Types of Vendor Contracts: Everything You Need to Know
There are many types of vendor contracts, and they are the type of contract you will encounter if you need to acquire goods or services from an outside party. 4 min read
Updated October 30, 2020:
Vendor Contract Overview
There are many types of vendor contracts, and they are the type of contract you will encounter if you need to acquire goods or services from an outside party. Such contracts are usually written out in the vendor’s favor and come with a longer, more complicated approval process than a typical purchase order. Ultimately though, the purpose of any vendor contract is to ensure that the expectations and obligations of both parties are clearly defined, with the buyer receiving the product or service they purchased and the seller receiving compensation for the product or service.
Types of Vendor Contracts
There are many types of vendor contracts, each with their own advantages and disadvantages. Examples of such contracts include:
- The Fixed Price Contract. Also known as the lump sum contract, this contract stipulates a fixed price will be paid for a well-defined product. Such contracts give the buyer a fixed price for the product without overruns, although the price may be higher to compensate for unknown factors and risks on the part of the seller. This type of contract is used when there is little to no uncertainty in the product or work being offered.
- The Cash Reimbursable Contract. Also known as a cost disbursable contract, this contract reimburses the seller for their work in addition to offering them a fee that represents their profit. Sometimes certain incentives must be met for the fee to be paid, such as the task being completed ahead of schedule or under budget. This contract is used when the scope of the work is uncertain or there is more risk involved.
- The Time and Materials Contract. This is usually used when labor hours are used to measure the service being offered. In these contracts, an hourly rate will usually be specified for the contractors, experts, or outside support being hired.
- The Letter Subcontract. This may be used for time and materials work when the job is so large it must be started before all the details of the contract are defined in order to have it completed on time. This contract defines a percentage of the work that may be completed during the letter subcontract phase, which is usually not more than 40%.
- The Indefinite Delivery Contract. This contract is useful when a production schedule or product quantity cannot be easily defined, although a range from minimum to maximum in quantity or time usually is stated. These are often employed when multiple projects must be performed at once or over a time period. Then a master agreement will define the overall project to be completed, leaving leeway regarding some of the finer details, which are in turn detailed in smaller work orders.
- The Distribution Agreement Contract. This is usually made between a vendor or manufacturer and a distributor and is used when one needs to get a product distributed to customers. The contract will define when, where, and how the distribution will take place, as well as if it is to be an exclusive or non-exclusive deal.
Tips for Vendor Contracts
Before signing a vendor contract, or any contract, for that matter, it is important you understand what you are signing. Likewise, it is also important that you have negotiated a contract that will give you the best deal possible. Some tips to ensure both include:
- Being sure that the project scope is clearly defined. To achieve this, the project length, deadlines, milestones, format, constraints, assumptions, acceptance criteria, performance monitoring criteria, responsibilities, and roles should all be clearly stated in the contract.
- Breaking projects into smaller ones rather than have them be governed by one large contract. Thus, when one phase of the project is done, a new contract can be made that is better suited for what is needed at the time.
- Determining a client review schedule for milestones met in a project, as well as a performance reporting and monitoring process.
- Determining what resources and support will be needed to complete a project, such as subject matter experts, facilities, and equipment.
- Using the best practices for whatever industry you are in, such as the Iterative Development Process or Rational Unified Process, in the case of software development.
- Determining what actions may bring about project termination, what responsibilities each party will have should a project be terminated, who will own the product (if there is one) at the time of termination, and what the contract closure procedures will be.
These are far from the only clauses that may be encountered within a vendor contract. If you need further explanation of details regarding the different types of vendor contracts, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.