Never Sign a Vendor Contract Amendment without Vetting it

Posted by Patrick Goodwin, President on Jul 27, 2017 10:30:00 AM

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Vendor contract amendments can seem pretty straight forward – a few paragraphs over a couple of pages that offers some modifications to the master contract that probably represent some improvement to current terms and conditions. The amendment may be perfectly innocuous or it may suggest some material changes. Either way, it is important not to treat this as a "no brainer."

It’s essential to understand the full financial and legal implications of a vendor contract amendment. In a previous post, we discussed to the perils of “free money” and how there’s almost always a price to be paid on the contract’s back end in exchange for these upfront, upsides. This most often takes the form of an extended expiration date or establishment of a cancellation penalty allowing for any upfront benefits to be recouped. Due diligence is as wise a practice on an addendum as it is on a contract no matter how much of a slam dunk the former seems to be. 

The fine print may also create spillover effects on to other active agreements with the same vendor. Depending on how various contracts are connected (for example, under a single Master Agreement), a change to one may extend the expiration date of others in entirely different parts of the organization. Colleagues relying on a contract management database may eventually discover their recorded end date is no longer valid, but not until it’s too late.

Don’t Squander Your Chance at Market Rate

We don’t want to imply that account reps bearing vendor contract amendments are always looking to pull a fast one on their clients. Most of these relationship managers lack a holistic view of your financial institution’s (FI) situation and may themselves be unaware of the amendment’s full ramifications. Moreover, they often see themselves as presenting a win/win package that provides unexpected upsides for the FI while making financial sense for the vendor.

The issue, however, is that although the FI is receiving some benefit, in our experience, it rarely equates to the market value of the bank or credit union’s business. And by agreeing to the addendum, the FI may have pushed out its next opportunity to strike a market rate deal even further. This serves as more proof as to why it’s important to stay attuned to the market pulse, not just at contract expiration.

The bottom line is (to repeat): whenever a vendor gives you something to sign, it should be scrutinized with the same rigor – including legal review – as the original contract. You may find that the offer, and the “free money” associated with it, is a deal to be grabbed with both hands.  If so, you’ll be doing so with the comfort of knowing you haven’t left money on the table or complicated your FI’s future situation in unforeseen ways.

Topics: Vendors & Contracts

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