Insurance and Security

Reduce your risk when working with vendors and contractors

Learn about the steps you can take to protect your business when partnering with other businesses.

Published: March 08, 2012
Updated: February 16, 2017

Whether you want to diversify your offerings, increase your output or get more time back in your day, there are a number of benefits to using vendors and contractors. However, offering products and services produced by these partners can also increase your risk and liability if they aren't managed properly. Use these tips to help vet vendors and contractors, convey your expectations and protect your company through specific contract terms. 

Vetting prospective vendors and contractors

Cost is always an important consideration, but it shouldn't be the most important factor when evaluating a potential vendor or supplier. Reliability and stability are essential qualities for any business you'll be depending on. Identify candidates who are strong in these areas by looking for vendors and contractors that have long-serving executives, and look at how long their companies have been in business. 

Learn about prospective vendors' reputations by conducting online research, such as visiting the Better Business Bureau. Ask vendors to provide the contact information for some of their clients — and follow through on speaking with their customer references. Pay close attention to how open potential vendors and suppliers are during the vetting process; their willingness to be open will reveal how they operate. For example, it's a good sign if they're willing to let you see financial statements and supply references.

The level of vetting you need to perform depends on how critical the vendor or contractor is to your business. Take extra time and care when vetting businesses that supply goods or services that are difficult to find or custom-made. Ask if the vendor has a business interruption back-up plan. And if it would be extremely damaging to your business if a vendor or contractor relationship doesn't work out, make sure you have a back-up supplier.

Communicate your expectations to vendors and contractors

After you research a potential vendor or contractor, speak with them about your needs and expectations. Then, ask them how they plan to meet your expectations. This conversation will form the basis for a contract, and will give you a better sense of how their operation is run.

Protect yourself with a strong contract

No matter how much confidence you have in a vendor or contractor, it's important to have a strong contract that protects you in case of financial loss. Make sure you have an attorney, accountant, or other professional look over the contract. The more specific your contract is, the more protection you afford your business. Your contract should include indemnity clauses for damages relating to goods or services, which prevents you from having to sue for losses. It is also important to include a penalty for failure to provide services as agreed as wells as a limitation of liability clause so you don't assume all the responsibility for damages caused by a vendor. 

Dealing with the vendor

Once you establish a relationship with a vendor or contractor, you can often negotiate better terms. Be sure to ask about how you can qualify for discounts. Businesses that sell to other businesses often have some leeway with negotiated prices, especially if you are a loyal customer. If you are not satisfied with the service you are receiving, don't be afraid to speak to someone higher up in the company.

If you find your vendor or contractor is not delivering products or services as promised, know when to make a change. If your vendor or contractor becomes unreliable, with untimely or incomplete goods and services, and they don't remedy the problem after you speak with them, start considering other sources. If their prices fail to stay competitive and they won't negotiate to stay affordable, it may be time to make a change.

Finding the right vendor or contractor takes a good investment of time and energy, but by doing the work up-front, you'll be positioning your business for future success.