Procurement Contracts: Meaning, Types, And Benefits

December 28, 2022
Procurement Management

Has your business ever struggled to procure materials on time to balance the demand-supply scales?

Procurement strategies can be tricky to master; however, procurement can be made simple with contracts that include detailed guidelines.

Procurement contracts need to be drawn up such that they cover every need your business may have from a vendor. It’s important to use strategies and methodologies that helps with procurement contract creation to avoid vagueness and disagreement.

A CPO Compass survey highlights how 59% of procurement functions aim to adopt technology to achieve better efficiencies.

The epitome of technological advancement in procurement can be seen in custom-designed procurement contract management software.

With the help of no-code platforms like Hubler, it is possible to design procurement contract management and automation software that resonates with a business’s needs.

Let’s understand procurement contracts in depth.

What are Procurement Contracts?

Procurement contracts are documents that legally binds the buyer and the seller. A procurement contract contains the terms and conditions regarding:

  • The commitment of the vendor/seller to make the said goods available to the buyer
  • The commitment of the buyer to pay the vendor for the said goods or to compensate the vendor for the services rendered
  • Clauses in the event of a breach or intolerable delay

A procurement contract in place, removes any ambiguities. Hence, it becomes easier to stay compliant with a buyer’s requirements.

The written word with a signature establishes a good foundation for the promissory relationship between the buyer and the vendor for reliable future deals as well.

What Do Procurement Contracts Contain?

Procurement contracts set the right expectations between the buyer and the seller. They must, thus, contain certain essential elements that clarifies the protocol to avoid any dispute or confusion.

Listed below are the seven essential components of procurement contracts:

  1. Performance securities: The buyer and the seller mutually agree to a quality standard to which all the deliverables must adhere. This is covered under performance securities.
  2. Contract termination: This is the most important clause in procurement contracts. It allows both parties an option to retract from the obligations should any difference become irreconcilable.
  3. Performance, monitoring, and control: These are the clauses that helps the buyer and the seller to keepe track of compliances, measure contract performance, and exercise control over the rights mentioned in the contract.
  4. Receipt, inspections, acknowledgment: These clauses are more buyer-centric — and lay down the terms and conditions according to which the buyer shall inspect, approve and receive the goods supplied by the vendor.
  5. Arbitration: The arbitration clause allows settling any disputes between the buyer and the seller without taking either party to court. This way, the resolution is quicker and more amicable.
  6. Financials: Every procurement contract contains the terms and conditions that controls the flow of finances. This determines the protocol for payments.
  7. Closure: The closure clause determines the conditions in which a procurement contract is called successful and is closed upon completion.

How Many Types of Procurement Contracts are There?

There are three kinds of procurement contracts that businesses execute with their vendors:

Fixed Price Procurement Contracts

These procurement contracts are the most common types of contracts.

As the name suggests, the price of deliverables agreed upon during the signing of the contract remains fixed throughout the contract term. This remains as-is regardless of the fluctuations of the price on the market.

These contracts are the easiest to manage and are, therefore, popular. However, for vendors, they may be limiting when prices of raw materials inflate.

There are three sub-types of these contracts:

  • Firm fixed price
  • Fixed price with incentives – contains incentives for exemplary vendor performance
  • Fixed price with economic adjustments – accounts for raw material costs on inflation

Cost-Reimbursement Contract

This contract favors the buyers more than the sellers.

Here, the buyer agrees to shoulder the associated expenses required to manufacture a commodity, like equipment, raw materials, staffing, etc.

The seller then incentivizes this arrangement for the buyer with a percentage of the profits. Some arrangements even include a clause where the buyer promises to purchase a fixed minimum quantity of the goods.

The seller is responsible for manufacturing the goods according to the buyer’s specifications. 

Time and Material Contracts

In time and material procurement contracts, the buyer agrees to pay the supplier for the time and materials input for manufacturing the goods.

However, there is an upper limit specified in the contract regarding the time and materials to avoid overcharging and fraudulent claims by suppliers.

These contracts are best suited for complex projects that require some flexibility to execute well.

Benefits of Procurement Contract Management

Employing procurement contract management software helps businesses streamline their entire procurement ecosystem with just one software. You get the following benefits:

Improved Compliance

With procurement contract management software, it is possible to automate compliances and set up alerts/notifications for upcoming deliverables. It helps both parties stay in step with timelines and requirements.

Risk Minimization

With procurement contracts in place, buyers can reduce the risk of overspending with inflation clauses in place. These contracts also help streamline the payment timelines to vendors for establishing good work relationships with them.

Better Document Management

Automated procurement contracts help your business with:

  • Easy data retrieval
  • Accessibility of information
  • Unified database for all procurement contracts
  • Version control
  • Availability of modern and updated templates

Efficient Auditing

Businesses do undergo audits every now and then. Having procurement contract management software in place helps to speed up the entire process. By making the data easily accessible and centrally available, audits can be smoothly executed.

Better Productivity

If your business custom-creates procurement management software, it is possible to incorporate data analytics into it.

With data analytics, your business can identify the bottlenecks in the procurement contract processes, giving you an idea of which aspects to streamline to improve productivity.

Reducing Turnaround Times

Procurement contract management software makes it possible to automate workflows, automate approvals, generate invoices, etc. This helps with reducing the turnaround times overall.

How Hubler Can Help with Procurement

Procurement contracts can be a pain to manage well. The best course to take is to create your own custom procurement contracts management solution.

Hubler, a leading no-code platform, helps your business get started by creating the right tools for your procurement operations. Hubler empowers you to:

  • Create procurement documents in one click
  • Customize dashboards for a better view of procurements
  • Analyze procurement contract data for valuable insight
  • Create budgets and keep them in control
  • Track your purchases and audit them

...and much more. For more information on how Hubler can help with procurement contracts, visit this page .

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