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Contract Management

5 Key Provisions to Look for in Critical Vendor Contracts

Aug 6, 2019 by Heather Garnett

Whether reviewing a new critical third party contract or negotiating new terms and conditions of an existing contract, there are many elements you need to consider.

Pricing and discounts are often a big factor; however, you should also be looking for specific provisions to ensure compliance with industry regulations and standards. Let's go through the five key provisions to look for in your critical vendor contracts.

The 5 Key Provisions to Review in Critical Vendor Contracts

1. Your third party vendor contract should contain an adequate and measurable service level agreement (SLA).

Your vendor contract should include minimum service level requirements along with any remedies for failure to meet such standards. A well-defined SLA should clearly identify expectations and obligations between the parties and should target measuring performance against those objectives.

Seven things to look for in your vendor's SLA are:

  • Standards by which the service(s) will be measured
  • Functionality and availability the vendor is committed to providing
  • Volume of work accepted and delivered by the vendor
  • Criteria for responsiveness
  • Reporting methods
  • Frequency of reports
  • Rights and remedies in the event of failure to meet the standards (this should allow for termination of the contract should the vendor fail to meet the standards over a specific period of time)

2. Your third party vendor contract  should have sufficient security and confidentiality provisions that cover non-public personal information (NPPI) as well as proprietary information.

The contract should clearly identify the vendor’s responsibility to maintain policy and procedures to meet the data security objectives of the Gramm-Leach-Bliley Act (GLBA), and other regulations, by addressing safeguards designed to do the following five things:

  • Ensure security of NPPI
  • Protect against anticipated threats
  • Protect against unauthorized access and have mitigation plans in the event of a security breach
  • Proper disposal of confidential information and data
  • Maintain confidentiality of proprietary information

3. Your contract should identify any subcontractors and ensure that these relationships are in accordance with industry guidance.

And if any are identified, it is important that they include the following four provisions within your contract:

  • They should specify any primary subcontractors and that the vendor remains responsible for all contractual obligations.
  • They will monitor and provide oversight of their subcontractor’s operations in accordance with industry guidance.
  • Subcontractors will be held to standards no less than those established between you and your vendor.
  • Your vendor should specify recovery objectives and testing requirements for any subcontractors. They should also provide disclosure of any such testing results and audits performed.

  1. Your vendor should provide appropriate compliance documents on a yearly basis.

Contracts should require that vendors provide, at a minimum, the following seven compliance documents annually:

  • SOC Reports
  • PCI Compliance Certificates
  • Certificate of Insurance
  • Financial Reports
  • Network Penetration and/or Vulnerability Assessment
  • Intrusion Detection and Incident Response Plans
  • Business Continuity and Disaster Recovery Procedures

  1. Your critical vendor contract should include a business continuity and disaster recovery plan in compliance with FFIEC Appendix J.

Contracts should include provisions covering compliancy with Appendix J such as the following:

  • Accessibility to your vendor’s BCP policies and procedures
  • Independent testing requirements that demonstrate the ability to meet sufficient recovery objectives
  • Frequency and availability of such test results 
  • Established recovery times for the return of critical business functions
  • Back up responsibilities
  • Cyber resilience
  • Management of third party/outsourced business continuity

But Wait! There Is More.

The above are a few major elements to look for within your critical third party vendor contracts, but these are by no means the only important provisions. Those are major elements regulators and auditors are most likely to call out when not properly addressed within your contracts, so ones you should pay extra attention to. So, remember, you need to thoroughly understand the vendor relationship and include all the proper, needed provision within the contract in order to protect your organization.

Dive deeper into other contract management components. Download the eBook.

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Heather Garnett

Written by Heather Garnett

Heather Garnett is an on-site paralegal with Venminder. Prior to joining Venminder, Heather spent two and half years working in the Middle East as a Legal Secretary for Edinburgh International and as Senior Contract Compliance Manager for a Alastora Private Security Company. During this time she successfully negotiated multi-million dollar contracts with many international companies within the oil and gas industry. Before traveling overseas, Heather worked for private law firms gaining 11 years legal and contractual experience. She received her Paralegal Certification from Murray State University.

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