February 2013 | How-To | Ten Tips

Crafting Logistics Provider Contracts That Cover All the Bases

Tags: Partnership

Before committing to a logistics service provider partnership, logistics managers must ensure they understand all the contract's parameters. One way to accomplish this is by outlining the terms of the agreement before signing the contract. George Muha, regional director of third-party logistics service and solutions provider Transportation Insight, offers this advice on key factors to cover in service provider contracts.

1. Establish start and end dates. Setting a start date establishes initial expectations, and an end date keeps service organizations on their toes when renewal time arrives.

2. Ensure payment terms are clear. Businesses need to be paid on time, so it is important that the contract clearly outlines payment expectations. Ensuring that both parties understand the payment terms helps avoid problems in the future.

3. Request lower price points for faster payment. Nothing is more powerful in negotiations than short payment cycles. If you are able to pay faster than the suggested payment terms, ask for a price concession in exchange for quicker payment.

4. Avoid discussing late-payment penalties. Many service agreements include penalties for late payment. Don't waste time arguing the specific penalties—if a provider senses you have a payment issue, the entire deal could fall apart. You'll call less attention to the issue if you simply request extra payment time.

5. Include an out clause for non-performance. Service providers require contracts because of all the upfront costs they invest in the relationship—but that doesn't mean they will always hold up their end of the bargain. Make sure the contract allows you to terminate the agreement if the provider does not meet expected service levels.

6. Protect against acts of God. Whenever possible, include contract terms that protect against acts of God, war, and other disruptive events. Most of your customers understand that service delays will occur if a tornado wipes out a warehouse, but others will make unreasonable requests. Including provisions in the contract is good protection.

7. Make sure all pricing is outlined. Understanding the pricing model is important. Nobody wants any surprises once the relationship goes live.

8. Designate a contact person. The agreement should name a contact person on both sides to receive all formal correspondence. If the agreement requires changes, or issues need to be addressed, both parties must know who to contact.

9. Address extras separately. Make sure any extra consulting, customization, or integration outside the scope of the agreement is addressed in writing.

10. Ask for ongoing process improvement meetings. Some providers promise more account management than they perform. Making quarterly reviews part of the agreement ensures the provider will deliver customer service.