Are you willing to hand over an additional $50,000 to terminate your vendor contract early? How about $150,000 to retain key office services personnel during a vendor change? Your answer to these questions are, undoubtedly, “no.” However, it is possible you may have already agreed to similar terms in your existing Labor, Services or Equipment contracts.
It is no secret; most contracts contain clauses and loopholes which favor one party over the other and that some of these loopholes have financial penalties attached to them which can range from triple the monthly bill, to a factor of a person’s salary, to a flat dollar amount.
Some of the more common types of these penalties Mattern has encountered are:
- Equipment Buyouts. Just like buying your leased car. If you decide to return your existing equipment, you may be responsible for remaining lease payments or the fair market value of a device.
- Equipment Removal Fees. If after termination of the equipment agreement you decide to return the devices, additional costs may be added to remove equipment from your premises.
- Early Cancelation/Termination. If the firm elects to cancel a labor or service contract prior to full term and without cause, this penalty can be a multiple of the base contract amount.
- Termination of Client Personnel. As the result of terminating a labor agreement, the vendor may not be responsible to keep those individual in their employ, but the client may be responsible to bear the severance costs of these employees until they are reassigned.
- Non-solicitation Fees. If you decided to change vendors and wished to retain any of the existing staff, the vendor may assess a penalty. Note: They may also assess this penalty if a third party hires the existing staff, with or without your knowledge/approval.
Although many of these penalties are only applicable if you terminate your agreement early, there are still some which can be imposed even at the end of an agreement which has gone to full-term. Where these really hurt you is when your firm is attempting to streamline services under one vendor or simply make a vendor change due to performance.
At Mattern, we are all in favor of vendor’s protecting themselves, but many of these penalties are just handcuffs to keep your firm from making cost-effective changes to your operation.
What do you do? First off, begin with the end in mind and think about what happens if you have to cancel a contract prematurely. Decide from the beginning on what controls you want over the situation and structure the contract appropriately. By creating a competitive situation your firm can minimize the impact of these penalties. The problem is the vendors all want the same protection so many of them are pitching the same penalties this is where market knowledge comes in to play.
If you feel you have an issue with the penalties in your contracts, contact the experts at Mattern who can develop a strategy to eliminate or reduce your firm’s exposure.