Finance

Developing a Robust Vendor Contract

Finance Clinical Trials Arena Staff Writer

14:00, August 23 2017

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Henry Kerali provides tips for virtual start-ups preparing vendor contracts

Over the past few years, there has been a spurt of virtual drug companies (VDC) rising to the fore. With a majority of VDCs working on tight budgets with limited manpower earning little to no revenue, they rely heavily on outsourcing. Therefore, how VDCs manage costs is vital to how they keep afloat. So if you are a VDC dealing with multiple vendor companies, here are five key things you need to know about vendor contracts.

Paying upfront

Most vendor contracts mandate a certain sum be paid upfront. In such cases, virtual pharmaceutical companies must minimize this payment as much as possible. Paying upfront hampers a sponsor's leverage in contract negotiations with vendors when a project is terminated. It is common for vendors to ask for upfront payment to cover certain costs (e.g. raw materials). In such cases, vendors should provide invoices to the sponsor so the drug company has a record of how their money is being spent.

Monthly Invoicing

For large contracts paid on a monthly basis, such as a vendor contract for a clinical trial, the invoice ideally should be unitized and performance-related. Sponsors must review and approve the units each month, before the invoice is issued, ensuring the sponsor is in agreement with the invoice amount. Any issues or questions concerning vendor contract should be addressed before finalizing the invoice.

Holding cash in escrow accounts

In a majority of clinical trial contracts, a select portion of the Investigator Grant (IG) is held in an escrow account, with the money normally used to pay ongoing IG invoices. Virtual drug companies should avoid keeping cash in escrow whenever possible. This is because it's extremely difficult to get the money back after it has left the company. With the cost of developing a drug continually rising, any money saved can be spent on an activity that could make or break a clinical trial.

Timelines

When it comes to establishing timelines, both the vendors and sponsors need to be pragmatic. In vendor contracts, Project Management usually incurs the largest fees by virtue of trial duration. This makes the value of a contract dependent upon the trial's projected timeline. However, in milestone-based contracts, timelines have to be agreed by both players where the sponsor holds the vendor accountable when milestones are missed.

Change Orders

Change Orders carry a lot of responsibility for vendors and sponsors. Both parties must work with one another to flesh out the details of a project contract. In the event the vendor fails to include an activity that should have been placed in the contract (resulting in a change order), it is their responsibility to raise the issue with the sponsor. At that point, the vendor should foot the cost and offer a discount to the sponsor.

 

For a more in depth read about vendor contracts, check out Carrie Nodgaard Helland's excellent article about managing development costs for virtual drug companies.

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