Contract pitfalls to avoid

Business contracts can be confusing even for seasoned businesspeople. Here are some contract "gotchas" to avoid.

Contract Pitfalls to Avoid

Whenever you sign a contract to purchase products or services, you need to make sure you’re not signing up for higher costs or lesser service than you expect. In most cases, the businesses you’ll work with aren’t trying to rip you off. The most common source of contract problems is that the parties each see the transaction differently.

Of course, some companies will unscrupulously try to get a little extra money out of you by using some of these tricks. Don’t be afraid to edit and return supplier contracts before signing them. And as always, lengthy or complicated contracts should be reviewed by a lawyer once they’re finalized.

Here are some contract traps to avoid.

Unfavorable renewal terms
In some types of contracts, automatic renewals are common, and can make for a smooth ongoing relationship between buyer and supplier. However, they can also cause problems, especially if there is a very narrow window when you can cancel the contract. Consider asking the vendor to omit automatic renewals for the first term of your agreement, to let both parties get accustomed to the relationship. Also make sure that at the end of each term, either party has the ability to end the relationship.

A related stumbling block is extensions. Often, long-term contracts can be renewed or extended fairly easily – but watch out. In some cases, if you want to add a month or two to the end of a multi-year contract, you’ll wind up with much less favorable terms. If you’re unsure of your exact timeline, be sure the various extension options are spelled out clearly.

Early cancellation fees are common – if you sign a two-year agreement, it’s fair for the supplier to penalize you for canceling after a year and a half. Just make sure the specific penalties are detailed in the contract just in case it comes up.

Unusual calendars
Only in the intimidating legal language of contracts could a supplier get away with redefining a month as 28 days, or a year as 13 months. It happens! These alternative calendars may be legitimately included to try to simplify costs or schedules, but usually wind up overly complicating matters. Stick to the same calendar the rest of the world uses.

Vague substitution clauses
The more details spelled out in your contract, the better. This applies to all aspects of the contract: costs, terms, responsibilities, materials, and approvals. Phrases like “or similar materials” can be dangerous. If some components haven’t been specified when the contract is signed, that’s fine, just make sure that you have final approval as decisions are made.

Incomplete cost listings
Contract-based purchases often include multiple charges, so it’s easy to overlook some costs. Make sure that all applicable charges are included:

• delivery
• setup/integration
• consulting
• maintenance/repairs
• warranties/guarantees
• upgrades
• support and service levels
• annual fees

Don’t accept “reasonable delivery charges” or similarly vague constructions: have the vendor include exact charges or rates for each item listed. Some vendors will demand pricing flexibility in case their costs rise – limit those types of changes to contract renewal time.

Getting out
It can seem awkward to plan for the end of a relationship when it’s just getting started, but it is a good idea. It’s essential for business services like hosted applications, call centers, and other professional services: in any situation where the vendor has access to your critical business data, make sure the contract specifies how the vendor will return that information to you, and how quickly they have to do it. In other cases, look for clauses that specify costs and timetables for removing equipment at the end of a contract.

Get FREE quotes for merchant accounts from BuyerZone.com

Since 1992, millions of businesses have saved on purchases using BuyerZone's expert advice and Request-for-Quotes service.