Read The Fine Print, Or Why Vendor Contracts Matter - InformationWeek

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10/22/2009
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Read The Fine Print, Or Why Vendor Contracts Matter

Not reading a contract for services thoroughly can have big implications down the road. Small and midsize businesses need to read the "fine print" in a vendor service contract. Here's what to look for.

Resource Nation provides how-to purchasing guides, tips for selecting business service providers, and a free quote-comparison service that allows business owners to compare price and service offerings in over 100 categories from from credit card processing to phone systems.

With the economy continuing its extended funk, there's no surprise that small and midsize businesses are cutting back expenses everywhere they can. But they may be missing an easy way to save big money without giving up anything: A recent study in the NYU Journal of Law & Business indicated 67% of consumers, on average, reportedly failed to fully read contracts in subjects related to computer software, rolling contracts, car rentals, apartment leases, home purchase and home loans. And evidence suggest that many businesses are no better, potentially leaving billions of dollars on the table.

Vendor contracts are notorious for including hidden components within the hefty text of their agreements. Even though combing through a contract is tedious, it might prevent excessive, unnecessary charges, both large and small. And that's only the beginning. Contracts not only hide fees and charges, but they can also determine ownership rights over creative work. If you don't read carefully, you might find that after spending thousands of dollars to build your company Web site, you might not even own it.

Here's a simple rundown of key terms you can expect to find in a contract and what red flags you should look out for:

Basic Contract Structure:
Typically, a "contract" is thought of as an agreement that is physically signed by both parties. Although this is true as far as it goes, contracts can also take other forms. Technically, a contract is comprised of an offer, acceptance, and consideration. Following this premise, a contract can manifest itself in the form of paying invoices for work completed, or approving e-commerce Web design proposals.

Contracts should explain what is expected of both participants. Because small and midsize businesses deal with so many different types of contracts (VoIP service, credit card processing, payroll services, etc.), it's difficult to know best practices for all of them. Companies may want to look up typical fees on association Web sites such as the Merchant Council for merchant account processing.

That said, most business contracts concentrate on Statement of Work (SOW), Timeline, Billing Structure, and Termination clauses -- some including Definitions of Terms, Ongoing Work and Confidentiality agreements.

Statement Of Work
The Statement of Work (SOW) is a general outline of what is expected from both parties and may make reference to any expected on-going work. For example, a Web design contract SOW section could include the number of pages, creative elements (Flash, videos, etc.), sign-up form pages, shopping- cart features, and any other custom work. It would not include minor details like text color or font choice. A phone systems service contract, meanwhile, might list the number of phone users, additional features, customer service hours, and set up fee.

Timeline
Most agreements will typically include a timeline that states when things are expected to be completed or expresses the duration of the agreement. Some contracts impose additional fees if a project hasn't been completed by the dates listed in the contract. In a Web design contract, for example, design agencies may insert a clause stating that the business receiving the design must provide feedback to initial designs (comps) within a specified number of days. Delayed feedback can lead to huge jumps in charges for the design to be completed.

Although the length of a contract may seem straightforward, there may be several "standard" contract lengths. The one in the contract may not be the ideal choice for your company but rather the best choice for the provider. For example, merchant-account providers typically have three types of lengths in their contracts: Open Ended, Specified Length, and Auto Renew:.

  1. Open Ended. The merchant can cancel the account at any time with no termination fee.
  2. Specified Length. The contract dictates a particular time period, and if the contract is cancelled before the end of the contract there is a penalty. If the contract is cancelled after the specified period of time then there is no fee.
  3. Auto Renew.: This is similar to the specified length type of contract, except that it is automatically renewed at the end of the time unless it is terminated just prior to the end of the original period.

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