purchasers have an option that sole source purchasers don't: having an alternative source ready. You may find similar suppliers that have products that are pretty much the same quality as previous vendors. Suppliers are aware of this, so they're usually more flexible when negotiating agreements. Draft contracts carefully to avoid situations where you can't change the vendor.
Use a standard template for your written justification. Your state will likely require you to submit written justification for your request for sole-source procurement. You may have to provide the following information:
- Documented research verifying the supplier as the only known source
- Specific features that prohibit competition
- Known timing and/or compatibility issues
- A description of the marketplace, including resellers, dealers, and distributors
Centralize the process of reviewing and approving all sole source requests. In many states, the responsibility of approving sole-source contracts rests with one office or position.
Publish all sole source requests publicly or an “intent to sole source.” This gives potential vendors the opportunity to view and indicate their interest in bidding, which increases competition.
Although single-source contracts may seem more beneficial, you might prefer sole source purchasing for your particular business needs. Weigh your options carefully to ensure you make the right choice for your company.
If you need help with sole-source 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.