Top Mistakes to Avoid in Procurement Contracts

In the world of procurement, contracts are more than just pieces of paper, they are the foundation of business relationships, ensuring that goods and services are delivered as expected and that both parties are legally protected.

However, even the most seasoned procurement professionals can fall into common traps when drafting, negotiating or managing contracts.

Avoiding these mistakes can save time, money and reputational damage.

In today’s blog post, we'll explore some of the most common pitfalls and how to fix them.

1. Failing to Clearly Define the Scope of Work (SOW): A procurement team at a technology company signs a contract with a software supplier. The scope of work is vaguely defined, simply stating that the supplier will "provide software solutions." After several months, the supplier delivers software, but it doesn’t meet the exact needs of the company because the specifications were not detailed enough.

Fix: Take time to carefully document every aspect of the scope of work, including key deliverables, timelines, quality standards and performance expectations. Include a detailed description of the services, clearly indicating what is in scope and what is out of scope.

2. Ignoring Payment Terms and Conditions: A procurement manager agrees to a supplier’s standard payment terms without review. When the final payment date arrives, the company realizes that late payment penalties and early settlement discounts were not clarified. The supplier demands immediate payment, and the company incurs a penalty.

Fix: Always review payment terms carefully, ensuring that they are fair and manageable for both parties. Include clauses for early payment discounts, penalties for late payments, and the schedule for payments based on milestones or project completion.

3. Not Including Clear Dispute Resolution Mechanisms: A manufacturing company signs a contract for the supply of materials, but after a series of delays, the supplier fails to meet the agreed deadlines. With no clear dispute resolution process, the situation escalates into a legal battle, causing unnecessary stress and cost.

Fix: Ensure your contract has a well-defined dispute resolution mechanism, such as mediation or arbitration, and specify the steps for resolving conflicts. Include timelines for resolution to avoid prolonged disputes and keep the relationship on track.

4. Overlooking Supplier Performance Metrics: After signing a contract with a new supplier, a procurement team doesn’t set up key performance indicators (KPIs) or benchmarks to evaluate supplier performance. The supplier delivers subpar services, but since no performance metrics were agreed upon, there is no basis for holding them accountable.

Fix: Set clear performance metrics and benchmarks for the supplier, such as quality, response time, resolution time and customer satisfaction. Regularly review these metrics to ensure the supplier is meeting the agreed standards and take action when necessary.

5. Underestimating Risk Management in Contracts: A procurement professional signs a long-term contract with a supplier without considering potential risks, such as changes in regulations or currency fluctuations. Halfway through the contract, a sudden change in import duties significantly increases costs and the company faces unexpected financial strain.

Fix: Integrate risk management clauses in the contract that address potential future risks, such as changes in law, tariffs or market conditions. Use mechanisms like force majeure clauses to protect against unpredictable circumstances.

6. Not Regularly Reviewing and Updating Contracts: A supplier agreement signed a few years ago has outdated terms, such as fixed pricing for services that no longer reflect current market conditions. The procurement team continues to accept the old terms without realizing they could negotiate better rates.

Fix: Schedule regular contract reviews to ensure that terms remain competitive, relevant and aligned with current market conditions. Consider renegotiating key terms periodically to ensure your procurement strategy stays efficient and cost-effective.

In conclusion, don't forget that by being proactive and thorough in contract management, procurement professionals can build stronger, more effective supplier relationships while protecting the organization’s interests.

Need procurement specific training? Reach out to support@efemini.com and we'll get you sorted.

PS: Many thanks to everyone who joined our Live Question/Answer session on Procurement Challenges. If you couldn’t make the event, you can watch the replay here