What is a multi-year contract?

Whether you’re looking to arrange services with your customers or organize your relationship with suppliers, you’ve probably considered using a multi-year contract. 

Multi-year contracts allow agreements to last longer than 12 months, offering a degree of financial stability that is especially welcome for businesses grappling with rising inflation and price fluctuations.

In this article, we’ll explain how you can use them and their benefits and downsides.

What is a multi-year contract?

A multi-year contract is simply a contract that covers a period greater than 12 months.

You can use them for various purposes and across a whole range of industries.

They are commonly used in the software as a service (SaaS) field.

For example, you might agree to use a specific contract management software for two years rather than one, which enables you to access a discounted price.

How long is a multi-year contract?

While there’s no upper limit on how long a multi-year contract can be, some regulations require that contracts be no longer than five years. 

Most commonly, multi-year contracts extend for two or three years. 

Multi-year contract example: How do they usually work?

Multi-year contracts are not too different from shorter-term ones.

The only difference is that the terms will bind you and the other party for longer. 

You’ll still be able to use contract templates for multi-year contracts, allowing you to speed up the creation process no matter how long they last. 

Apart from that, you’ll just have to be wary that multi-year contracts usually require more negotiation than their shorter counterparts.

This is because both parties need to be extra cautious about the terms of the agreement, as they’ll be locked into the contract for longer. 

Benefits of multi-year contracts

When you’re arranging a contract, you’ll want to ensure you get the best deal possible. Fortunately, multi-year contracts offer several benefits for both suppliers and customers:

Financial security 

The past few years have taught us all about the value of economic stability.

With inflation rising, moving between short-term contracts could throw up a nasty surprise in the form of a considerable price increase.

Multi-year contracts give both parties an assurance over prices.

If your business focuses on selling goods or services, you might be worried about multi-year contracts leaving you paying more for supplies without your income rising.

However, many multi-year contracts are linked to inflation, so you can be confident about your financial security.

Mutual confidence

Unless one of the parties decides they need to find a way of terminating a contract, multi-year contracts ensure that you’re locked into a business agreement for a significant period.

This means that your relationships will grow.

You and the other party will develop confidence in one another as you can be confident that your futures are linked.

Saved resources

Negotiating contracts takes a lot of time and money.

Although contract software has made it easier, using a multi-year contract is a great way to ensure that your legal teams have less work to do.

Downsides of multi-year contracts and how to avoid them

The advantages of using multi-year contracts are clear.

However, they’re not the perfect solution for every situation. Here are some of their downsides and how you can avoid them: 

Hidden costs 

While it’s true that using multi-year contracts means you can save on the number of contracts or contract extensions you need to negotiate, the negotiations for each multi-year contract can sometimes be demanding. 

This is because the risks involved are more considerable than with a short-term contract, so negotiating teams tend to be larger.

To avoid surprising costs when negotiating your multi-year contracts, you should carefully consider the added expenses that come with doing so.

Failures to fulfill the contract

Perhaps the biggest worry people have with multi-year contracts is being locked into an agreement with a party that fails to uphold its promises.

An example of this would be an executory contract such as a rental lease where the renter fails to make their regular payments. 

However, you shouldn’t be too frightened of these sorts of issues arising with a multi-year contract.

The risks can be effectively managed by including performance-related clauses or other withdrawal options in the agreement. 

This will mean that you’ll reserve the right to withdraw from the contract if the other party fails to follow their obligations, regardless of the length of the agreement. 

Trust PandaDoc for all your contract management 

So, there are various potential ways you can use multi-year contracts.

While you should be careful of the limitations of multi-year agreements, options such as withdrawal clauses will be able to protect your interests.

But how do you actually make a multi-year contract? This is where PandaDoc can help you.

With its range of templates, insights, and cutting-edge workflow software, you can use PandaDoc to make contract management painless.