Procurement contracts explained

Procurement contracts can become a headache for any fast-growing business. How can legal and business teams work together to make sure procurement contracts, and the processes that govern them, scale with the business?

In this Juro deep-dive, we’ll explain what procurement contracts are, how they’re managed and how contract management software can improve procurement contract management processes in your business.

What is procurement?

Before we can delve into the specifics of procurement contract management, we first need to understand what procurement actually entails. 

Put simply, procurement is a term used to describe the sourcing, negotiation and purchasing processes undertaken when businesses obtain goods or services for their operations. It encompasses everything from locating certain materials, supplies, and equipment to negotiating the terms for these and actually purchasing them. 

It requires a firm understanding of supply chains and the ability to develop lasting relationships with reliable suppliers. But as with almost all business transactions, it also requires contracts - and lots of them. 

What is a procurement contract?

Procurement contracts are legal agreements used to govern transactions between parties whereby goods or services are being obtained for business purposes. Also known as purchase contracts, this type of business contract is used to create a legally binding relationship between the business that’s purchasing the goods and the party that’s selling them, and protect these parties’ interests. If you're looking for a basic procurement contract, grab this free purchase order template.

Importance of procurement contracts

Procurement contracts are important for a lot of reasons. For a start, the contract purpose is akin to most other contracts: to formalize and finalize the terms of a new business relationship. 

By doing this, they provide security for both the vendor and the buyer. This confidence is critical in procurement relationships since most transactions will require involving third parties to purchase materials and fulfill delivery obligations. Without this security, vendors could be contracting for materials and resources that may not end up needing, but will still have to foot the bill for themselves. 

Similarly, as procurement contracts are often used within competitive markets (for example, from a vendor agreement template or supplier agreement template), businesses need the assurance that suppliers will fulfill their obligations and meet the demand that’s been created. After all, time is money, and without a robust contract in place, receiving compensation for unfulfilled promises can be near impossible. 

Ultimately, procurement contracts are distinct from many other commercial contracts in the sense that they often rely on a chain of different interactions, transactions, and stakeholders in order to be fulfilled. Naturally, this makes them far riskier than some other commercial transactions, and a contract is a perfect mechanism for reducing this risk. 

Lastly, procurement contracts serve as an effective tool for ensuring that the relationships developed between vendors and buyers are long-lasting. By providing clarity to these relationships, contracts help to prevent misunderstandings and establish the obligations owed by each party with certainty. As a result, having procurement contracts in place can prevent relationship breakdown and also hopefully reduce the risk of churn.

Types of procurement contract

Since procurement is a broad business function, there are numerous different types of procurement contracts your business might encounter. These include: 

1. Fixed-price contracts

Under a fixed-price contract, the seller has promised to sell and supply a certain product or service for a set price. A fixed-price contract establishes the details of a good or service being provided when the transaction will happen, and the price the buyer is expected to pay. 

Since these details are agreed in advance, a fixed-price contract offers more protection for buyers than some other procurement contracts. This is because this type of contract establishes the payment terms in advance and if the costs of supplying the goods or services increase, this won’t be reflected in what the buyer pays. 

One of the biggest advantages of fixed-price contracts is that they clearly define the roles and obligations involved in the completion of a contract, which reduces the risk for both parties. 

But not all fixed-price contracts are born equal. There are three different subtypes of this procurement contract to consider:

Firm Fixed Price (FFP)

Firm Fixed Price contracts are used in situations where the buyer pays the seller a fixed amount, regardless of whether extra costs are incurred or more resources are required in the course of the transaction. 

Fixed Price Incentive Fee (FPIF)

A Fixed Price Incentive Fee contract is another type of Fixed Price Contract, but under this type of procurement contract, a seller is eligible for a bonus or ‘incentive’ if they deliver on the promises of a contract early and exceed certain expectations, like quality or delivery ahead of schedule. 

Fixed Price with Economic Price Adjustment (FP-EPA)

A Fixed Price with Economic Price Adjustment contract operates on the basis that a buyer pays the seller a fixed fee, but with allowance for price adjustment in certain situations. These situations include market fluctuations and other events that are out of the seller’s control. 

2. Cost-reimbursable contracts

Often known as a cost-plus contract, cost-reimbursable contracts are contracts whereby a contractor is paid a set fee for their work but is also reimbursed for any additional materials or costs incurred when executing the contract. The costs often cover expenses both directly and indirectly incurred. 

For this type of procurement contract, a total cost estimate will be established before the contract is agreed, and this enables the parties to allocate an appropriate budget and establish a reimbursement limit. These types of contracts are most appropriate when the costs associated with a transaction are predictable. 

3. Time and materials contracts

Time and materials contracts are legal documents that seek to reimburse a vendor for the materials used when fulfilling the contract and the time they spent working on that particular project. This type of procurement contract is particularly common amongst developers and other professionals that focus on delivering a service, as there are often not many materials involved in the fulfillment of these contracts, and the value being delivered is often quantified as time. 

The only difficulty with this type of procurement contract is that it can be difficult to manage, particularly when the time required to deliver a service is uncertain, as this can make it difficult to provide a good level of certainty as to price within the contract. 

Procurement contract management process: challenges and solutions 

1. Choose vendors and establish contract requirements

🔃 The process: 

In a typical procurement contract process, the contract manager is responsible for communicating with the project manager about the specific deliverables required, including but not limited to which items and services are to be purchased, how they’re to be quantified, and when to deliver them. 

⛔ The challenges:

The difficulty with procurement contracts is that these discussions typically require input from a wide range of different departments, which can complicate who is responsible for approving which terms and values later in the contract workflow. In a manual contract lifecycle, this often results in contracts being sent for signing before certain terms have been approved, which can add risk to these transactions. 

✅ The solution:

The best way to respond to these challenges is to implement a contract tool that enables users to set up approval workflows for certain procurement contracts, or even establish these approval workflows at template level. 

By implementing software like Juro, users can add conditional approvers to contracts and ensure specific contract stakeholders are asked for their approval if there’s any deviation from standard or pre-approved terms. Alternatively, users can set up sequential approval workflows to ensure all teams have approved the contract terms before the agreement gets sent out for signing.

Want to maintain control over your company's procurement contracts without creating more contract admin? Hit the button below to try Juro.

2. Draft the procurement contract

 🔃 The process: 

Once the scope and deliverables for the transaction have been outlined, legal or procurement teams are then tasked drafting a contract, which they later send over to the counterparty for review. In a manual contract workflow, these contracts are typically written up using Microsoft Word, saved, and then emailed to other members of the team for redlines and editing. 

⛔ The challenges:

The problem is that when procurement teams create these contracts themselves from scratch, they can become inconsistent. This is because they often don’t use pre-approved language and contract terms like legal teams do, which can add risk to agreements and make the company more susceptible to liability. 

✅ The solution:

The best way to manage this is to introduce automated contract templates for procurement contracts. By doing this, legal teams can ensure that all of the most up-to-date thinking around terms, clause language, and commercial positions are applied to agreements and that all procurement contracts are robust. 

In Juro, legal teams create contract templates that ensure consistency throughout agreements, and procurement teams simply need to answer a Q&A flow that captures any key data that might vary between contracts, like the counterparty name, effective date, and so on. 

This enables contract creators to quickly and easily auto-populate contracts with all of the relevant information, which reduces the risk of discrepancies and errors. Juro’s intuitive rich-text editor also makes it easy for procurement teams to self-serve on contracts without needing constant oversight from legal.

3. Negotiate the contract terms with counterparties 

 🔃 The process: 

Once the contract has been drafted in a tool like Microsoft Word, it then gets saved and emailed back and forth between the parties for negotiation. During this time, the counterparty will review the contract and add redlines to it, often in a new version of the contract. Since procurement contracts tend to be more heavily negotiated, this process can take a long time and require a lot of resources.

⛔ The challenges:

There are numerous flaws in this process. Firstly, switching between tools to negotiate procurement contracts makes it harder to keep control of the different versions of a contract, which can result in missed edits or worse, the wrong version of a contract getting sent out for signing. All in all, moving between different platforms and formats during negotiations can cause friction within the contract workflow, which subsequently means contracts take longer to get over the line. 

There’s also the risk that procurement specialists will deviate from approved contract terms in order to end contract negotiations sooner. 

✅ The solution:

Fortunately, there are a few ways that procurement contract negotiations can run more smoothly, all of which can be achieved using a contract automation tool like Juro. 

One of the best solutions is to find legal software that enables you and your counterparty to negotiate, redline and respond to each other's comments in one workspace and in real-time. When using Juro’s native contract editor, parties can collaborate on a single version of a contract in real-time, without needing to leave the platform.

Contract owners can tag team members and counterparties, attach comments to specific clauses within the contract and create comment threads to make the negotiation process frictionless. 

Juro can also be used to ensure that the terms approved by legal teams are used within the contract and not deviated from, firstly using the approval workflows discussed earlier in this post, but also through conditional logic. 

Setting up conditional logic in Juro enables legal teams to set up conditions that automatically populate the contract with certain contract terms and clauses when met. This means that legal teams can automatically insert certain clauses to contracts over a certain value or that operate in certain jurisdictions without manually drafting these in themselves.

4. Send the procurement contract out for signing 

 🔃 The process: 

Once a procurement contract has been reviewed, negotiated and approved, it’s then ready to be sent out for signing. How long this takes depends on how contracts get signed - in wet ink or using an electronic signature. 

In a manual workflow that relies on wet signature and multiple tools, the final version of the contract will typically be saved to a shared drive and emailed over to the counterparty for signing. From here, the counterparty will need to save the contract as a PDF, print it out, sign it in wet ink, scan it and email it back before also saving it in a shared drive. 

⛔ The challenges:

This is an arduous process and one that can delay getting procurement contracts over the line, which can be problematic for time-sensitive transactions. Often, signatories will have a copy of the contract sat in their inbox for days before they finally put pen to paper. 

✅ The solution:

Fortunately, with the vast majority of procurement contracts happening from across borders and online, most companies have adopted eSignature as their method of signing. This allows them to add a signature digitally rather than in-person or on paper. This is where eSignature providers like DocuSign (and DocuSign alternatives) have proven useful.

But if you want to remove the friction altogether, you’re going to find an all-in-one contract tool like Juro most useful. That’s because, unlike standalone eSignature tools, Juro offers the functionality needed to create, edit, review, negotiate and sign contracts electronically - all in one unified workspace.

That means fewer tools, fewer subscriptions and better control of your procurement contracts. 

5. Manage compliance post-signature 

🔃 The process: 

Post-signature, procurement contracts are typically filed away and not referred to again unless a party fails to fulfill their obligations. Often, this means procurement contracts are saved across shared drives or using a physical storage solution, like storing it in a filing cabinet.

By storing procurement contracts in this way, rather than in a contract repository, all of the valuable contract data that could be extracted from procurement contracts gets dismissed. This information, if extracted and analyzed properly, could help to inform future procurement contracts, make more competitive deals and identify where friction could be removed to improve the contract process in the future. 

⛔ The challenges:

This approach to storing procurement contracts also lacks visibility, so other departments will find it difficult to locate and track contracts throughout the contract lifecycle. 

✅ The solution:

These problems can be resolved by implementing a contract tool with a data-rich contract repository or by creating your own contract repository in excel. Even better, you could use Juro which creates your procurement contracts as structured data and makes them machine-readable from the off. As a result, Juro users can query contracts in seconds, filter procurement contracts by different values, and manage contract renewals with ease. 

Automate procurement contracts in Juro 

As your business grows, so will the number of procurement contracts your team manages. If you want to agree and manage all of these contracts in one intuitive workspace, why not try Juro’s contract automation software? 

Juro is the only platform that truly enables you to process contracts end-to-end with one solution, enabling legal and procurement teams to agree contracts faster and at scale. 

Fill out the form below to start automating your procurement contracts and join the Juro users who typically win back 70% of time spent on contract admin.