Multi-Year Contracts

What are Multi-Year Contracts?

A multi-year contract is a legal agreement for the provision of goods or services extending beyond a single year. Unlike annual contracts, multi-year agreements don’t require renegotiation or renewal each year. Instead, they provide stability and continuity for an extended period, typically between 2 and 5 years.

The defining characteristics of multi-year contracts are:

  • Duration: They last for more than twelve months and can span up to five years.
  • Funding provisions: Performance in subsequent years is normally contingent upon the appropriation of funds. If funds are not appropriated, the contract may allow for a cancellation payment to the contractor.
  • Flexibility and amendments: Contract modification is allowed when all parties agree to the changes.
  • Legal and financial security: Multi-year deals usually include provisions that protect both parties from price volatility and ensure a consistent supply of goods or services at a favorable price over the contract term.

In B2B sales (especially at the enterprise level), multi-year contracts are commonplace. They allow businesses to plan their budgets and operations with more certainty, while providing suppliers with a stable revenue stream. For the buyer, a longer-term deal normally comes with volume discounts, bundling options, or other incentives in return for guaranteeing that commitment to the supplier.

Synonyms

  • Multi-year deal
  • Multi-year agreement
  • Long-term contract
  • Multi-year SaaS contract

Examples of Multi-Year Contracts in B2B

There are several different types of legal agreements in the B2B space. Each has its own contract elements and dynamics, requires different negotiation tactics, and serves a different purpose.

Let’s take a look at some of the most common types of long-term agreements you’ll see in business-to-business transactions:

1. SaaS Multi-Year Contracts

SaaS contracts sometimes involve commitments of two to three years and can include various types of agreements:

  • SaaS service agreement: Defines the relationship between the SaaS provider and the customer, detailing the software access, service levels, and payment terms.
  • SaaS subscription agreement: Customers pay for access to the software on a recurring basis, typically monthly or annually, with clear pricing and billing schedules.
  • SaaS licensing agreement: Outlines the terms and conditions for the use of licensed software, such as proprietary software or open-source code.
  • SaaS service level agreement (SLA): Sets performance standards, uptime guarantees, and response times for the SaaS product.

A longer-term SaaS contract provides benefits like price stability, protection from annual price increases, and savings in time and resources for vendors of core, everyday software (e.g., CRMs). In some cases, they also account for gradually increasing usage levels, so customers can scale up their usage as business needs change. This is called a ramp deal.

2. Service Contracts

Service-based multi-year contracts cover the provision of ongoing services over multiple years. Generally, they include terms for payment schedules, service levels, and procedures for handling disputes.

In the B2B world, examples of these contracts include:

  • Maintenance contracts — Can cover anything from software support and upgrades to equipment maintenance.
  • Managed services agreements (MSAs) — Typically involve outsourcing a business process to an agency or third-party provider. They can cover a wide range of services, from customer support and data center management to HR/recruitment services and marketing. 
  • Consulting agreements — Covering consulting services like project management, IT consulting, or business strategy.
  • Retainers — Contracts between a client and a service provider where the client pays a recurring fee in exchange for a specified amount of the provider’s time or services. It’s commonly used in digital marketing services.
  • Outcome-based contracts — One party pays the other, either partially or wholly, based on the performance or achievement of pre-defined targets. For example, an ad agency might charge based on the number of leads or conversions they generate for a client.

Businesses engage in long-term agreements with service providers when they (a) already have a solid relationship with the provider, (b) consistently need a high volume of services, and (c) want to guarantee the quality and availability of the services they need.

3. Supply Contracts

Supply contracts are common in procurement and B2B manufacturing. They ensure that the buyer has a consistent flow of goods or materials over an extended period while protecting them from price fluctuations and supply chain disruptions.

The types of supply contracts used depend on the nature of the goods or materials and the risk involved. Some common supply contracts include:

  • Fixed-price contracts — The buyer and supplier agree on a fixed price for the goods or materials, regardless of market fluctuations.
  • Cost-plus contracts — The buyer and seller agree to a cost-plus pricing model, where the buyer pays the cost of materials plus a fixed markup for production and delivery.
  • Requirements contracts — The buyer purchases a minimum quantity of goods from the supplier over the contract period, with pricing based on anticipated demand.

Supplier contracts benefit businesses by locking in prices, reducing risks associated with market volatility, and securing continuous supply, which is critical for production planning and cost management​.

4. Co-Development and Co-Manufacturing Contracts

These contracts involve collaborative efforts where suppliers or partners invest upfront in technology, machinery, or workforce to support long-term projects. They are common in industries requiring significant initial investments and long-term commitments to realize returns.

For example, co-manufacturing contracts are standard in the pharmaceutical industry, where multiple parties collaborate to conduct research and clinical trials for new drugs.

They’re also prevalent in CPG (consumer packaged goods) industries like food and beverage and cosmetics, where multiple partners co-develop new products or manufacture them on behalf of the brand owner.

Such contracts are often complex and involve detailed terms around ownership and intellectual property, in addition to the standard terms of a long-term contract.

5. Government Contracts

Multi-year contracts in the public sector — particularly in defense, infrastructure, and technology — are structured to cover long-term projects that require consistent funding and performance over several years. They include clauses for appropriations and performance metrics to ensure accountability and compliance.

Government contracts typically have strict requirements and guidelines on procurement, bidding processes, and pricing. They also involve detailed terms around intellectual property, confidentiality, and data protection.

6. Reseller Agreements

A reseller agreement is a contract that allows one company to sell products or services from another company as if they were their own. It provides an efficient way for businesses to expand their reach and increase sales without the cost of developing anything new.

There are several types of reseller agreements. These include white-label agreements (the reseller can rebrand and customize the product), non-exclusive agreements (the supplier can also sell to other resellers), and master agreements (the reseller has control over a network of sub-resellers).

Reseller agreements also typically include terms around pricing requirements, product specifications, and marketing guidelines. These are put in place to protect the creator of the original product and ensure consistency in brand messaging and quality control.

Benefits of Multi-Year Contracts

Most B2B contracts are bilateral, meaning they are between two parties, and they outline the mutual obligations of the parties involved (e.g., payment in exchange for service delivery).

Benefits of multi-year contracts compared to short-term ones include financial stability, the opportunity to develop long-term strategic partnerships, and resource savings due to reduced frequency of negotiations.

Let’s dive in.

Benefits for Suppliers and Sellers:

  • Guaranteed revenue and predictable cash flow for an extended period
  • Less immediate risk of customer churn
  • Reduced cost of sales and customer acquisition
  • Greater bargaining power in negotiations with suppliers and sub-contractors (e.g., bulk purchasing discounts)
  • Opportunity to build stronger relationships with clients and develop a deeper understanding of their needs
  • More significant investment potential in technology, machinery, and workforce due to longer-term ROI
  • Streamlined fulfillment and production planning 

Benefits for Buyers and Customers:

  • Price stability, especially for goods or services with volatile market prices
  • Risk reduction due to supplier commitments and performance guarantees
  • Improved product quality through long-term partnerships and feedback mechanisms
  • Greater efficiency in procurement and supply chain management
  • Opportunity for co-development and customization of products or services to meet specific needs
  • Cost savings through volume discounts and reduced transaction costs

Challenges of Multi-Year Contracts

All that said, long-term contract commitments also require careful consideration of terms to mitigate risks such as supplier non-performance and potential hidden costs. Sometimes, it’s better to enter a shorter agreement (e.g., annual renewals) with possible contract extensions based on performance and mutually agreed-upon terms.

Here’s a look at the challenges businesses tend to face with multi-year contracts:

Challenges for Suppliers and Sellers:

  • Limited flexibility in adjusting prices or terms due to long-term commitments
  • Potential for resource constraint and inability to take on additional projects or clients
  • Increased risk of non-payment or payment delays by buyers
  • Dependence on the buyer(s) for continuous demand and revenue
  • Difficulty in predicting market trends and adapting to changing industry landscapes 
  • Possible profitability loss if market prices drop significantly

Challenges for Buyers and Customers:

  • Potential for service or product quality degradation over time
  • Limited flexibility in changing suppliers or terminating the contract if performance is unsatisfactory
  • Difficulty in incorporating new technology or practices if long-term solutions are too rigid
  • Dependence on a single supplier or service provider for extended periods 
  • Possible lock-in followed by massive price hikes or unfavorable terms upon renewal
  • Potential for overpaying with changing market conditions.

Elements of SaaS Multi-Year Contracts

SaaS agreements cover how end-users access and use a vendor’s software over the Internet. Since they govern the use of something intangible (software) over a specific period, they have different characteristics from long-term manufacturing or procurement agreements.

Now, let’s take a look at the core elements of a multi-year SaaS contract:

Contract Term and Renewal Options

The typical SaaS contract lasts 2-3 years. However, some agreements can be as long as 5 years. Some benefit-driven pricing models (e.g., usage-based pricing) may require shorter timeframes or periodic reviews. But for the most part, SaaS vendors prefer multi-year agreements to ensure customer retention and steady growth.

As for contract renewal, buyers typically have the option to extend the contract for a set period. However, some vendors structure their agreements with auto-renewal clauses, meaning the contract automatically renews unless the buyer opts out within a certain timeframe (e.g., 30 days before the end of the term).

Pricing Structure and Adjustments

In just about every multi-year contract, there is some sort of financial incentive for the buyer. The most common incentive used in software contracts is a discounted price for committing to the application for multiple years (e.g., “2 months free each year” or “10% off with annual payments”).

In the case of enterprise SaaS pricing, it’s custom. The vendor reviews the client’s specific requirements and tailors a plan based on usage, number of users, and other variables. If there are usage-based components, those will be baked into the final cost as well.

In a lot of long-term deals, SaaS businesses use ramp pricing. This is usually to accommodate companies that expect a larger volume of users or usage with time. Sometimes, it’s used alongside tie-ins to inflation indexes. 

For example, a company planning to open a new office might want to plan ahead for the additional headcount. The pricing structure might start with a flat fee in the first six months, followed by an increase once the team opens the office and hires team members to work there.

As an added benefit, this agreement helps the software provider to maintain overall margins while allowing their client to grow into the platform and realize cost benefits.

Another way SaaS companies adjust prices in long-term contracts is through annual or bi-annual price review clauses. These clauses set a predefined percentage increase or decrease in the price based on certain performance metrics or market conditions.

Most of the time, multi-year contracts come with early termination fees. The vendor usually sets these based on the remaining term, and their purpose is to recoup any revenue lost from a customer breaking the agreement. 

Recurring Billing Schedules

In every contractual agreement, buyers and sellers have to agree on when and how much they’ll pay. And the SaaS revenue model is based on recurring billing according to subscription cycles.

In multi-year contracts, recurring payments typically happen on a monthly or yearly basis (though some companies bill quarterly). The exact billing schedule is often based on the contract term and agreed-upon pricing structure.

Implementing an automated billing solution is one of the most essential SaaS billing best practices. With billing automation, payments are automatically charged to the customer’s credit card or bank account on the agreed-upon schedule. This eliminates the need for manual invoicing and payment collection processes and significantly reduces the risk of late payments and involuntary churn.

Service Levels and User Management

The primary purpose of a multi-year SaaS agreement is to secure the delivery of a service. As such, it’s essential for both parties to agree on service levels. SLAs (service level agreements) set out the expectations and responsibilities of each party.

In these agreements, vendors commit to:

  • Uptime guarantees
  • Issue resolution times
  • Support availability hours
  • Other performance metrics specific to the software being provided

From the customer’s perspective, there should be provisions for managing user access and permissions. This could include the ability to add new users up to a certain threshold, with tiered pricing for additional users.

It’s also important for the buyer to have control over which users can access which features and data within the platform. This often involves setting up different levels of permissions for different user roles (e.g., administrator vs. regular user).

Data Security and Intellectual Property Rights

When it comes to software, data security and intellectual property (IP) are significant concerns for both buyers and vendors. In a multi-year contract, IP rights should be clearly defined to avoid any potential disputes over ownership or usage of data generated by the software.

Additionally, strong data security measures should be outlined in the contract to protect sensitive information from unauthorized access or breaches. This could include regular data backups, encryption protocols, and disaster recovery plans.

Considerations When Negotiating Multi-Year Contracts

Even if you have standard protocols and pricing structures for multi-year deals, each will be at least somewhat unique to the buyer you’re working with. So, contract negotiation plays a big role in whether you can (a) make deals customers are happy with while (b) making sure those deals are feasible for your business.

Here are some key considerations when negotiating multi-year contracts:

  • Length and renewal terms. How long will the contract be for, and what are the options for renewal? Can the customer opt-out at any point, and if so, what are the consequences?
  • Pricing and adjustments. What is the agreed-upon pricing structure, billing schedule, and potential for price increases or decreases? How will you determine adjustments?
  • Service levels. What are the expectations and responsibilities of each party when it comes to service delivery? Which performance metrics will you use to measure them?
  • Early termination. Under what circumstances can the customer terminate the contract early? What about the vendor? What are the associated fees or penalties?

To successfully negotiate a contract, both parties must have a thorough understanding of each other’s needs and expectations. It’s important to be flexible and willing to compromise while also protecting your business’s interests. It helps to go into the negotiation with a floor and ceiling for what you’re willing to agree to, so you know when to walk away if the terms aren’t favorable.

Advantages of Contract Management Software in Managing Multi-Year Contracts

The right contract management software is an invaluable tool in closing deals. Not to mention, it can improve the contract management process by saving your team hours of manual work, reducing human error and the risk of non-compliance, and improving collaboration across departments.

Here are some of its specific advantages when it comes to managing multi-year contracts: 

  • Automated renewal reminders and alerts to ensure timely contract renewals
  • Centralized contract repository with version control and audit trails
  • Customizable contract templates and approval workflows for efficient contract creation and execution
  • Integration with billing systems for seamless invoicing and payment processing
  • Advanced reporting capabilities to monitor contract performance
  • Secure storage and sharing options with permissions control to protect sensitive contract data

People Also Ask

What are the typical lengths of multi-year contracts?

The duration of most multi-year contracts is 2-5 years. However, it really depends on the nature of the software and the needs of the organization buying it. Some, like healthcare or government agencies, may require longer contract terms.

What happens if the customer’s needs change during a multi-year contract?

Sometimes, customer needs change during a multi-year agreement. That’s why it’s important to have provisions for early termination and contract adjustments built into the agreement. This allows both parties to make changes or end the contract without major consequences if they meet certain criteria.

How much of a discount should I offer for a multi-year contract?

Most companies offer a discount somewhere between 10% and 20%. That said, you should only offer a discount that makes sense for your business and doesn’t jeopardize profitability. It’s also important to consider the value of the long-term commitment from the customer.