Procurement Contracting: Significance, Types, and Best Practices

February 26, 2023
Procurement Management

Despite its prevalence in business, many professionals still don't understand procurement contracting comprehensively.

In most cases, it's conveyed merely as a contract that must be signed. Yet there is much more involved than merely signing a piece of paperwork.

In this holistic guide, we discuss several critical elements associated with the term procurement contracting. Let's dig deeper. 

What is Procurement Contracting?

Procurement contracting entails the operations involved in negotiating and drafting legally enforceable agreements among suppliers and contractors as part of project management.

Projects require these contracts so that they can get the necessary resources. 

A mutually agreeable price for various commodities, products, and services can be reached between the purchaser and seller with the aid of contracts and procurement.

Complying with the contract's terms and conditions and making timely payments on invoicing are essential components of this arrangement.

A procurement contract is a legally enforceable agreement between a purchaser and a vendor that serves to describe the parties' current business relationship and safeguard the best interests of both parties.

In essence, procurement contracting involves:

  • All the tasks and activities of identifying a suitable vendor and product
  • Conducting due diligence on the supplier
  • Negotiating terms and conditions
  • Overseeing the entire process right from order placement through payments and delivery
procurement purchasing supplier management process

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What's the Significance of Procurement Contracting?

A procurement contract's significance in commercial transactions is on par with any other legal agreement. All the terms the purchaser and supplier discussed and agreed to follow get detailed in the agreement. 

It specifies the conditions under which the purchaser must pay the supplier. It also details the orders that have been placed, the delivery schedule, and any necessary adjustments.

The credibility of both the supplier and the buyer gives rise to the procurement contract. When they are both uncertain about the validity of the contract, project management becomes chaotic.

A procurement contract is the backbone of any successful project since it formalizes the parties' agreement.

The contract terms that they had settled on are mutually beneficial. In terms of fulfilling their responsibilities, it will protect them from deception and false representation.

Top Benefits Offered by a Procurement Contract

  • Complete Visibility and Transparency

If the buyer is acquainted and confident that the supplier is reliable and vice versa, then they won't have to worry about being tricked into anything.

During the procurement process, they'd be presented with a list of all of the agreements mentioned in the contract. It will ensure that both parties are insured against any kind of deception or misinformation from the counterpart.

Consequently, the business relationship between the buyer and the supplier will become more stable and strengthen over time if all the pricing and receipts get disclosed in their entirety.

When it comes to keeping the partnership between the supplier and the buyer open and honest, a substantial portion of integrity is required on both sides.

Signing the agreement in the contract.

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  • Protection Against an Evading Contract Obligation 

The purchaser and the supplier are responsible for ensuring that their obligations, as outlined in the contract, are met. After they have entered into the contract, they are collectively liable to each other.

When one of the parties intends to commit fraud against the other, the possibility of taking legal action to compel compliance is investigated.

In any business transaction, the use of procurement contracts is what ensures that everyone involved stays secure. When they do business, they are obligated to ensure that everything gets done in compliance with the law.

It assures that they can seek redress if one of the parties has the intention to commit fraud.

  • Avoids Conflicts Between Parties Due to Agreement

When the buyer and the supplier have reached an agreement on all of the terms and conditions, there will be fewer instances of ambiguity and misconception.

They are both aware of what has already been specified, and they've committed to carrying out the task with the appropriate level of diligence.

The buyer or another employee in the organization will decide whether or not the supplier is suitable for fulfilling their requirements for the contract.

They are aware of the obligations to work together following the aspects they have decided. The buyer and the supplier are bound by the procurement contract to conduct performance reviews to fulfill their obligations.

Both are able to achieve their maximum level of performance as a result of the procurement contract.

Prominent Types of Procurement Contracts

Speaking of procurement contracting, there isn't just one way to settle on a contract's stipulations. The three most common types of procurement contracts include the following:

  • Fixed-Price Contract

The pricing of the resources, commodities, or services under a fixed-price or lump-sum contract is agreed upon at the time of contract signing.

It does not vary afterward, irrespective of whether outside or internal factors cause costs to rise or the delivery date to be pushed back. 

This sort of contract is beneficial since it specifies in detail what each party is responsible for providing and at what expense. These kinds of contracts are the most typical, standard, and simple to administer.

  • Cost-Reimbursement Contract

When a buyer commits to cover the direct expenses (material and machinery costs) and indirect expenses (such as wages and utilities) of producing a good or service, this is known as a cost-reimbursement or cost-control contract. 

The value for the purchaser comes in the form of a flat charge or a share of the surplus over the cost price.

In this scenario, the supplier assumes virtually all of the potential downsides. After all the expenditures have been validated, only then will they be reimbursed. 

Should the project's scope shift, the supplier is responsible for covering any associated costs. Suppliers will factor in extra expenses to limit price reductions and boost their bottom line if they go this route.

  • Time and Materials Contract

Such contracts allow vendors to be compensated both for the time and resources they invest in a project. To the contractor, the vendor becomes functionally equivalent to an outsourced workforce.

Due to the adaptability it brings to the table, this contract is ideal for projects whose scope is difficult to pin down.

However, while using such a contract, the buyer must exercise greater control over the project to prevent delays and budgetary overruns.

Some Vital Processes and Best Practices to Follow for Procurement Contracts

To upgrade the business procurement function and reduce the underlying risks that emerge with procurement contracting, here are some effective processes and strategies to follow:

  • Define Everyone's Roles and Duties

Since numerous departments and personnel within the business get directly impacted by procurement contracts, everyone involved must be aware of their respective responsibilities and obligations.

If the responsibilities associated with contracts are not made crystal clear, companies run the risk of certain departments not doing their jobs diligently and others needlessly holding back the system.

As a result, the entire business might operate at a massively inefficient level.

  • Centralize All Procurement Contracts

One of the most effective ways of procurement management in a business is contract centralization. Contracts for a company must always be kept in a centralized location and in a format consistent across the board.

The simplest way to achieve this is to either develop new digital contracts from scratch or digitize the paper contracts that are already in existence.

Managing digital contracts instead of handling physical ones requires less storage space and increases the security level. The digital files get restricted to only those personnel who have authorized permission to access them.

In particular, dealing with digital copies makes it much simpler to search for, access, and evaluate the vital data stored in each contract.

Additionally, it guarantees that you are aware of the location of each contract and the information it includes, which prevents contracts from being siloed and even concealed within specific departments or locations.

Online business contract Electronic signature, e-signing, digital document management, paperless office, signing business contract concept.

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  • Make the Contract Terms More Standardized

Procurement contract management could be improved significantly by the standardization of the contracts created. Teams don't want to start from scratch whenever the company enters into a new contract.

Whoever is in charge of devising a new contract should have access to a library where they can choose from pre-approved terms, clauses, and phrasing.

If the company does not standardize the terms of contracts, rogue divisions within the organization may draft contracts that do not match the criteria established for the business and may not adhere to the legal and industrial regulations in place. 

  • Keep Close Track of All the Contract Obligations

One further advantage of digitally centralizing procurement contracts is that it enables tighter surveillance of all contractual commitments, including both your own and those of the other businesses with which you have contracts. 

The marking of crucial deadlines and the automatic receipt of notifications on upcoming deliverables are relatively simple tasks to do.

It eliminates the possibility that the business will violate the deadlines for payment or auto-renewal, and it also enables them to oversee and lower the likelihood of late or missed deliverables from the vendors.

  • Enforce Compliance Standards

It is equally critical to ensure that all of the contracts conform with the relevant internal, industry, and regulatory laws as it is to supervise all of the contract schedules.

The company could incur substantial costs in the form of penalties, legal proceedings, and damage to its reputation if it does not comply with regulations. Businesses thus need to review each contract to confirm that it gets executed properly.

Again, companies can achieve this objective more easily by centralizing all their contracts, which would prevent other departments from writing contracts that lack these essential components.

When starting from a database of previously approved clauses and phrases – or even whole contract frameworks – that include mandatory compliance-related content, adherence becomes much simpler. 

  • Leverage Process Automation

Automating the entire procurement contracting process by deploying a contract lifecycle management (CLM) tool, right from commencement till the end, could very well be the most effective way to enhance it.

Some of the many benefits businesses can accrue by implementing a CLM platform to automate their whole procurement contract lifecycle include:

  • Increased productivity
  • Reduced contract processing time
  • Fewer errors
  • Enhanced compliance
  • More actionable data insights
  • Conduct Periodic Reviews

The procurement contract system that the company has established is a dynamic process even after it has been implemented.

The process must evolve over time if the company wants to maintain its high level of effectiveness and ensure that it continues to cater to the requirements of the business.

In addition to this, it needs to be able to adapt to modifications in both the procurement landscape and the industry. Due to its versatility, the process needs to be scrutinized consistently to ensure that it is performing as expected.

One needs to be aware of whether there are tiny hiccups or huge bottlenecks and have to adjust accordingly.

How Hubler Helps With Procurement

Implementing procurement contracts symbolizes that all terms have been mutually agreed upon between the buyer and the supplier. It's the glue that keeps everyone together and guarantees the project will be accomplished.

Once you learn how to utilize it properly, you will notice significant cost savings. On the other hand, a poor choice can have serious consequences for the business. Therefore, efficient procurement contract management is critical.

Managing procurement contracts effectively can be a challenging endeavor. Thus, building your own customized system for keeping track of procurement contracts is the optimum solution. 

Hubler assists you in setting up your procurement systems with the proper tools. With Hubler, you can:

  • Manage all the core processes within a single solution
  • Get access to in-depth analytics, customizable dashboards
  • Generate documents in one click
  • Simplify P2P operations
  • Develop and manage budgets
  • Track and audit your purchases for an error-free procurement cycle
  • Maintain a self-service portal for your vendors
  • Witness seamless integration with your current system
  • Make the most of vendor performance management and much more.

To leverage a robust procurement solution for your business, book a demo with us today. 

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