Last updated on December 7th, 2022
When starting your first new business, it can be difficult to learn and keep track of all the different terms and phrases. It’s something every business owner goes through, so I thought I would help out.
Here, I’ve decided to write about procurement contracts. They’re something most businesses need to set up and so, I’m sure a lot of new business owners will want a handy guide to help them out (see also, ‘How to Start Investing as a Business? A Guide for Beginners‘). I hope the one I’ve written below helps you!
What Is A Procurement Contract?
First, you need to understand what procurement (see also, ‘What is Global Procurement?‘) is.
Procurement is an important part of running a business as it involves sourcing and obtaining both goods and services which all help keep a business operating (to find out more, see also, ‘What is Service Procurement?‘).
A lot of people think procurement (see also, ‘What is Procurement Cost?‘) is just about sourcing materials they use to make their products, but it’s not.
It also involves hiring the people to make them, finding the warehouse space to store them, and even finding the best place for office supplies and equipment to keep your business going.
Not only that but procurement can also be used as a key performance indicator (KPI) as 80% of CEOs claim that procurement helps them make strategically valuable contributions.
Procurement is a massive industry because every business needs it in some way. As a result, the global procurement market is projected to reach £13.58 billion by 2030.
So, a procurement contract is a legally binding contract between a buyer (that’s your business) and seller that protects both parties throughout the procurement process until it is complete. These procurement contracts are sometimes also called purchase contracts.
They basically work like any other contract by setting the parameters of the deal between the buyer and seller, and ensure that both are legally bound to meet.
These parameters include things like the product selection, payment terms and conditions, and negotiations made, product management details, and more.
Procurement contracts are important because it holds a business’s supplier to account when things go wrong.
Over the past few years, 75% of companies have felt a negative impact on their business due to disruptions with their supply chains, and procurement contracts help protect both businesses involved in the procurement process.
It encourages better collaboration, improved coordination through each step, and usually allows businesses to source services or products for more affordable cost.
Types Of Procurement Contracts
Most procurement contracts are written and generated by the buyer – in this case, your business. The project and buying team passes on what they need in terms of materials, staff, equipment, and more, so the procurement team can begin communicating with vendors.
Once everything is agreed upon, the buyer’s procurement team writes up the procurement contract. This means that if you want to start procuring goods and services, you need to know how to write up a procurement contract.
There are three main types of procurement contracts. Here’s a quick rundown of each one:
Fixed Price Contracts
These are also known as ‘lump sum contracts’ as they establish what the buyer wants, when they need it, and the price the buyer is paying.
They are very clear and defined so the seller knows what they need to provide to the buyer, and the buyer knows how much they need to pay to the seller. As a result, they’re also the most common type of procurement contract.
Cost Reimbursable Contracts
These are sometimes known as cost control contracts. Here, the buyer also covers the expenses that go into completing the work as well as the product or service itself.
This means the buyer covers the materials and equipment for the seller as well as salaries for the workers and utility costs. More of the risk is shifted to the seller as they will only receive payment once all of the expenses have been verified by the buyer.
This means they end up absorbing any extra costs due to changes or disruptions.
Time And Materials Contract
This type of procurement contract is one that turns the vendor itself into the contract or a third-party employee.
This is because this type of procurement contract covers the time spent on the project and any materials the vendor required. As a result, it’s usually software (see also, ‘What is Dispatch Software?‘) developers who use this type of procurement contract because it focuses more on services rather than materials.
So, those are the three main types of procurement contracts that your business will likely use, depending on what kind of products you sell (see also, ‘How to Sell on Amazon Without Product‘).
Writing A Procurement Contract
Most businesses hire a legal professional to write the procurement contract for them to ensure there are no loopholes or mistakes.
The final product will eventually include areas that cover:
- Monitoring And Control Of Performance – This is vital for observing the progress of the procurement process and to ensure that everything is done with compliance to the procurement contract.
- Receipt, Inspection And Acceptance – This outlines the process of receiving the receipt from the seller, inspecting any goods, and either accepting or rejecting the finished products.
- Change Management –This covers any changes that may occur like with the quantity, design, specification, and timing. Most changes are avoided but sometimes they are necessary.
- Contract Termination – This highlights the details of what happens towards the contract’s termination such as pricing, delivery schedule, and packaging.
- Alternative Dispute Resolution – How negotiations will take place in the event of any conflict or disputes between the buyer and seller.
- Financial Management And Payment – This lays out the payment schedule.
- Performance Securities – This part discusses areas like warranties or maintenance periods.
- Contract Completion And Close – With everything important discussed, this section will tie up any loose ends.
Your procurement contracts may look a little different, but this is the general layout of procurement contacts I have seen in the past.
Also keep in mind that they may also change depending on the type of procurement contract you want written up.
I hope this guide has helped you understand what procurement contracts are and how important they are to businesses.
I also would always advise that you get a legal professional to draft your procurement contracts so they are definitely legally binding. Don’t feel you have to do everything by yourself!