Is your contract too long?

And I’m talking here about the number of words, not the contract’s duration.

This comes up a lot in standard form contracts, particularly on the buy-side. There’s a perception amongst a lot of procurement departments, and the lawyers that advise them, that the more clauses (and the longer the clauses) you insert into the standard form contract, the better off you are.

And, to an extent, that’s true.

But there’s a cost, and the cost breaks down into three main categories.

Firstly, there’s the friction costs. Sellers will read the contract, not understand the clauses, and will be put off by clauses that do not make sense in the particular context. Your staff will have to take time to explain the clauses and probably get involved in to-ing and fro-ing about the clauses. Time is money and, for most procurement contracts, the risk and value involved will not justify the time.

Secondly, there’s the opportunity cost. Procurement staff could be working on the bigger contracts and contracts that add real value or carry significant risk, but the friction produced by an over-long standard form takes them away from that kind of work. This is a significant cost which is no less significant because often hidden.

Thirdly, there’s the cost that flows from laziness. The development of a standard form contract (in fact, any contract) should be built on:

an assessment of the risks that the business is exposed to as a result of the contract and;

a decision on which risks are best addressed by the contract and which risks are left outside the contract because they are best addressed by other means.

When people start adding more, and longer clauses, to a standard form contract, that’s usually because they haven’t spent enough time thinking about the risks that the business is exposed to.

And that’s the biggest cost of all.

7 May 2024