What Small Businesses Need to Know About Procurement Contracts

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No organization can survive without collaborations and relationships. One idea may launch a company, but to ensure its survival and growth, you must recruit the right people and form mutually beneficial relationships with other business leaders in your industry. 

When collaborating with different organizations, it’s crucial to have a contract to define the relationship and legally bind two or more parties in fulfilling their obligations to each other. Since procurement concerns the negotiation and fulfillment of commitments, it naturally becomes related to contracting.

For the profitability of your business, one of the most important things you must have is procurement contracts and responsible management of those legal agreements. Once you have a procurement contract in place, you must ensure that the legal obligations of each party are fulfilled as written in the contracts.

What Is a Procurement Contract?

A procurement contract or agreement is used to procure or purchase the goods and services of another business in exchange for payment. This written agreement between you and the other party states your obligations, which usually includes detailed price lists, payment information, conditions of delivery, and other legal conditions and terms.

Although the procurement contract and procurement and contract management sound simple enough, they vary in complexity because of the commercial environments businesses operate in and the variety of products and services that companies can choose from.

The three types of procurement contracts include:

1. Fixed-Price Contracts

In this contract, the seller agrees to provide their product or service at a set price, no matter the resulting equipment, material, and labor costs. The seller must pay any costs beyond the agreed-upon, which puts less risk for the buyer.

2. Cost-Reimbursement Contracts

When the service provider or supplier can’t assess the work or the full scope of the project, a cost-reimbursement contract comes in handy. In this type of contract, the buyer agrees to pay for the actual cost of the work completed. Moreover, a cost-reimbursement contract also ensures that the seller remains on schedule and within the budget.

3. Time-and-Materials Contract

Vendors can also request a time and materials contract for reimbursement for materials used and payment for the amount of time spent on the project. This procurement contract is best used for more flexibility and ability when it’s difficult to quantify a project’s parameters.

The Procurement Contract Process

The buyer usually generates the procurement contract, with the project team establishing the materials, services, staffing, and other requirements with the buying department. The procurement team uses these details to solicit bids from different bids, comparing proposals and selecting one for the project.

Once the seller has been selected, the buyer will create the procurement contract based on the information from the buying department and project team. To manage the relationship between the vendor and coordinate across different parties, it’s essential to practice responsible procurement and contract management.


Forming relationships and collaborating with various vendors or service providers is crucial to the growth and success of a company. Still, it’s also essential to keep in mind that you must always have a procurement contract in place for a successful project. Make sure to develop strategies for procurement and contract management so that the project stays on track.

If you’ve been having difficulty managing your procurement contracts, then Anapact is perfect for you! As one of the best procurement and contract management software in the market, Anapact can reduce risk, ensure compliance and make the most of your contract documents. Get a demo today!

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- About the Author

Picture of Louis Balla
Louis Balla
Louis is the Co-Founder of Anapact and partner at Nuage, a top rated ERP consulting firm based in Venice Beach, California.