Small businesses need to hire other businesses (vendors) to help them deliver projects. They do not need to pay for their vendor’s mistakes. Let’s break down a common situation.
Imagine This
You get hired for a big project. You bring in other businesses (vendors) to help. After you complete the project, your client says something is wrong and they won’t pay until it’s fixed. The problem was caused by your vendor, but they say they did what their contract with you said. They will fix it, but only if you pay them to do it. What do you do?
Here’s the Issue
If what you promised your client is different from what your vendor agreed to, you’re in a tricky spot. This can happen for many reasons. Vendors might interpret their scope differently because they do not understand and are not responsible for the entire project. Unless your contracts are carefully drafted, they probably favor your client and vendor more than they favor you. This means your client can hold you responsible for the vendor’s mistake, but you can’t easily hold the vendor responsible. As a result, you end up paying to fix something that wasn’t your fault.
The Fix: “Flow-Down” Clauses
One way to avoid this mess is to use what’s called a “flow-down” clause in your vendor contracts. Think of it like copying and pasting parts of your client’s contract into your vendor’s contract. Basically, you’re saying, “Vendor, you have to do what I promised my client.” This creates consistency between what you promise and what your vendor delivers, offering vital legal protection. You’ll need to share your client’s contract with the vendor, but you can remove any private information like how much you’re getting paid.
Smart Tip
If your vendors don’t like what’s in your client’s contract, they might not agree to a flow-down clause. To prevent this, try these tips:
- Negotiate in Tandem. Negotiate your client contract and your vendor contracts at the same time.
- Share Contracts. Share your client contract with your vendor so they can identify objectionable terms.
- Resolve Vendor Objections. If a vendor says they can’t accept a part of your client’s agreement, that’s a heads-up to go back to your client and ask for a change that works for everyone.
Bottom Line
Be sure your vendor agreements match what you’re promising to clients to avoid paying for a vendor error.
