Glossary of Contract and Procurement Terms
Your comprehensive reference guide to contract management and procurement terminology
A
Addendum
A document that adds new terms to an existing contract without altering the original agreement.
Allocated Cost
The portion of total expense assigned to a specific department, project, or cost center.
Amendment
A formal change or modification to a contract after it has been signed.
Approved Supplier List (ASL)
A vetted roster of vendors prequalified for use within the organization.
Arbitration
A dispute resolution process where an independent third party makes a binding decision outside of court.
Assignment
The transfer of contractual rights or obligations from one party to another.
Automatic Renewal Clause
A provision that renews a contract for another term unless one party opts out.
B
Benchmarking Clause
A term requiring periodic review of contract conditions against market standards.
Best Efforts
A commitment to pursue performance with diligence and good faith, though not guaranteeing success.
Bill of Materials (BOM)
A detailed list of components, parts, or raw materials required to produce a product.
Billing Schedule
A defined timeline specifying when invoices will be issued and payments become due.
Blanket Purchase Agreement (BPA)
A long-term contract setting general terms for multiple future orders.
Breach of Contract
Failure by a party to fulfill contractual obligations, which may lead to legal remedies.
C
Capacity to Contract
Legal ability of a party to enter into a binding agreement (e.g., age and mental competence).
Capital Expenditure (CapEx)
Spending on assets that provide benefits over multiple years.
Change Order
A written authorization to alter the original scope, price, or timeline of a contract.
Confidentiality Agreement
A clause or standalone contract that restricts disclosure of sensitive information.
Consideration
Something of value exchanged between parties, such as money, goods, or services.
Contractor
A person or company engaged to perform work or provide goods or services under a contract.
Cost Avoidance
Savings achieved by preventing a price increase or future spend rather than reducing current cost.
Cost-Plus Contract
Pricing model where the buyer pays actual costs plus a fixed percentage or fee.
Counterparty
The other contracting party with whom the agreement is made.
Credit Terms
Conditions defining when and how payment is due (e.g., Net 30, Net 60).
Currency Fluctuation Clause
Allows price adjustment when exchange rates move significantly.
D
Deliverables
The tangible or measurable outcomes a supplier must produce under the contract.
Discount Schedule
Predefined price reductions based on quantity, timing, or payment method.
Dispute Resolution Clause
Specifies how conflicts will be resolved (e.g., mediation, arbitration).
Due Diligence
Investigation conducted before signing to verify accuracy and assess risk.
Dynamic Discounting
A program offering early payment in exchange for a price reduction.
E
Economies of Scale
Cost advantage gained by purchasing or producing larger quantities.
Effective Date
The date when the contract becomes legally binding and enforceable.
Entire Agreement Clause
States that the written contract represents the full understanding between the parties.
Escalation Clause
Allows for price increases over time based on market indices or inflation.
Estimated Time of Arrival (ETA)
Projected delivery date for goods or services.
Exclusivity Clause
Prevents one party from engaging with competitors during the contract term.
F
Fixed Price Contract
Agreement where payment amount does not vary with actual costs incurred.
Force Majeure
A clause that frees parties from liability when extraordinary events beyond control occur (e.g., natural disasters).
Framework Agreement
A master contract defining terms for multiple call-off orders over time.
Fraudulent Misrepresentation
Intentional deception to induce another party to enter a contract.
Freight on Board (FOB)
Indicates when ownership and risk transfer from seller to buyer during shipping.
G
Good Faith
The expectation that parties will act honestly and fairly in performing contractual duties.
Governing Law
Identifies which jurisdiction's laws apply to the interpretation and enforcement of the contract.
Gross Margin
The difference between revenue and cost of goods sold, expressed as a percentage.
Guarantee Period
The timeframe during which the supplier is responsible for defects or failures.
I
Incoterms
Standardized trade terms defining responsibilities for shipping, risk, and customs between buyer and seller.
Indemnity
An obligation for one party to compensate another for losses or damages under specified conditions.
Independent Contractor
A person or entity engaged to perform services but not as an employee.
Intellectual Property Assignment
Transfers ownership of IP created under the contract to the company.
Inventory Turnover
The rate at which inventory is sold or used in a given period.
Invoice
A formal request for payment under the terms of a contract.
Invoice Matching
Process of validating that the invoice aligns with the purchase order and goods receipt.
L
Lead Time
The time required between placing an order and receiving goods or services.
Liability Cap
A limit on the total damages one party can recover from another under the contract.
Lifecycle Costing
Evaluating total cost of ownership, including acquisition, operation, maintenance, and disposal.
Liquidated Damages
Pre-agreed monetary compensation for failure to perform contractual obligations.
Logistics Agreement
Defines responsibilities, timelines, and costs related to transportation and warehousing.
M
Market Basket
A representative group of items used to benchmark supplier pricing.
Material Breach
A serious violation that undermines the core purpose of the contract.
Mediation
A non-binding process where a neutral third party assists in resolving a dispute.
Milestone
A defined point or event marking progress toward completion of deliverables.
Most Favored Nation (MFN) Clause
Ensures a buyer receives terms no less favorable than any other customer.
Multi-Year Agreement
A contract extending beyond one fiscal year, often with built-in pricing protection.
N
Net Payment Terms
Specifies the number of days after invoice receipt when payment is due (e.g., Net 45).
Non-Compete Clause
Restricts one party from competing with another for a defined time and geography.
Non-Disclosure Agreement (NDA)
Protects confidential information shared during negotiations or partnerships.
Non-Solicitation Clause
Prevents one party from poaching the other's employees or clients.
Novation
The act of replacing one party in a contract with another, transferring all rights and obligations.
O
Offer
A proposal to enter into a contract under specified terms.
Option Year
A provision allowing extension of a contract beyond its original term.
Order Form
A commercial document detailing goods, services, quantities, and pricing under a master agreement.
P
Payment Milestones
Specific achievements or deliverables that trigger partial payments.
Payment Terms
Conditions outlining when and how payments will be made.
Performance-Based Contract
Compensation tied to achieving measurable outcomes.
Performance Bond
A guarantee provided by a third party to ensure contract performance.
Preferred Supplier
A vendor given priority status due to performance, price, or relationship value.
Price Adjustment Clause
Allows modification of pricing based on predefined factors (e.g., inflation, cost indices).
Price Benchmarking
Comparing a supplier's prices to market averages or peer vendors.
Procurement Policy
A company's internal rules governing purchasing and supplier engagement.
Purchase Order (PO)
A formal buyer-issued document committing to purchase goods or services.
Q
Quantity Commitment
Agreement to purchase a minimum volume to secure specific pricing.
Quick Ratio
Financial metric used to assess a supplier's liquidity and short-term solvency.
R
Rate Card
A predefined list of hourly or unit rates for services.
Rebate Agreement
Supplier provides a refund or credit based on volume, loyalty, or performance metrics.
Renewal Clause
Specifies conditions under which a contract may be extended.
Representation and Warranty
Statements of fact or promises regarding conditions, quality, or authority.
Request for Information (RFI)
A document requesting information from suppliers for goods or services.
Request for Proposal (RFP)
A document inviting suppliers to submit proposals for goods or services.
Request for Quote (RFQ)
A document requisitioning suppliers to provide a quote for goods and services.
Request for Tender (RFT)
Formal invitation for suppliers to submit binding bids.
Return Merchandise Authorization (RMA)
Process for returning defective or unwanted goods.
S
Savings Realization
The point at which negotiated savings are actually reflected in financial results.
Scope of Work (SOW)
Defines deliverables, timelines, and responsibilities under a contract.
Service Credits
Monetary deductions applied when service levels fall below agreed thresholds.
Service Level Agreement (SLA)
Defines performance standards and metrics for service delivery.
Severability Clause
Ensures that if one part of a contract is invalid, the rest remains enforceable.
Should-Cost Model
Analytical tool estimating what a product or service should cost based on inputs and benchmarks.
Sole Source
A procurement awarded without competition due to unique supplier capabilities.
Spend Analysis
The process of categorizing and evaluating expenditures to identify cost-reduction opportunities.
Subcontractor
A third party engaged by the main contractor to perform part of the contractual work.
Supplier Performance Scorecard
A rating system evaluating vendor performance across metrics such as quality, cost, and delivery.
Supply Chain Risk
The potential for disruptions in sourcing, logistics, or supplier solvency.
Survival Clause
Specifies which obligations remain in effect after termination or expiration.
T
Termination Clause
Outlines conditions under which a contract can be ended by either party.
Third-Party Beneficiary
A person or entity that benefits from a contract despite not being a signatory.
Tiered Pricing
Pricing structure that changes based on volume thresholds.
Time is of the Essence
A clause emphasizing that deadlines are critical and binding.
Total Cost of Ownership (TCO)
The complete cost of acquiring, using, and maintaining an asset or service.
Transparency Clause
Requires disclosure of costs, margins, or subcontractors.
V
Variable Pricing
Pricing that fluctuates based on external factors like commodity rates or demand.
Vendor Managed Inventory (VMI)
System where the supplier monitors and replenishes stock on the buyer's behalf.
Volume Discount
Reduced unit price for purchasing higher quantities.
W
Waiver
Voluntary relinquishment of a known right under the contract.
Warranty
A contractual assurance that goods or services meet defined quality or performance standards.
Work for Hire
Establishes that intellectual property created under the contract belongs to the commissioning party.
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