3 Big Vendor Contract Blunders to Avoid

Author: L. Schlereth Date: August 30, 2011

Working with vendors is a necessary part of many small business operations. And though you might find vendors whose work is valuable and trustworthy, some contract sections can be a major disadvantage to you if you’re not careful.

Here are three of the biggest vendor contract blunders small business owners make and how you can avoid them:

Mistake #1: Not having intellectual property ownership provisions when outsourcing product research and development.

John Boyd, partner with Rimon PC, a law firm in San Francisco, says this is a blunder small business owners make too often. For example, if you’re a small business that develops and manufactures pet products and you outsource the design of a dog carrier, the vendor might own the design, and you won’t be able to use it at your own discretion. To avoid this mistake, Boyd says to make sure you own any of the inventions from the research and development process.

Mistake #2: Not having specific language.

Jeff Gordon, VP of value creation for Net(net), an IT investment optimization firm in Holland, Mich. that helps business negotiate contracts, says the biggest issue he’s seen is “missing performance language.” Fully describe all the requirements of the vendor’s work, including the frequency of the work provided, payment timelines and replacement policies for broken items. He knows of one printing company that was not specific enough with one of their paper-manufacturing vendors on shipping deadlines for invitations. When the vendor’s shipment was delayed, the printing company missed an important deadline and lost customers. “Contractually, there’s no such thing as being too specific,” says Gordon.

Mistake #3: Not mentioning variable changes based on unforeseen circumstances.

You can be specific on timeline expectations, but include language for potential unpreventable delays. Gordon says he knew a small construction company that had a contract with a builder to finish work on a house by a certain deadline, but bad weather caused delays. Gordon says it’s especially important to take variable changes—things like weather and economic conditions—into account when drafting contracts, because they will likely affect payment. He recommends including language that states prices are going to be valid for a certain period of time or can be re-negotiated in the event of unforeseen events that  affect the ability to complete the work.

Related Resource: 4 Tips for Collaborating with Marketing Vendors

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