The acceptance of your goods or services, the right to return those goods and service requirements are all contract terms that can make a contract profitable and efficient from an administration standpoint or they can be a sink hole for your balance sheet and employee time.
Here are some questions and strategies on these contract terms you need to ponder when looking for ways to make a contract profitable and easy to manage:
- Approval/acceptance process. If a customer gets 30 days to accept or reject your goods, you may be required to redo more items, especially if the specifications are vague and they are holding up payment. What's the shortest time you can specify for acceptance? If they reject, how long do you have to respond? Also, you need to specify a total length of time for this rejection/acceptance period so you are not bogged down in weeks or months of modifying or changing a product, let alone not get paid for the goods and/or services.
- Right of return. In the retail or consumer industry, return rights are routinely granted and may take the form of product obsolescence protection, stock rotation, trade-in agreements, or the right to return all products upon termination of an agreement. Some of these rights may be expressly stated in contracts with customers or distributors, while others are implied during the sales process, or based on historical practice. Return rights need to be clearly stated in contract or disclaimed if you are not giving those rights. Not only does this cause problems with revenue recognition but it’s difficult to estimate the amount of returns. And if you are in other industries, you need to expressly limit the right of return, if any, to a certain time period.
- On site versus remote service. Service charges are often where companies can make money. Who will pick up the tab for travel and expenses if you have to go to customer facility to provide service? Are you able to include service/maintenance charges as part of ongoing contract charges? Do you provide a step process to avoid unnecessary on site trips? It’s not just the travel and on site time—there are employee hours lost in travel and productivity which won’t be reimbursed.
In the next blog post, we'll look at payment terms, shipping terms and termination rights that can be profitable and efficient for your business contracts.