5 Elements Every Vendor Agreement Should Include

Vendor Agreement March 19, 2021

Hanh Truong

Introduction to Vendor Agreement

Generally, businesses will need vendors to supply goods, like raw materials, or services to effectively operate. A small business retailer, for instance, would rely on a third party to provide new shipments of trendy clothes. While a restaurant would depend on their local farmer to deliver fresh produce and vegetables for their kitchen.

In order for these business relationships to be dependable, both parties need to establish a vendor agreement. By delineating expectations, any confusion or conflict of interest will be minimized.

What is a Vendor Agreement?

A vendor agreement is a contract between two parties, detailing the exchange of goods and services in return for compensation. Businesses will typically have vendor agreements with software providers, IT specialists, consultants, and raw material suppliers. These contracts define and describe all the goods that are being provided, as well as payment expectations. Oftentimes, vendors can negotiate with the company before establishing an agreement. This ensures that both parties concur with each other's conditions and goals.

However, companies will generally set terms, conditions, and requirements for the vendor to adhere to. Doing so allows them to have control over their operation and prevent delays in customer service. Vendor agreements are also legally binding contracts, meaning the document can be used in court cases if necessary. This is to protect both the company and vendor and guarantees that they are both liable for their actions.

5 Elements Vendor Agreements Should Include

Each business's vendor contracts should be tailored to align with the particular organization's needs and expectations. However, there are some key provisions that all companies should include in their agreements to streamline their operations. The following are 5 common elements to cover in vendor agreement templates.

1. Service or Product Description

A vendor contract must descriptively detail the products or services that the vendor will be providing to the business. It should also include conditions by which the goods should be delivered. For example, a restaurant may specify to their independent contractor that they want their frozen meat to be expedited in cold shipping boxes. If the contract is specific, there will be fewer mistakes and delays in the supply chain.

2. Length of Contract and Duration

It is also important to include how long a vendor must supply goods to the company. This will provide insight into the duration of the business relationship between the two parties. Additionally, the contract must set forth how often the goods will be provided. For instance, a restaurant could have an agreement with its frozen meat supplier to have shipments every other Monday.

By establishing time frames and deadlines, the vendor will be more likely to be efficient and proactive in providing their service. It also allows the business to pay their vendors on time and to know when they should expect to renew the contract or to find another supplier.

3. Terms for Pricing and Payment

Vendor agreements must detail how much money the company will pay its suppliers in return for the goods. The business should also specify if it is making non-monetary payments to its vendors, such as debt-forgiveness or in-kind contributions. In-kind contributions include voluntary services or donated goods. In addition, the terms should specify how the payment would be sent. Typically, companies will use either mail a check, send money through PayPal, or perform an online bank transfer.

Depending on the volume or timeline of an order, a company may plan to make multiple payments. For example, they may pay a quarter of the total cost upfront and send subsequent payments each month. This type of payment must be spelled out in the contract. This will prevent any misunderstanding and miscommunication between the vendor and brand.

4. How to Exit the Contract

Business owners need to indicate conditions at which they or the vendor can cancel an agreement. Many contracts, for instance, will require vendors to give written notice to the company at least 3 months ahead of time. With an exit clause, the company and vendor will know how to responsibly leave a contract.

5. Actions for Non-Compliance

When a vendor decides to not comply with a condition in the agreement, they are essentially breaching the contract. This can cause great delays in operations and increase costs. Therefore, the agreement needs to have a clause that outlines remedial actions for contract breaches.

For instance, a restaurant could indicate that they will not pay for a shipment if goods are expired or damaged. Owners should also describe the extent of specific breaches which may result in the company canceling a contract agreement. By delineating actions for non-compliance, businesses can hold their suppliers accountable.

In order to foster a transparent and dependable business relationship with vendors, companies need to set out expectations in a contract. With thorough vendor agreements, organizations can protect their operations and streamline workflows.