Occasionally we recommend specific products or services and we may receive a commission if you click those links.
Contracts can be a powerful tool. In addition to giving you legal protections and remedies for non-performance or non-payment, they can lower costs in your business in several ways:
They can lower prices through volume discounts: by negotiating a contract with a supplier or vendor, you may be able to secure lower prices for goods or services by committing to a certain volume of purchases over a set period of time, or even by buying from them exclusively. This can help you lower COGS and improve margins.
By locking in prices: with or without volume requirements, contracts can also help you lock in prices for a set period of time, protecting you from price fluctuations in the market. This can help you better forecast your expenses and budget more effectively. There’s some risk here, because vendors usually price their risk, so if their product or service is volatile, they may opt for a higher lock-in price to hedge against increases that happen over the life of the contract.
Reducing transaction costs: contracts can help streamline your purchasing processes and reduce transaction costs associated with frequent purchases. This can save your business time and money. There are other tools that provide similar results, if your goal is solely internal transaction costs.
Improving quality and consistency: by working with a supplier or vendor under a contract, you can establish quality standards and ensure consistency in the goods or services provided. This can help reduce costs associated with rework, returns, and customer dissatisfaction. It also allows you to solidify most “handshake” warranties by defining what is (and is not) covered and for how long, if there is an issue.
Reducing legal costs: contracts can also help clarify expectations and responsibilities between parties, reducing the risk of misunderstandings or disputes that can lead to legal costs. They can even specify remedies for disputes that don’t necessarily involve litigation (most commonly those are mediation and arbitration).
As you can see, contracts can provide your business a number of benefits, and can even help create a more stable and predictable cost structure for your business.
Standard disclaimer: We are not lawyers and this is in no way intended to be legal advice. Always talk to a licensed attorney if you need help with legal matters.
