How to review a vendor contract – 10-Step Vendor Contract Review Checklist

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Due to the importance of vendors (companies that supply goods and services), having clear and well-defined vendor contracts aligned with your expectations is crucial for your business.

That's why we have created this 10-step vendor contract review checklist. While each business has its own needs and thus vendors, this checklist will help you keep your focus on the most critical parts and clauses most vendor contracts should cover. The checklist will also be a great starting point to build upon, allowing you to tailor the vendor contract to your business needs.

Step #1: Involve stakeholders from relevant departments

If you are a part of a larger organization, before you begin reviewing the vendor contract, consult with other parts of your company, in particular:

●       Legal: Legal teams will ensure the contract meets regulatory requirements and industry regulations and is legally sound.

●       Procurement: The procurement teams will oversee the internal procedures and ensure the contract meets all procurement criteria. However, they usually keep records of the same types of contracts previously signed.

●       Finance: Colleagues from the financial department will ensure the contract doesn't break the budget and pay special attention to any financial clauses that need clarification, avoiding costly mistakes.c

●       End user: The department that will benefit from the contract will likely initiate the entire procedure, so ensure their opinion is heard during the negotiations.

Small business owners don't have the luxury of having several teams to deal with contracts. But, if it's a high-value deal, it is a good idea to contact your attorney or bookkeeper or seek help from external consultants before signing, to reduce potential risks.

Step #2: Summarize the contract in recitals

Even though services or products the vendor needs to deliver might seem obvious, clearly define the contract purpose internally and in the recitals. This will help interpret the clauses, especially in cases where disputes arise, improving your position before the court.

A good recital will also contain the most critical contract information, such as:

●       Brief scope description

●       Service price and essential payment terms

●       Contract duration and effective date

●       Exclusivity

You can include other important elements that will help with interpreting the true intent behind the contract in case of unforeseen circumstances.

Step #3: Clearly define the Scope of Work (SOW) and deliverables

Clearly defining SOW and deliverables is one of the most critical parts of the contract. Here's what to pay attention to:

●       Deliverables: State precisely what the vendor is expected to deliver, whether products and/or services.

●       Details: Explain in detail but precisely what the expectations are regarding quality, quantity, and volume. Clearly define delivery dates and milestones, as you don't want ambiguity. Remember to include acceptable delivery methods and locations, if applicable, and define delay and grace periods, if appropriate.

●       Performance metrics and expectations: It's a good idea to have clear key performance indicators (KPIs) regarding quality standards, delivery times, service uptime, etc. Also, define performance review periods, notifications, and consequences for underperformance, ranging from financial penalties to contract termination.

●       Consider signing a separate SLA: For services, performance standards are usually defined with a Service Level Agreement (SLA), which specifies performance standards, which are super common when you work with vendors who provide technical services. SLA is usually a separate document found in the appendix/schedule of the main business contract. It contains parameters such as availability, response times, delivery time, monitoring and reporting protocol, and the first level of dispute resolution. Because of their importance, SLAs are usually a separate document (appendix or schedule) and require a separate contract checklist for their complexity.

Step #4: Check pricing and payment terms for common pitfalls

Here are a few important payment terms you should double-check before signing:

●       Pricing model: State explicitly how the contract will be paid, whether fixed, hourly/daily, per unit delivered, in tiers, or combined.

●       Payment currencies, exchange rates, and methods: Clearly define the payment currency, exchange rates, and exchange dates, as well as acceptable payment methods, in detail.

●       Schedules: Depending on the pricing model, you want to specify the payment schedules clearly. This can be upfront or upon delivery for fixed payments, milestone-based, monthly, NET terms upon delivery, or any other scheduling model specific to your (vendor's) industry.

●       Penalties: Clearly define what happens if the vendor fails to deliver what was agreed on time or if you miss the payment.

●       Discounts and bonuses: Mention if any discounts are available for bulk orders or if there are bonuses for early deliveries.

Step #5: Check contract duration and termination clauses

Take a close look at contract duration, particularly automatic contract renewal terms, and what happens if the parties continue their relationship without signing another contract.

Also, check termination terms and whether or not there is a termination for convenience, and also clauses that regulate the breach of the contract.

Next, check notice periods and see if contract exit procedures are covered. These usually include returning exchanged documentation, leftover materials, etc.

Step #6: Confidentiality and data security

While confidentiality clauses are often part of a separate agreement, such as an NDA or a DPA, mentioning them in the main contract is also a good practice.

The contract should list what information is considered confidential. However, it shouldn't be limited only to that list, especially regarding the forms in which the data was acquired.

It should also include those with the right to access confidential information, but only when necessary and for contract fulfillment.

As for the security and personal data processing, it's good to list expected standards in a separate DPA. However, at least mention what type of compliance standard you expect the parties to maintain (for example, compliance with laws such as GDPR, CCPA, HIPAA, and similar).

Step #7: Intellectual property

Intellectual property rights (trademarks, patents, copyrights, designs, etc.) are an incredibly valuable company asset, so you should always have well-defined IP key provisions in your vendor agreements.

Specify who owns any IP created during the contract's execution and whether the parties have the right to use another party's IP while performing their part of the contractual obligations.

If applicable, describe who has the right to use, modify, or distribute the deliverables and if third parties have any rights to the IP (in the case of licensing, for example).

Step #8: Indemnity and liability clauses

Be extra careful about liability limitations, such as the exclusions of gross negligence or disproportionate caps, as they can put your business at risk if anything unpredictable happens.

Also, check indemnity clauses, which describe what happens if a third party makes any claims related to the vendor's actions while performing the contract. If appropriate, you can mention mutual indemnification.

You can specify insurance requirements, particularly the types and limits, and any proof of insurance coverage if applicable.

Step #9: Dispute resolution

Don't forget to stipulate the jurisdiction and governing law that will apply to your contract, which is essential when dealing with international vendors.

It is a good idea to include an escalation path allowing parties to settle any issues before going to court. You can also opt for mediation and arbitration as viable court alternatives.

Step #10: Signatures and effective dates

Lastly, double-check that the parties' authorized signatures are listed with their full names and titles and that those names match the preamble.

Also, ensure that the contract has a defined date of execution, not only when it was concluded/signed, as this will help ensure its validity and prevent legal issues.

Bottom line

The vendor contract review process can be tricky, as each company has its own way of doing business. Things can get especially complicated if you are a small business international vendor, where foreign laws and contractual standards you don't regularly deal with come into play.

If you need help reviewing vendor contracts, don't hesitate to contact OK To Sign today.

Our legal experts will double-check your contracts for any ambiguities or hidden unfavorable clauses, clarify the contract terms for you, give you valuable insights, and ensure you fully understand the obligations you are about to accept, mitigating operational risks.