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Strategies for GPO Contracts with Suppliers

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GPO Contracts – Strategies for GPO Contracts with Suppliers

GPO Contracts need to be strategically prepared to protect the rights and interests of the GPO and it’s members, not the suppliers

When it comes to GPO Contracts, the purchasing agreements made between a GPO and a supplier, documenting the purchasing arrangement between the Group Purchasing Organization (GPO) and each of its approved suppliers in the form of a strategically crafted GPO contract is an absolute must. With potentially millions and perhaps even billions of dollars changing hands, this is no time to rely upon a handshake or just a term sheet to confirm the deal. It is also not a good idea to rely upon the supplier’s contract form to set out the terms of the deal. It is unlikely that supplier’s form will be helpful or favorable to the GPO. Their form is designed to protect the supplier’s best interests and not those of the GPO. Another problem with using the supplier’s form and not a GPO contract is that each one will be different, so that there is no consistency in legal terms in the contracts between the GPO and its approved vendors. Further, if the supplier does not have experience in working with GPOs, the sales forms it has on hand will not likely fit the arrangement. It is not uncommon for a supplier’s agreement to treat the GPO as if it were the buyer of the goods or services being furnished, rather than the GPO’s members. For those GPOs that are invoiced as the purchaser and then re-invoice the purchases to is members, this approach is, of course not as much of a problem. But for those GPOs who only broker the deal on behalf of their members, it does not work for the contract to treat the GPO as the direct purchaser. A GPO Contract produced by the GPO and it’s lawyers is the only option to protect the rights and interests of the GPO and it’s members

The GPO Contract – A GPO Must Present it’s own Contract When Contracting With Suppliers and Vendors

Accordingly, and for the aforementioned reasons, it is imperative that the GPO have its own form to present to suppliers. The form will vary, depending upon whether the GPO is actually buying the goods from the supplier and then reselling them to its members, or the members are taking title and delivery of the goods, but the GPO is assuming financial responsibility for the payment of such purchases, or as is often the case, the GPO is simply arranging for the purchase of the goods by its members who will be directly responsible to the supplier for payment. Regardless of the arrangement, there are many commonalities each version of the GPO contract or GPO supplier agreement will share.  It is important that the business terms be clearly set out.  It is equally important that legal terms to protect the GPO and its members be included in any Group Purchasing Contract with its suppliers. 

The GPO Contract – The GPO Contract can be a Strategy in and of Itself

The format of the GPO purchasing contract can be a strategy in and of itself.  The GPO will likely find it advantageous to design the contract in such a way to make it seem the least suspectable to scrutiny and negotiation, particularly regarding legal terms.  One approach we have seen work well is to place the business terms at the front of the agreement, followed by the legal terms.  Often the business terms will fit within the first page, including room for the signatures at the bottom of the form.  The legal terms can be attached as an addendum under the heading “General Terms and Conditions,” for example.  If the form is presented as a printed, pre-set form, rather than something that can be easily changed on a computer, the supplier might be less likely to ask for changes.  Such a result would more likely occur where the salesman of the supplier has authority to sign the purchasing agreement.

GPO Contracts - Business Terms Contained Within the GPO Contract

Within the GPO Contract are the business terms and they serve as an excellent checklist to make sure that the GPO has explored all possible benefits to itself and its members, leaving nothing on the table.  A supplier will seldom provide all the benefits detailed in the form, but in the process of going through the various possibilities, it is possible that the supplier might make one or two additional concessions it had not planned on doing at the outset.   Some of the more common benefits offered to the GPO and its members within the GPO contract are explained below.

 (a)     Within the GPO Contract, the most common incentive is a volume rebate program.  Typically, the supplier offers an ascending array of discounts contingent upon reaching certain volume levels of purchasing.  For instance, a rebate program might be structured like this:

             Purchase Volume                        Percentage Rebate

                 $1,000,000                                         1%

                 $2,000,000                                         2%

                 $3,000,000                                         3%

                 $4,000,000                                         4%    

The suppliers usually prefer to pay these rebates annually, but the GPO should ask to be paid quarterly.  The highest level of rebates achieved should go back to dollar one so that if the GPO made $4,100,000 in purchases, the entire amount of purchases would receive the 4% rebate, as opposed to just the $100,000 of purchases over the $4,000,000 mark. Sometimes a GPO can successfully persuade a supplier to guarantee the highest level of rebates during the first year or two as the members undertake the difficult process of changing over to the supplier’s line from the old suppliers.  Therefore, if the GPO only makes $1,500,000 of purchases during the first year, they would nevertheless receive the full 4% rebate on that amount in that example. 

(b)     Another common incentive within the GPO Contract gives the GPO a special discount off the normal selling price.  Such discounts typically range anywhere from 1 to 10%.  When used in combination with the volume rebate program, it obviously makes it more difficult for the GPO to hit its target goals, because they are paying less for the goods.  It is not a bad problem to have, however. 

(c)      Suppliers almost universally offer or accept prompt payment discounts contained within the GPO Contract.  With the GPO purchasing power behind the program, the supplier will be more inclined to extend out the length of time within which the payment to be made to qualify for the discount.  Instead of having to make the payment by the 10th of the following month, it could be as late as 60 days following the date of the invoice.  The amount of the discount might be increased, as well.

         (d)     Some suppliers will pay, if included within the terms of the GPO Contract a GPO headquarters allowance.  This is paid to the GPO to help support its administrative cost in operating the GPO, thereby making the increased purchasing power available to the further benefit of the supplier.  Such GPO discounts noted within the GPO contract are usually based upon a percentage of volume but are not contingent upon achieving any particular level of volume.  Again, the supplier should be encouraged to pay this as frequently as possible, rather than waiting until the end of the year.

         (e)     Another benefit should be, or can be incorporated within the GPO contract is a request to extend the terms of payment, so that instead of requiring that the payment be made within 30 days, they could set the terms of equal payments at 30, 60 and 90 days.  If a supplier is not willing to offer this on an ongoing basis, they might be willing to consider it for an opening order.

         (f)      One of the key impediments to the member getting onboard with a new supplier’s program is the problem of the existing inventory it has from the old supplier.  To help the members in this process, a new supplier could accept terms within the GPO Contract in the form of an offer to purchase the old supplier’s inventory at cost (in the form of a credit) as part of its “change-over program.”  Of course, this is not necessarily unique to GPO purchases, but it should be a component of a GPO’s purchasing program and included within any GPO Contract.

         (g)     Within the GPO Contract, The GPO should secure a shipping performance guarantee from the supplier.  Significantly reduced prices are of little value if the GPO is unable to purchase and receive the products when they are needed.  To make the shipment guarantee effective, there should be some type of penalty associated with the failure to fulfill a certain percentage of orders placed by the members.  Usually, the shipping performance guarantee percentage is 95% or higher. 

         (h)     The warranty program of the suppliers should be spelled out within the GPO Contract.  The GPO could consider negotiating a special penalty arrangement if members experience more than a small threshold percentage of returns of the supplier’s product. 

         (i)      The GPO may also be able to negotiate and include within the GPO contract or supplier agreement, a commitment from the supplier to buy back obsolescent products as the supplier comes out with newer ones. 

The GPO Contract - Legal Terms Included in the GPO Contract and Supplier Agreement

Although many of the legal terms in a GPO contract or GPO supplier agreement, mirror those found in regular purchase orders placed by a distributor to its suppliers, there are some important differences.  The most noteworthy of them are:

(a)     The unique relationship of the parties should be explained clearly in the GPO Contract.  In most cases, the members are not signing the agreement, but are intended to benefit from it.  Under the law, that makes them third party beneficiaries.  The purchasing agreement should make specific reference to the rights of the members under the agreement, even though they are not primary parties.

(b)     Whether or not the GPO is considered a buyer of the goods and will be held liable for the cost of the goods should also be clearly delineated in the GPO Contract or Supplier Agreement.  If the purchases and payments for goods are to be made by the members, this provision should state that the GPO is not liable for any failure on the part of a member to meet its obligations to the supplier.

(c)      One of the most important terms in the GPO Contract is the indemnity provision.  The GPO and each of its members should be indemnified as to any claims arising against them involving the sale or use of the goods acquired from the supplier, as well as other events that should be spelled out in this clause.  Suppliers will sometimes seek to make this provision mutual, but they seldom succeed in having the GPOs agree to indemnify them within the GPO contract or otherwise.

(d)     As important as it is to have the supplier agree to indemnify the GPO and its members within the GPO Contract, it is equally important to have this indemnity backed up by adequate insurance coverage.  The GPO purchasing contract should require the supplier to have coverage in at least the amount it specifies, and that the GPO and its members should be named as additional insureds, as evidenced by insurance certificates each year.  If the GPO has numerous members, the supplier might be reluctant to provide insurance certificates for the members.  A middle position would be to require the supplier to provide such certificate to a member upon its request.  The gold standard of insurance coverage is broad form supplier coverage which covers not only the distributors, but also all resellers downstream from them.  At the other end of the spectrum is the supplier who purports to be self-insured.  They seldom are as creditworthy as an insurance company.  One other important note about insurance is that under broad form supplier coverage, the GPO is not automatically named as an additional insured.  So, the supplier needs to make arrangements with its insurance agent to make sure that is accomplished.

(e)     It is wise to include a representation from the supplier that the GPO Contract or supplier agreement does not violate the Robinson-Patman Act or any other laws.  In order for a buyer to be held liable for participating in a price discrimination scheme, it must be proven that the buyer did so knowingly.  With this representation included, it is much easier for the buyer to prove it had no knowledge of any violation of the Robinson-Patman Act.

(f)      Another provision within the GPO Contract or supplier agreement especially applicable to GPOs is a requirement that the supplier provide the GPO quarterly reports of the purchasing volume of each of the members, so that the GPO will know how to allocate the volume rebates among the membership.  Having current information is also needed by the GPO to know when it is getting close to making the next rebate threshold.  Accordingly, the members can be encouraged to make an extra effort to support that supplier, thus enabling them to hit the next target (see the rebate example above).

A well thought out and well-drafted GPO Contract or purchasing contract or agreement provides the GPO with a strategic advantage as it enters into negotiations with its suppliers.  Conversely, a GPO which does not have such a form, but rather seeks to save time and expense by relying upon the contract forms of its suppliers has lost the high ground before the negotiations have even started.

Call Raw Law LLC for national expertise in legal representation for GPO’s, Group Purchasing Organizations, and Buying Groups.