Article

Your Vendor Agreements

June 2009, Auto Dealer Today - WebXclusive

by David Keller, CPA, CFE - Also by this author

Eliminate the Never-Ending Contract

In this day and age, dealers utilize many different software programs to track sales leads, perform follow-up after the sale and manage payroll, human resources, service reminders, accounting, F&I, etc. Additionally, dealers use many third-party vendors which have DMS access for downloading information to their software to furnish dealers with add-on products and/or reports.

Maybe it is time to inventory all these programs to find out if you are still utilizing them and if anyone is looking at their output. Start by reviewing your accounts payable bills for any data processing costs. These bills are recorded in many different areas of your financial statements, so don’t just look at your data processing expenses. Look in outside services, miscellaneous expenses, professional fees, departmental expenses, etc.

Once you have a list of vendors, find the original contracts you signed. Document the original date of the contract and the start and end dates of the contract. Then look for any amendments to the original contracts you may have signed over the years. If you can’t find these, or aren’t sure you have any and all amendments, contact each vendor and have them furnish you the copies of any existing and ongoing contracts. Also, pull a copy of the most recent bill from each vendor.

Now that you have this documentation, complete a recap of all the contracts. An example of the information to recap in columns on a spreadsheet would be:

    Name of the vendor
    Original date of the contract
    Start date
    End date
    Any amended start and end dates
    Contract number
    Monthly maintenance amount
    Original term
    How many periods are remaining
    Any cancellation fees, if stated
    What financial statement account it is expensed to

You will probably want to contact each vendor and have them furnish you a list of the above information to make sure you have all the contracts and expiration times. It may amaze you how many different contracts you have signed. It may also surprise you how many different terms and conflicting end dates your contracts have.

The reason for this is that you or someone who works for you may have unknowingly signed contracts with staggered contract terms. This means the additional contracts you signed over the years do not have the same end date as the original main contract. This is a problem if you ever want to switch vendors. You may not be able to because you still have some contracts with a remaining term. You may be able to terminate the contracts with a remaining term by paying a cancellation fee, but this can be very expensive and doesn’t have to happen if you plan appropriately.

After reviewing clients’ bills and gathering this information from their records and vendors, I have been surprised by how many different changes, amendments and additions to the main contract they have signed over the years.

How do you contain and limit this problem going forward? Put all your managers and personnel on notice that no one is allowed to sign and/or agree to any contracts. Next, put your vendors on notice that no one except you can renew, add, modify, etc. any contracts on behalf of any of your companies and if they do get someone other than you to sign, the contract is not valid. This type of notice can apply to any of your maintenance contracts for any type of service you need to contract for. When you sign any new contracts, add a clause to the effect that no one is allowed to contract with this vendor but you.

When reviewing any additions, modifications or renewals with vendors, you should have on hand any other contracts with the same vendor, any associated vendor they rely on and their terms with end dates. You should negotiate to have any changes end at the same time as the main contract. This allows you to change vendors in the future without contract end date issues like penalties and surcharges.

Now is the time to negotiate and/or renegotiate these staggered terms with your vendors. Call and meet with them to discuss the problems you have with these staggered dates. Let them know this is unacceptable and they need to do something about it if they want to remain your vendor in the future. Have them present a proposal to you to rectify these staggered contract dates.

The other thing you want to eliminate from any new contract is language that allows the vendor to automatically renew the contract for an additional period if not notified in writing so many days before the existing contract expires. Before execution of the contract, cross through these clauses and initial and date them. And, add a clause of your own that states you will not automatically renew any contracts in this manner, and if their contract contains any language to this effect you may have missed, the contract is null and void.

Remember, you can use this same exercise to review all your vendor contracts that have monthly maintenance. Again, you may be surprised how many you or your personnel have signed. Take control of these costs and ongoing contracts now. If possible, limit them to month-to-month or a year at a time and try to eliminate any termination or cancellation fees.

Remember, what you don’t know can be an expensive lesson.  

Vol. 6, Issue 4

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