What are the top 5 risks to watch out for when drafting vendor contracts?

Vendor contracts are essential for establishing clear expectations, deliverables, and terms with your external partners. However, they can also expose you to various risks that could harm your business, reputation, or relationship. To avoid costly disputes, delays, or breaches, you need to be aware of the top 5 risks to watch out for when drafting vendor contracts and how to mitigate them.

1 Scope creep

Scope creep refers to the unplanned changes or additions to the original scope of work that can increase the complexity, cost, or duration of the project. Scope creep can occur due to unclear requirements, changing customer needs, or poor communication. To prevent scope creep, you need to define the scope of work clearly and precisely, include a change management process, and monitor the progress and quality of the work regularly.

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Maurizio Mallia

Customer Experience Leader | Driving NPS & CSAT Growth | Boosting Retention & Loyalty | Contact Centre Optimization | Reducing Complaints | Fintech & BPO Specialist | Scaling Start-ups
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The top risks are clearly laid out here. What is key is to mitigate against these risks: Mitigation involves: * Clear and Precise Language: Define terms unambiguously.  * Performance Metrics and KPIs: Set clear, measurable objectives.  * Robust Data Protection Clauses: Ensure compliance with data security laws.  * Detailed Scope of Work: Clearly outline project deliverables.  * Termination Clauses: Define clear exit strategies and penalties for non-compliance or termination. Regular contract reviews and legal counsel can further mitigate these risks.

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Ankit Soni

Product Manager Driving Innovation & Growth | Strategic Product Development & Management | Proficient in Product Sourcing & Procurement | Passionate About Delivering High-Impact Solutions
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- Vague Terms: Avoid ambiguity for clear understanding. - Performance Metrics: Set specific expectations for service quality. - Intellectual Property: Define and protect ownership rights. - Data Security: Address and prioritize privacy concerns. - Termination Clauses: Clearly outline conditions for contract endings. - Liability: Clarify responsibilities for damages or losses. - Indemnification: Define terms for compensating losses. - Payment Terms: Clearly state payment schedules and terms. - Renewal Terms: Specify conditions for contract extension. - Dispute Resolution: Establish a process for conflict resolution.

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Brandon Heunemann

Corporate Facilities/Project Management
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Scope creep is the mischievous chameleon of project management, sneaking in with unforeseen changes. Combat its tricks with a well-defined scope, a vigilant change management process, and the watchful eyes of regular progress monitoring. Keep your project on track and avoid the complexity abyss! #ProjectManagement #ScopeCreepPrevention

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2 Intellectual property rights

Intellectual property rights are the legal rights that protect the ownership and use of the ideas, inventions, or creations that result from the vendor's work. Intellectual property rights can be a source of risk if the vendor claims ownership of the work product, uses your confidential information without authorization, or infringes on someone else's rights. To protect your intellectual property rights, you need to specify who owns the work product, what licenses or permissions are granted, and how confidential information is handled.

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3 Performance issues

Performance issues are the failures or deficiencies in the vendor's work that prevent them from meeting the agreed standards, deadlines, or outcomes. Performance issues can arise due to lack of skills, resources, or quality control, or due to external factors such as market changes, regulatory changes, or force majeure. To address performance issues, you need to establish clear and measurable performance indicators, include penalties or incentives for performance, and have a dispute resolution mechanism.

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Alex Owyong

Regional IT at PSA | Digital Transformation | Business Partnering
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Include clauses that allows your organization to exit the contract should things turn south. These clauses should be fair and reasonable, while being measurable so that both parties agree to exit the contract based on measurable outcomes.

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4 Liability and indemnity

Liability and indemnity are the legal obligations and responsibilities that arise from the vendor's work, especially if it causes harm, damage, or loss to you or a third party. Liability and indemnity can be a risk if the vendor does not have adequate insurance, does not comply with laws and regulations, or does not assume their fair share of liability. To limit your liability and indemnity, you need to define the scope and extent of liability, allocate the risk proportionally, and require the vendor to have appropriate insurance coverage.

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5 Termination and renewal

Termination and renewal are the conditions and procedures that govern how the vendor contract can be ended or extended. Termination and renewal can be a risk if the vendor contract does not have a clear expiration date, does not allow for early termination for cause or convenience, or does not provide for a smooth transition of work. To manage termination and renewal, you need to specify the duration and renewal options of the contract, include termination clauses and notice periods, and plan for the handover or continuation of work.

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Sheetal Pawar

India Lead-Legal & Secretarial (Data centre group)
(edited)
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6. Liquidated Damages This clause is highly crucial in Vendor contracts as it acts deterrent against any delays in delivery. Imposition of LDs for per day delay and also the LDs which the customer may be subjected due to its failure to its end customers due to delays of Vendors should be captured very clearly after analysing the reasons for delays which could be industry specific. While we talk about LDs from Customers perspective as stated in para above, from the Vendor’s perspective creating carve outs from LDs is also necessary, situations like delays due to third party suppliers or shortages of raw materials etc..

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the top 5 risks to watch out for when drafting vendor contracts?

1

2

3

4

5

6

1 Scope creep

2 Intellectual property rights

3 Performance issues

4 Liability and indemnity

5 Termination and renewal

6 Here’s what else to consider

Vendor Management

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What are the top 5 risks to watch out for when drafting vendor contracts?

1

2

3

4

5

6

1 Scope creep

2 Intellectual property rights

3 Performance issues

4 Liability and indemnity

5 Termination and renewal

6 Here’s what else to consider

Vendor Management

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