Understanding Vendor-Managed Inventory Agreements

Used primarily in business-to-business arrangements, most organizations across the country rely on one form of vendor-managed inventory (VMI) agreement or another. That said, most of these agreements are not explicitly tied to engineering, construction, or contracting endeavors. Their use in those spaces can be traced to their relationship with other agreements, such as master service agreements, which are more directly relevant to a variety of engineering and construction/project management purposes and projects.

In general terms, a vendor-managed inventory agreement is a type of pact that allows a contractor to monitor inventory levels of a target finished product that will be used in relation to a specific engineering or construction project. Stated differently, a vendor-managed inventory agreement allows a contractor to monitor a supplier’s inventory levels of an item or items in relation to that contractor’s needs in relation to a particular endeavor. A vendor-managed inventory agreement must contain several key elements in order to be enforceable, including, but not limited to, the following:

In addition, a vendor-managed inventory agreement may be referred to as a consignment contract, a collaboration agreement, a vendor consigned inventory agreement, or a vendor-managed inventory consignment contract. There is a wide range of ways in which a vendor-managed inventory agreement may be used to further the goals of an engineering or construction project. Perhaps, the most prevalent usage is in relating to the advance shipment of tangible items that will be used in relation to a particular endeavor. This usage, however, is not universal. Vendor-managed inventory agreements may also be used in the advance shipment of capital equipment items and/or computer software items.

While the variety of uses for vendor-managed inventory agreements is a positive, these contracts cannot be used in all circumstances. For example, they cannot be used to oversee the management of ongoing purchases of items in relation to a particular project over time. This is because a vendor-managed inventory agreement requires a contractor to manage inventory levels of items based on a pre-determined level of inventories. This means that a contractor cannot add or remove items from the agreement during its term in any significant way.

Many contractors experience significant improvements in their project management practices and outcomes once they begin using vendor-managed inventory agreements. These improvements generally stem from greater efficiencies in the procurement of goods and services and the scheduling of work. This makes it possible for a contractor to engage in the better management of its personnel, time, money, and other resources.

Few engineering and construction contractors understand that vendor-managed inventory agreements help take the concept of a sustainable building environment one step further. They help to ensure a sustainable construction process by allowing you to pre-qualify potential vendors before ever entering into a contract with them. Contractors who utilize vendor-managed inventory agreements, however, must do so with caution. Most importantly, all contracts must be created according to the terms of your relationship with them. If not, this can lead to exorbitant expenses and liabilities down the line as a result of your failure to adhere to the terms of those agreements.

A vendor-managed inventory agreement also has the potential to represent a significant streamlining of your project management processes. Engineers, architects and contractors have to manage many inputs, timing, team members and other moving parts. Despite these significant obstacles to effective project management, most companies that have chosen to use these agreements report successful results. They also maintain that successful outcomes and the avoidance of disputes have been made possible only through the use of well-crafted comprehensive VMI agreement templates.

Given the high stakes involved in engineering and contracting endeavors, it is imperative that you have the assistance of experienced legal counsel to negotiate the most beneficial terms. Doing so will ensure the best possible outcome for you and your clients as well as mitigate the risks you face.