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Read The Fine Print, Or Why Vendor Contracts Matter
Not reading a contract for services thoroughly can have big implications down the road. Small and midsize businesses need to read the "fine print" in a vendor service contract. Here's what to look for.
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Billing Structure
The billing section is where an agreement specifies how services are paid by the business. This is typically where the hidden fees are located. Merchant account agreements, for example, often include multiple hidden fees. The Wall Street Journal recently reported that U.S banks received $45.3 billion last year due to credit and debit card charges to merchants last year, and merchant fees are up 78%. Here some of the hidden charges associated with merchant account contracts:
Discount Rate: This is generally the largest fee and refers to the percentage fee charged per transaction. (This fee is higher for keyed in transactions than it is for swiped cards)
Over the limit fee: If a merchant stipulates they expect to process $3,000 in monthly transactions but go over this amount, there is a fee tied to whatever goes over the allotted $3,000. This fee can be as much as %5.
Chargeback/Retrieval fees: This fee occurs when a customer disputes the charge and contacts their bank thereby leading into a fraudulent activities investigation. This charge ranges from $25 to $50. Merchants can refute the customer's dispute through writing and with valid documentation. Even if a merchant is successful in refuting the dispute, the charge may still occur.
The Merchant Council lists more hidden fees in these types of accounts.
Ongoing Maintenance And Governance
Many projects -- from IT consulting to Web site hosting -- require ongoing work, and the contract should specify the terms of that work. If your contract specifies help desk hours and expected wait time for service calls, for example, you can hold your VoIP service provider to these obligations. However, if your contract does not specify wait time, you can't be sure how long you'll have to wait for service, and there will be little you can do to recoup any losses.
Confidentiality
If in the process of doing work for you, one of your vendor needs access to sensitive or proprietary information concerning your company -- from meta tags used on your Web site to search engine optimization keywords or even customer credit-card numbers and other databases, you need to make sure the contract has an iron clad non-disclosure agreement. This non-disclosure clause must include stipulations for both breaches of contract and early termination situations.
Termination
One final section in a contract that can contain hidden fees is the termination section. If you end a contract early, or breach a contract, most likely you'll incur significant penalties. These are most commonly seen in postage meters rental agreements and with credit-card processing providers.
But that's only part of the problem. For "art" based projects -- graphic design, trademarks, Web design, etc. -- many designers maintain the rights to their custom work until the project is complete. That means if you terminate early, you could risk not receiving any of the work you paid for and never own it. Try to make sure your contracts include benchmarks and a project timeline that grants ownership rights piecemeal as the project progresses.
In the case of merchant account agreements, some providers will waive the cancellation fee with the hopes of gaining more business. Some contracts will include a clause that will waive the cancellation fee in the event of changes to the rates or fees paid during the contract period.
This is just an overview of some of the many important provisions in business contracts that can materially affect your company's bottom line. At the very least, be sure to read the fine print with these points in mind to make sure you don't leave your company open to any nasty surprises.
Even better, hire a lawyer to review your contracts before signing them. Just be sure to read that contract, too!
Monique L. Myers is a writer, surf instructor and an art enthusiast based in San Diego, California. She writes extensively for Resource Nation and VoIP Service, both online resources that provide expert advice on purchasing and outsourcing decisions for small business owners and entrepreneurs.
Resource Nation provides how-to purchasing guides, tips for selecting business service providers, and a free quote-comparison service that allows business owners to compare price and service offerings in over 100 categories from from credit card processing to phone systems.
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