Key Points in a Vendor Contract

By: Evan Labb

Evan Labb is Head of Partnerships at ( During this video he discusses key points in a vendor contract. This will help small business owners in evaluating a vendor contract.

  1. Define the scope of service
  2. Create the performance standards or service level agreement
  3. Establish a set of resolution procedures & penalties
  4. Implement controls on security & confidentiality
  5. Determine ownership & licensing

Doing a deal with a vendor and negotiating a vendor contract, there are some specific provisions in there that may be somewhat unique and somewhat atypical and not in all the other contracts you do. So it's important to have a couple of things in mind when you do these contracts to make sure they are covered.

The first is really the scope of services. What that really means, what's the vendor providing to you, what are they going to do, whether they're going to custom-built a service for you, they're going to provide a service to you, whatever they are going to deliver at the end of the day. You need to make sure that that's very clearly defined so that there's no misunderstanding or lack of clarity around it.

The next thing you want to have is the performance standards or service level agreement. What this essentially is, is what are the metrics, what are the means by which you're going to measure whether or not the vendor has provided what they are contracted to do. These are going to be very important if you're talking about a vendor who is providing you a service. It could be of time, it could be availability of the service, it could be the value that they've delivered. But you really need to understand very clearly in the contract what those items are.

After that, you want to have a set of resolution procedures and penalties. So if something that hasn't gone right, something that isn't going right, how are you going to solve that problem? What are the very clearly defined steps that are required on each person’s part? How long does someone have to respond? How long do they have to fix the problem? If they haven't fixed the problem in a certain amount of time, what are the penalties that are associated with that. And what you want to do is have those clearly defined and also have penalties around them so that the motivation is on both partner's part to get the thing done.

You also want to make sure that you have controls on security and confidentiality. So what type of information is a vendor going to get from you, what type of information about your users, what are they going to get, what type of things are they going to have access to and you want to make sure that they are clearly defined. Not only that they are responsible for maintaining control and safety of all this but also, that any third party that they contract out with has to abide by those same regulations. Because oftentimes, you’ll find that vendors use outsource vendors themselves. You want to make sure that you're covered here.

The final thing that is important especially when you're talking about technology is ownership and licensing. You want to make sure, if you're working with a vendor who is writing some quotes for you or building a product for you, who owns that at the end of the day. Is it something that they are going to own and continue to hold on to and be able to resell? Is it something that you'll have ownership for? That has to be really clear in defining the contract or otherwise, it could lead to a lot of litigation down the line.

So what you see is a vendor relationship so different in many ways from the other partnerships that your company is going to be involved in negotiations and vendors, you want to make sure to incorporate all of these elements into your contract so that you'll have the protections that you need to make your business successful.