Procurement contract guide 2025: Strategy & risk management

Procurement contract management is a complex job. Between dynamic supplier relationships, a changing compliance landscape, and risks posed by unclear contract frameworks, there’s enough pressure that may keep procurement leaders up at night.

Fortunately, technology solutions like procurement software and contract management tools are making it easier to stay on top of purchasing contracts—with less overhead. But before you jump into the latest tech, it can be helpful to understand the basics, including the types of procurement contracts, the information they contain, and governance strategies for success.

What is a procurement contract?

A procurement contract is a legally binding agreement between a buyer (your organization) and seller (your supplier) that defines the terms and conditions for purchasing goods or services. 

The document, also called a purchase contract, makes sure both parties understand their obligations and provides a framework for a successful business relationship. Effective contract management also impacts sourcing strategies by ensuring sourcing initiatives optimize cost savings and reduce supply chain risks.

Components of a procurement contract

Procurement contract terms often include the following components:

• Actual costs: The total cost of the goods or services being procured after all fees and expenses

• Delivery terms: Delivery timelines, locations, and any relevant shipping information

• Order quantities: The number of items being ordered and delivered to the buyer

• Quality parameters: Details regarding buyer expectations and how they will measure the quality of the goods or services

• Payment terms: Expected payment methods and payment plan information, if relevant

• Legal and compliance requirements: Industry standards or specific regulatory requirements both parties must adhere to during their partnership

• Contract termination and dispute resolution clauses: Agreed-upon processes for resolving disagreements or terminating the contract

The contract’s execution details are typically part of a scope of work document, which lives within the procurement contract.

Why procurement contracts matter

An effective procurement contract protects both parties’ interests for the length of the agreement. It can safeguard buyers from poor-quality goods and services, unexpected costs, and delivery delays. It shields suppliers from nonpayment and contract breaches. 

These contracts also help companies minimize risk. They ensure all procurement practices follow necessary laws and outline clear penalties for noncompliance. This is important because these agreements typically cover high-value, strategic purchases that involve contract negotiations and long-term vendor relationships. 

One aspect purchase contracts don’t usually cover is tail spend, the fragmented, low-value purchases organizations make outside of formal procurement processes. Digital buying solutions with discounted costs and purchase controls often work better for tail spend purchases, as these tools allow for quicker approvals for ad hoc buys while also setting up guardrails to control spending.

3 types of procurement contracts

There are three main types of procurement contracts: fixed-priced contracts, cost-reimbursable contracts, and time and materials (T&M) contracts.

Fixed-price contracts

Fixed-price contracts use a set price for the cost of goods and services, regardless of the actual costs incurred. These agreements contain three subtypes:

• Firm fixed price (FFP): A fixed price with no opportunity to adjust, even if costs fluctuate

• Fixed price with incentive fee (FPIF): A fixed price that offers an incentive for meeting or exceeding performance expectations

• Fixed price with economic price adjustment (FPEPA): A fixed price that may be adjusted due to unforeseen economic conditions

• Lump sum contract: A fixed, predetermined price with no adjustments or additional fees

Sample use case: An accounting firm might use a fixed-price contract to order office supplies. This lets them lock in a certain rate for a standard item so they can budget better for future orders.

Pros of fixed-price contracts:

• Predictable cost

• Easier contract management

• Increased transparency

Cons of fixed-price contracts:

• Lack of flexibility if project scope changes

• Less visibility into the vendor’s actual costs to assess value for money

• Risk of lower quality if the supplier cuts corners to stay within the fixed price

   

Cost-reimbursable contracts

In a cost-reimbursable contract, the buyer agrees to reimburse the supplier for actual costs generated while completing the project. The contract specifies which costs are considered “allowable,” or eligible for reimbursement. This often includes both direct costs (like labor and materials) and indirect costs (such as overhead).

Subtypes of cost-reimbursement contracts include:

• Cost plus fixed fee (CPFF): Suppliers are reimbursed for direct and indirect costs plus a fixed fee that stays the same regardless of the actual project cost.

• Cost plus incentive fee (CPIF): The supplier receives a set incentive fee on top of the cost reimbursement if they meet certain performance criteria.

• Cost plus award fee (CPAF): Vendors are reimbursed for allowable costs and may receive an incentive fee that depends on their performance. The difference between a CPAF contract and a CPIF contract is that the award amount for a CPAF contract varies and is determined through a performance evaluation.

Sample use case: Cost-reimbursable contracts work well for large-scale infrastructure projects like constructing new bridges or highways because material costs can change significantly over time, and unforeseen expenses are common.

Pros:

• Adaptability for projects with an uncertain scope

• Potentially lower final costs, as suppliers are less likely to inflate costs to build in wiggle room for overages

• Focus remains on quality rather than strictly adhering to a budget

Cons:

• Uncertain total cost

• Requires close monitoring and oversight to keep expenses under control

• Contractors may have less incentive to work efficiently if all their costs are covered

   

Time and materials contracts

Under a time and materials contract, the buyer agrees to pay the contractor for the actual time spent on a project and the cost of the materials used. This contract type is helpful for projects where the scope might be uncertain or requirements might change. 

Sample use case: A restaurant might opt for a time and materials contract when hiring contractors to redesign its customer dining area. Since elements like furniture, flooring, wall art, and lighting fixtures will be selected throughout the construction process and impact installation time, a time and materials contract could be the most appropriate choice. 

Pros: 

• Allows for flexibility in project scope and duration

• Greater potential for cost savings if the project finishes early or under budget

• Typically easier to negotiate, manage, and implement

Cons:

• Costs can exceed the budget if not monitored carefully

• Laborers may be less motivated to work efficiently with open-ended hours

• Tracking material costs and hours requires detailed project management

   

The modern procurement contract process

Managing procurement contracts begins with a strategic approach to their creation. Here are a few key steps you can take to get started.

1. Determine objectives: Clearly define the scope of work, including specific goods and services, quantities, timelines, quality expectations, and metrics that will be used to evaluate performance.

2. Draft core clauses: Add sections regarding termination, dispute resolution, force majeure, confidentiality, legal requirements, and governing law and jurisdiction.

3. Negotiate deliverables: Negotiate contract terms like pricing, warranties, intellectual property rights, and more.

4. Finalize approvals: Connect with your organization’s finance and legal teams to ensure alignment before granting final contract approval.

5. Monitor performance: Track contractor performance using the metrics outlined in the contract to ensure the supplier stays on course.

    

Contract management strategies for streamlined governance

Contract governance starts the moment the agreement is signed and continues throughout the contract's length. Procurement teams that use strategies like the following often find success streamlining their contract governance processes and improving outcomes.

Set governance policies

Procurement governance policies exist to ensure the procurement process—including contract management—is carried out legally, ethically, and transparently. Creating internal governance policies can help organizations minimize risks and maximize value.

Build strong supplier relationships

Strong vendor relationships can help procurement teams negotiate more favorable contract terms, which can help them save money and improve their supply chain resilience. These partnerships can also lead to higher product quality and lower risk.

Set renewal milestones

Starting the contract renewal process early gives you more time to explore cost savings through vendor negotiations and alternative options. It also ensures you aren't rushed when reviewing contracts to verify that they meet your needs.

3 Procurement contract best practices

As with most business processes, procurement is in its digital transformation era, and organizations are jumping on board. According to a report by the Chartered Institute of Procurement and Supply and RS Integrated Supply, 75 percent of large firms already use digital procurement tools. 

With benefits like increased efficiency, cost savings, greater transparency, and added agility, e-procurement can be a good place to start to improve contract management.

Implement digital workflows

Many organizations now use automation for time-consuming manual tasks, and contract management is no exception. 

According to the 2024 PwC Digital Procurement Survey, one in every two companies surveyed plan to implement or upgrade a contract lifecycle management tool in the next three years. In return, they expect cost reductions, time savings, and greater compliance.

Contract management software can:

• Provide pre-approved contract templates

• Collect digital signatures

• Track compliance

• Route contracts to the appropriate reviewers 

• Securely store sensitive documents

   

Incorporate SRP criteria

Responsible purchasing integrates ethical, social, and environmental considerations into an organization’s procurement strategy. This helps ensure ethical and sustainable sourcing, supplier diversity, and reduced environmental impact.

Technology can simplify this process. For example, Amazon Business helps you direct your buyers to  purchase from organizations that identify as small or minority-, woman-, veteran-, or LGBT-owned by enabling you to create your own Diversity Certifications Policy. You can label these businesses as preferred to make it easy for your buyers to see and support them during purchasing. 

Build resilient supply chains

Predictive procurement tools can help organizations forecast demand and anticipate supply chain disruptions caused by weather or other events. These tools use historical data to enable smarter, more proactive business buying strategies and reduce supply chain risk.

Common procurement contract pitfalls and how to avoid them

Procurement contract management is complex, which means it can come with its fair share of risks. Here are a few common challenges and practices that may help mitigate potential problems.

• Challenge: Being administratively prepared to monitor contracts for regulatory compliance, supplier performance, breaches, and more
• Possible solution: Implement e-procurement software that can automatically track these metrics to reduce administrative burdens.

• Challenge: Poor communication between buyers and suppliers and between internal teams
• Possible solution: Try using vendor collaboration tools that streamline communication, and be intentional about staying in touch throughout projects so you’re always on the same page. Give internal departments regular updates to manage their expectations.

• Challenge: Unreliable suppliers that cause delays, quality problems, and supply chain disruptions
• Possible solution: Use supplier sourcing tools to help vet vendors based on factors like reputation, quality, delivery time, financial stability, and compliance record. You can automate this using supplier management software.
   

How Amazon Business supports procurement contract compliance

Staying on top of procurement contracts is essential for compliance and success. Procurement solutions like Amazon Business are vital for enforcing compliance and enabling efficient and cost-effective procurement practices.

Amazon Business offers features like Guided Buying, spend controls, and Punchout Catalogs through Business Prime to give your organization better command over individual purchasers. These tools ensure all of your buyers stay within budget and give preference to recommended suppliers, including those in your Diversity Certifications Program. 

You’ll also have access to Spend Visibility, a Business Prime exclusive, to uncover compliance issues, make smarter budgeting decisions, and identify opportunities for further savings. Amazon Business also integrates with your existing procurement solution.

Learn how Amazon Business can help your organization simplify contract-aligned purchasing and strengthen procurement compliance at scale. Contact our sales team today.