What is vendor contract management: The process & best practices

The typical small or medium-sized business can have hundreds of suppliers, from utility providers to software companies to labor companies and beyond.

And with each vendor you do business with comes a contract, meaning most companies have hundreds of active contracts in play at any given point in time.

Given the important legal ramifications that come with being engaged in a legally binding contract, it begs the question:

Should business leaders be paying closer attention to their supplier contracts?

The short answer is yes, and in this article, we’re going to show you by introducing you to a business practice known as vendor contract management.

We’ll discuss what vendor contract management is, how it's beneficial, how it works, and cover best practices for implementing a supplier contract management practice in your own organization.

What is vendor contract management? 

Vendor contract management is the practice of managing formal agreements between a business and its suppliers.

This encompasses everything from creating and signing contracts to monitoring performance to ensure that contractual obligations are fulfilled. Vendor contract management is used to protect the organization from risks associated with poor performance or non-compliance, working across the entire contract lifecycle, from negotiation through to renewal or termination.

The main objectives of a supplier contract management process are to:

• Ensure contract compliance
• Monitor performance
• Minimize risk
• Optimize costs
• Improve vendor relationships

Benefits of effective vendor contract management 

An effective vendor contract management practice affords businesses of all sizes a number of important benefits, the three most important being:

1. Performance management. This is the main benefit of vendor contract management: ensuring that your suppliers deliver on their contractual commitments.
2. Risk mitigation. Supplier contract management can help avoid the risk of non-compliance or potential pursuits popping up down the line.
3. Cost control. Good vendor contract management controls costs by optimizing pricing via contract negotiations as well as through the aforementioned risk mitigation strategies.

Types of vendor contracts 

A first step in getting on top of managing vendor contracts is to understand the different kinds of contracts that you might have in play. These include:

• Fixed-price contracts: Agreements where there is a well-defined scope and set price agreed upon before starting.
• Cost-reimbursement contracts: Agreements where vendors are reimbursed for the actual costs incurred plus some kind of profit margin or reward.
• Time and materials contracts. Similar to cost-reimbursement contracts. Vendors bill customers for the materials used and the time spent on the project using a predetermined hourly rate.
• Unit price contracts. Agreements where a price is established per unit purchased, but the quantity is as yet unknown. Often used for ongoing supplies, such as office paper.
• Master service agreement (MSA). General terms are set for a long-term vendor relationship, with specific projects outlined in individual Statements of Work (SOW).
• Service level agreement (SLA). Defines specific performance standards, such as customer support expectations, as well as any penalties for failing to meet standards.
• Retainer contracts. An agreement where the vendor is paid a fixed amount regularly to ensure availability for ongoing services, such as consulting or legal support.

Essential elements of a vendor contract 

What makes a good vendor contract?

Here are five essential elements that every quality supplier control includes.

1. Terms and conditions 

This is the core legal agreement that outlines the obligations, rights, and duties of both parties. It includes clauses like confidentiality terms and contract duration.

2. Service level agreements

SLAs specify the quality and performance expectations from the vendor, including delivery timelines, standards for services or goods provided, and expected response times.

3. Pricing and payment terms

This section discusses the cost structure you’ve agreed upon, including any fixed fees, variable charges, and discounts available. It also outlines your responsibilities as the buyer in terms of payment.

4. Scope of work

The scope of work (SOW) defines the specific tasks, services, or products the vendor will provide, including clear descriptions of deliverables and responsibilities.

5. Renewal and termination clauses

Every good vendor contract should specify the conditions under which the contract can be renewed, terminated, or renegotiated.

How does vendor contract management work? 

The vendor contract management process encompasses a number of critical stages. While there is a largely linear flow involved, however, certain aspects of the process, such as renewal and renegotiation, add a cyclical element.

For that reason, it is often referred to as the vendor contract management cycle.

Here are the key stages involved

• Contract creation. Defining needs, negotiating terms, and drafting the agreement.
• Approval and execution. Singing the contract and putting it into action.
• Storage and tracking. Storing and organizing contracts securely and tracking key dates like payment deadlines or renewal dates.
• Performance monitoring. Regularly evaluating vendor performance against SLAs and ensuring contract compliance.
• Amendments and renegotiation. Updating the contract as required or renegotiating terms prior to renewal.
• Renewal or termination. Deciding whether to renew or terminate the agreement based on current business needs and previous vendor performance.

Vendor relationship management vs vendor contract management 

Vendor relationship management is a broader practice than vendor contract management.

While vendor contract management is focused on ensuring compliance and performance obligations, vendor relationship management encompasses a wider set of actions, such as regular check-ins and risk assessments.

Procurement vs contract management

Contract management is focused on overseeing the lifecycle of vendor agreements, managing risk, and ensuring compliance with the terms that have been agreed to.

Procurement is a much broader practice. It's about the acquisition of goods and services through strategic vendor sourcing and negotiation. Supplier contract management could be considered part of the wider procurement cycle.

Vendor contract management best practices 

Looking to implement a vendor contract management practice in your own organization?

Here are five best practices for vendor contract management to keep in mind as you move forward:

1. Nail down your contract creation processes

Spend some time working on how you create contracts. Create templates, build a clause library, and focus on clearly defining the scope of work with your vendors.

This will help you work faster while also avoiding risks and potential disputes.

2. Work on your negotiation skills

Getting better at negotiating contracts will help you reduce costs and increase the value you receive from vendors.

Here are three tips to consider:

1. Do your homework. Understand the vendor’s pricing model, market conditions, and the services or products you're purchasing.
2. Leverage competition. Use competitive bidding to secure better pricing or contract terms.
3. Aim for a win-win. Strive for deals that benefit both parties so that you’re building profitable long-term relationships.

3. Implement a regular contract review process

Put a process in place for going over existing contracts and ensuring they align with current business needs.

This will help you cut costs that are no longer relevant, provide opportunities to negotiate with vendors, avoid risks, and ensure you stay up to date with industry standards and regulations.

4. Don’t forget about your own compliance

Make sure that your vendor contract management process includes a compliance monitoring aspect.

Your regular contract review process and performing monitoring program will help with this, but you should also make it a habit to review contracts in light of major changes such as updates to data security regulations like GDPR.

5. Leverage modern software tools

There’s a whole world of software platforms built specifically for managing vendor contracts.

These helpful tools provide a centralized contract repository for easy storage and tracking, real-time performance monitoring and reporting, and some helpful automation functionality to speed up workflows.

Vendor contract management system 

Automation is an important component of effective and efficient vendor contract management.

Aspects of the vendor contract management system that can be automated include:

• Contract authoring via pre-approved templates
• Approval workflows
• Renewals and expiry reminders
• SLA and compliance tracking

By leveraging automation to improve supplier contract management, you’ll reduce manual oversight, lower costs, minimize errors, and get contracts into play more rapidly.

Finding a vendor contract management software

A solid vendor contract management software is critical to ensure compliance and extract value from vendor relationships. Remember, though, that you have your own obligations as part of a vendor agreement, most notably the requirement to meet payment requirements.

BILL, our financial operations platform, can help you streamline the vendor contract process with automated workflows, three-way invoice matching, and a number of powerful integrations with the financial software tools you’re already using.