There are 10 critical terms in business contracts that can make the deal profitable and save your company time.
The contract price is not the end all, be all.
Many businesses have signed a contract only to find hidden costs, losses and unexpected time commitments as the contract job unfolds.
Here are the contract terms you can negotiate to make profit instead of unexpected hits on the bottom line.
1. Insurance requirements—big companies often ask suppliers, consultants and contractors to have a high dollar amount of insurance, e.g. 5 million in catastrophic general liability (CGL) coverage. You may have no CGL coverage or only $1 million. Before you give them your bottom line dollar amount for providing services, widgets, etc., find out what their insurance requirements are and if they will allow you to have less coverage (they typically won’t allow you to have zero insurance).
Also, cyber insurance is being required by many companies now. Do you know what your cost is for cyber insurance and have you factored it into the price?
2. Personnel required on the job. If you only need one person to get the job done in the required time and the customer wants two, your costs could double. Make sure the contract specifies tasks to be done in a certain period not the number of personnel. Also, have you correctly factored the number of employees required to do the job into the price?
3. What is warranty on service or good you are providing? If they want 90 days and you only provide 30, you need to figure out how likely warranty service is going to be required. Have you factored in likelihood of warranty work into your cost structure? Is an extended warranty a selling point that won't erode your bottom line? What's the industry standard on warranties for the goods or services you provide?
4. 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.
5. 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.
6. 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.
7. Statement of work or deliverable requirements. Drill down to specify what your customer should provide for you to be able to provide the service or good. Remember the adage--who, what,when, where, how and why in drafting your SOW. What assumptions need to be spelled out, e.g. expensive items that you will not be providing? Provide an extension of time budget in the SOW so that you don’t lose the contract over a minor delay. Can you specify that the development of the deliverable is a separately priced item? Coming up with the deliverable specs is work you should be compensated for as many companies have not clearly formulated what device, capabilities, etc. they need.
8. Shipping terms. FOB shipping point or FOB shipping origin means the customer pays shipping and takes ownership as soon as the goods leave the dock. FOB destination—means the seller pays shipping terms and bears risk of loss until goods arrive. Shipping costs and insurance affect your bottom line.
9. Termination Rights. Yes, there may be a customer that requires so much hand holding and extra work for your company. There are some contracts that cost a seller far more than they will ever make on the sale. Make sure you have termination rights to get rid of the customer from hell.
10. Payment Terms—Cash flow can allow a company to live or die. Whether it’s a net 10 discount (some inflate the total price by that 10%), getting some money up front, or phasing payment to deliverables, you need to keep a tight rein on payment. If you can get a retainer up front, have that apply to the final invoice. Consider selling your time in prepaid blocks (particularly useful where you are consulting or providing maintenance and the customer is notoriously slow pay).
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As Warren Buffet puts it, "Risk comes from not knowing what you're doing" and"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."
We hope this checklist on contract terms has helped educate you on how contract terms can make you money.