Crafting Effective Vendor Services Contracts and Change Orders
A well-drafted vendor services contract is crucial for setting clear expectations and protecting your organization’s interests. This post focuses on key elements that should be included in your vendor contracts and offers guidance on how to effectively draft change orders.
Disclaimer: The information provided in this post is for general informational purposes only and does not constitute legal advice. Always consult with a qualified legal professional when drafting or modifying contracts.
Key Elements of Vendor Services Contracts
Scope of Work (SOW)
Use precise language to define the deliverables, responsibilities, and timelines. For example, instead of saying “regular updates,” specify “weekly status reports every Friday by 5 PM.” Avoid including extraneous information, such as sales material or company history, which can introduce ambiguity. It should also include end dates to establish outer limits under which the agreement must be reviewed. Agreements that are good until cancelled rarely work out for either party since the language becomes out-of-date or irrelevant.
Service Level Agreements (SLAs)
Clearly state performance expectations, such as uptime guarantees and response times, using quantifiable terms. Include specific consequences for failure to meet these standards. For example, “In the event of more than two hours of downtime in a month, a 5% service fee reduction will apply.” It is best to provide formulas and, if possible, how the calculation will be made to avoid dispute.
Pricing and Payment Terms
Define the exact pricing structure, including any discounts or penalties for late payment. Instead of vague terms like “payment upon delivery,” use “payment due within 30 days of invoice date.”
Frequently forgotten, but very important in nearly all IT contracts are termination clauses. Clearly delineate the grounds for termination, specifying any required notice periods and associated penalties. For example, “Either party may terminate this agreement with 30 days’ written notice if the other party fails to remedy a material breach within 14 days of notice.”
Liability and Indemnity
Clearly define the limits of liability for both parties. Use specific language, such as “The vendor’s liability for any claim arising under this contract shall not exceed the total amount paid by the client in the preceding 12 months.” Additionally, include an indemnity clause that outlines each party’s responsibility for third-party claims: “The vendor agrees to indemnify and hold harmless the client from any third-party claims arising out of the vendor’s negligence or willful misconduct.”
Non-Compete and Non-Solicitation
If applicable, include clauses that prevent the vendor from competing with your business or soliciting your employees or clients for a defined period. For example, “The vendor agrees not to engage in any business that directly competes with the client’s services for a period of one year following the termination of this agreement.” Similarly, “The vendor shall not solicit or hire any employees of the client during the term of this agreement and for one year thereafter.” It may also make sense to have language stipulating the conditions under which you could offer employment to a member of your services team. This generally involves a fee of around 20% of the offered salary.
Confidentiality and Data Protection
Protect sensitive information by specifying what constitutes confidential data and how it should be handled. Use clear terms, such as “All data shared under this agreement shall be encrypted using AES-256 encryption.” Be sure to include if specific regulations must be followed and critical details such as data removal and portability.
Intellectual Property Rights
Explicitly state who owns the intellectual property created under the agreement. For instance, “All software code developed during the contract term shall be the exclusive property of the client.” This "works for hire" language is common unless your purchase includes IP that exists prior to the agreement.
Change Management Clause
Include a clause that outlines the process for making changes to the contract, specifying that any alterations must be documented in a formal change order.
Document Totality and Fully Executed
It is amazing how many times I see signed contracts that are just a signature page and nothing else. In those cases, you could present any agreement to the judge and attach the signature page and the other party would have little defense. Make sure that you have a copy of each agreement with all parties signatures (fully executed) and those signatures are part of a complete document including the entirety of the agreement. Electronic signature tools can be very useful for this in a remote context.
Tips for Writing Precise Change Orders
Refer Directly to the Original Document
When drafting a change order, reference the specific sections being amended. For example, “Section 4, Paragraph 3 is amended to read: ‘The contractor shall deliver all reports by the 10th of each month.’” Avoid introducing new terms or concepts that aren’t already part of the original contract.
Focus on Essential Changes
Only include changes that are necessary and directly relevant to the contract’s execution. Keep the language clear and concise, avoiding any extraneous details. Commonly found unnecessary language include change history, justifications, alternative options considered, etc. While this information may be valuable to document, they shouldn't be in the change order itself.
Ensure Mutual Agreement
Make sure both parties sign off on the change order, acknowledging their understanding and agreement to the changes made. For example, “This change order is agreed upon by both parties as of [date], and the original contract remains in full force and effect except as modified herein.” This is just good record keeping and should be done regardless of the contract.
Document and Track Changes
Maintain a clear record of all change orders, including the date, the reason for the change, and the specific amendments made. This will help avoid disputes and ensure transparency. I always suggest a contract management solution to make sure you have full tracking and status. This will help you ensure that you have fully executed copies (all parties have signed) and remind you of expiration dates.
Conclusion
Precise language in vendor contracts and change orders is essential to protect your organization and ensure smooth project execution. By focusing on clarity and relevance, you can create agreements that stand the test of time and foster positive vendor relationships.
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