4 Most Important Parts of a Logistics Services Contract

Contracts are a necessary part of defining expectations and securing excellent results in the logistics industry. However, negotiating them isn’t always a comfortable process.

You might be tempted to “sign on a handshake” or leave important considerations undefined to preserve a business partnership, but this could leave you in a difficult position if a problem arises. Make no mistake: you absolutely need a well-written logistics services contract, and it should have these four important functions to provide you with the most trustworthy business protection.

1. Liability and Consequential Damages

When a box arrives to your customer in a damaged condition, or a component is shattered in transit, your customer is most likely going to look to you as the manufacturer or distributor to “make it right” regardless of who delivers it. This is why it’s so important to have respective damages and liability responsibilities clearly defined in your 3PL agreement.

Without these expectations clearly spelled out, much will be left to chance. A good 3PL partner will, of course, will help make sure explicit contractual language exists to ensure there are no miscommunications in the process.

This language also helps the 3PL partner adapt more quickly to working with you: the product expert.

When you communicate how pallets should be configured and how the product should be stored, there will be fewer questions and “trial and error” challenges as your businesses initially collaborate.

The Uniform Commercial Code identifies the duty of care imposed upon the 3PL warehouse, which is often referred to as the “reasonable care” standard. As such, a 3PL’s warehouse liability for loss and/or damage to goods in its possession is limited to that which is attributable to its negligence subject to a negotiated limitation.

While delivering an intact product is important, storage concerns are especially important for the food, beverage, and pharmaceutical industries. For food and beverages, without clear temperature parameters, the improperly stored product could become contaminated or ferment while not changing outward appearance. Imagine if a cheese manufacturer reassured a logistics partner that their products were stable at “ambient” temperature. If the manufacturer’s version of “ambient” is higher or lower than their 3PL partner’s, the product quickly becomes unsalable, and neither party realizes a mistake has been made until a customer complains.

For pharmaceuticals, changes in temperature, humidity, and even vibrations can change or mitigate medicinal efficacy, leaving patients without the products they need and exposing pharmaceutical firms to liability. Unlike the previous cheese example, customer complaints might not arise in time to stop a significant medical challenge, leading to even greater issues.

All of these issues are easily avoided by addressing specific issues in your 3PL contract. This section should outline:

Exact parameters for storage––temperature, humidity, movement, storage time, and so on.
A reporting system to indicate how these parameters are to be adhered to, hence resulting in less potential exposure.
Contingency plans if those parameters fail for a certain period of time. (Should the affected product be moved to coolers, transferred to another company, or discarded?)
Chain of contact if unique issues or questions arise.

2. Contract Term and Termination Obligations

As a service provider, a 3PL is primed to deliver the best experience possible to their clients. For larger accounts, this might take the form of substantial changes to warehouse infrastructure, or even dedicated storage and shipping facilities. A logistics provider is happy to make these efforts on behalf of their clients, but understandably the 3PL needs reassurance in return.

Just as you may enter into volume contracts and obligations with your supply chain partners to secure discounts or consistent delivery, a 3PL needs commitment to thrive. They need to sign dedicated contracts with staff and facilities to build customized infrastructure, secure equipment, capital expenditures, and real estate (be it leased, purchased or built), and they will need a specific obligation from your company to do so––a defined term of service in the contract and how outstanding obligations are to be addressed at the end of the business relationship or contract term, e.g., equipment leases, real estate, fixtures.

A defined term allows your financial team to anticipate costs accurately, allowing your company to grow sustainably and also supports your business relationship with your 3PL. The length and depth of those terms will vary widely depending on your industry and logistics needs, but your logistics partner can make suggestions and explain their requirements to speed up the process. This results in a win-win for both parties and important cost savings for you.

3. Warehouse Lein

No business has a goal to “go under,” but it’s an unfortunate reality of business that can happen. A warehouse lien in your contract offers a smart solution: a uniform commercial code process to confirm status as a secured creditor in the event of bankruptcy, and freedom to liquidate a portion of held product to satisfy the debt. In bankruptcy, this process must go through bankruptcy court to enforce the lien, providing a distinct timeline to keep everyone on the same page.

Unlike a transportation lien which only covers the product on a truck, a warehouse lien extends to all the product in a warehouse, giving your 3PL flexibility for satisfying the outstanding debt.

Placing a warehouse lien in your contract strengthens your partnership with your 3PL and gives them a type of collateral in the event something financially devastating happens.

With business bankruptcy timelines stretching far beyond personal ones––more than a decade, in some cases––a warehouse lien can provide evidence of secured status in a bankruptcy, which gives clarity and security for both a business and their logistics partner.

4. Compensation

The type of compensation you’ll be negotiating is perhaps the most obvious item of importance for your contract. Whether you’re opting into a management fee with costs passed to the consumer, or choosing a static rate based on unit volume, including a well-explained compensation plan will help you define your expenses and your 3PL partner’s financial expectations.

Part of your contract negotiations should be a detailed discussion about any and all value-added warehousing services your company anticipates using, in order to break out those costs. From product handling services to overtime for warehouse staff during your busy periods, hashing out these costs beforehand keeps the machine of logistics-driven commerce working.

Bear in mind flexibility will always need to enter the picture during the contracting stage. All companies aspire to grow and become more successful, and growth doesn’t always follow a predictable financial path, but a good contract can adapt accordingly.

To Sum It All Up

These four keystones of a solid logistics services contract, in addition to others, will protect your business, your clarity of communication, and your collaborative relationship with your 3PL partner. They’ll also help you avoid financial surprises, and keep your product viable and ready for market no matter what conditions arise.

Now, you’re ready to tackle a contract which meets your needs head-on, dive deeper into the contract execution with our free guide: 3PL Contract Best Practices.

​4 Most Important Parts of a Logistics Services Contract