Wolf&Grayson EditorialSpotting the Hidden Traps in Vendor and Broker Agreements
Vendor contracts often hide expensive traps that can lock businesses into unfavorable terms for years. These agreements may contain automatic renewal clauses, liability shifts, and hidden costs that companies frequently overlook until it’s too late.
John Carpenter, National Practice Partner with ERA Group, has spent years helping businesses identify these red flags before they become costly mistakes. His consultancy helps companies “find the money that’s hiding in their expense stream so they can pay for the goods and services they need to run or expand their operations.”
Carpenter’s background includes 15 years as an elected official, where he gained firsthand experience in contract negotiations and fiscal responsibility. During that time, his team managed to lower taxes three years in a row and ultimately eliminated all municipal debt. “Responsible spending has been in my DNA for my whole life,” Carpenter explains. “It served me well in public service, where we did extraordinary things with taxpayer dollars—especially saving money.”
The Evergreen Contract Problem
One of the most problematic provisions Carpenter encounters is the automatic renewal clause. “Evergreen contracts require you to terminate at least 90 days before the contract end date, or you’re locked in for another period. I can’t tell you how many businesses get caught in those clauses,” he says.
The timing makes it especially difficult for busy executives. “Who’s thinking 90 days ahead about renewing a contract in a small or mid-sized business? If you’re not tracking it, it’s easy to miss. Even one day late, and you’re stuck for another term.”
This issue often prevents companies from acting when they’re unhappy. “I’ll talk to someone frustrated with their employee health benefits or medical supply costs, and we discover they’ve already missed the termination window. Their contract may be up in a month, but they’re already locked in for another year or two.”
Carpenter’s rule of thumb: “A healthy termination clause should be equal on both sides. Either party should be able to terminate for convenience with 30 or 60 days’ notice.”
Broker Agreement Transparency
Insurance broker relationships create unique transparency challenges. “Brokers are compensated two ways,” Carpenter explains. “They get paid when you pay your bill, and they also receive money on the back end from the insurance carriers where they place coverage.”
Most business owners don’t realize they may have access to part of that back-end compensation. “Unless you’re savvy, that money is invisible.
Carpenter’s rule of thumb: You can’t just call your broker and demand a share—but if you have someone who understands the industry, that money can sometimes be made accessible.”
Indemnification Issues
Another major red flag Carpenter highlights is liability shifting. “Sometimes clients end up indemnifying their vendors and essentially becoming the vendor’s insurance company. That’s a nightmare scenario.”
Even when vendors agree to indemnify, the protection is often inadequate. “The supplier may only indemnify up to the annual contract value. If they make a $2 million mistake but you’ve paid them $100,000 in the past year, the most you can recover is $100,000.”
Subcontractors complicate matters further. “Vendors may be opaque about who their subcontractors are—and still ask you to indemnify them.
Carpenter’s rule of thumb: Any contract that makes you your vendor’s insurer is bad.”
Conclusion
The key to healthier vendor relationships is involving experienced procurement professionals—whether in-house staff or external consultants—who understand industry-specific pitfalls and market standards.
To learn more, connect with John Carpenter on LinkedIn or visit his website for smarter strategies in contract management.
