Vendor Agreement Review: Protect Your Business from Bad Deals
Vendor agreements — also called Master Service Agreements (MSAs) — define your relationship with suppliers, contractors, and service providers. A poorly reviewed vendor contract can leave you liable for their mistakes, locked into unfavorable terms, or without recourse when deliverables fall short. Here's what matters.
Scope of Work and Deliverables
The Statement of Work (SOW) attached to a vendor agreement is where most disputes originate. Ensure deliverables are specific and measurable (not 'best efforts'), acceptance criteria are defined with clear timelines, change order processes are documented, and milestones are tied to payments. Vague SOWs are the vendor's friend and your enemy.
Insurance and Indemnification
Always verify: the vendor carries adequate insurance (general liability, professional liability/E&O, cyber liability if handling data), you're listed as an additional insured, indemnification covers third-party claims arising from the vendor's work, and there's a duty to defend (not just indemnify — the difference matters). Cross-check insurance requirements against actual certificates of insurance (COIs). Many contracts require insurance but nobody checks.
Payment Terms and Penalties
Standard vendor payment terms are Net 30, but many vendors push for Net 15 or payment upon receipt. Negotiate: payment tied to milestone completion (not just delivery), retention of 10-15% until final acceptance, right to offset against penalties or damages, and clear late-penalty terms that apply equally to both parties. Never agree to 'time and materials' without a cap.
Termination and Transition
The exit strategy is as important as the entry. Key provisions: termination for convenience with reasonable notice (30-60 days), transition assistance obligations during wind-down, data return and destruction requirements, survival clauses (which obligations continue post-termination), and assignment restrictions (can the vendor sub-contract or sell the contract?).
Red Flags to Watch For
- ⚠No specific deliverables or acceptance criteria in SOW
- ⚠Vendor not required to carry professional liability insurance
- ⚠Indemnification is mutual but vendor has lower liability cap
- ⚠Time-and-materials billing with no maximum cap
- ⚠Auto-renewal with right to increase rates without consent
- ⚠Vendor can sub-contract without your approval
- ⚠No transition assistance obligations on termination
- ⚠Liquidated damages only apply to your late payments, not vendor's late delivery
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