Contracts should detail exactly what should transpire within a relationship. However, if one or more parties don’t live up to their side of the deal, your contract should also spell out how to resolve the issue.
8 key terms every contract should have to put your firm in the best possible position for any scenario:
- Termination date – there should be an explicit date when the contract, and the associated terms and pricing will expire. A good best practice is to add these important dates as a calendar reminder, so you don’t forget them in the future. Avoid phrases like “36 months from installation” and evergreen clauses.
- Notification timeline for non-renewal. There should be language outlining when you must notify the other party that you do not want to renew the contract. Sadly, many firms miss those dates, and the contract is renewed for some period. Make sure that period is as short as possible in case you do miss that date. Better yet, put the burden of notification on the other party.
- Renewal extension clause. As mentioned above, make this period as short as possible and be sure to include language that the pricing shall remain fixed for the renewal period.
- Termination/Cancellation process – Every contract should have a cancellation for convenience clause. This allows you to terminate a contract for any reason. There may be assumptions of obligations (leases) but you should be able to cancel any contract you enter into.
- Price increase escalators – Detailed language should be included. Is it only for the labor aspect of the pricing? Any overages or extra charges?
- Termination fees. If you cancel an agreement or it terminates, what expenses are you on the hook for? Return fees? Restocking fees?
- Allowances, incentives. Any negotiated allowances or incentives should be clearly defined in the agreement and their status in any renewal. Do the expire? Can they be rolled year-to-year?
A contract should clearly outline the expectations for both the buyer and the service provider; knowing what loopholes to close within the contract comes with experience. Entering into a contract that doesn’t have proper terms to protect the firm is risky over the life of a contract. Things change – firms merge, offices move, pandemics happen, and contracts must be detailed enough to be fluid. A long term view prevents unexpected surprises. The last thing the firm wants is overypaying for services and being charged for services it doesn’t need. Knowing current market rates, terms, and how contracts are structured allow for an agreement that adds value and sets the foundation for a productive relationship. It’s in both the service provider and firm’s best interest.
