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A balance of contract is a term that is sometimes used to identify the amount of goods and services that have yet to be delivered to a customer under the terms of a contract that currently exists between the client and the provider. Businesses of many different types make use of this phrase when referring to the remaining obligations of the supplier to the client at any given stage in the life of the contract. The term is more commonly employed with retailer contracts, although the concept fits in well with a wide range of customer/vendor relationships that are governed with the establishment of a contract.
One of the easiest ways to understand how a balance of contract occurs is to consider an agreement between a customer and a vendor to deliver 1,000 units of a particular good over the life of a one-year contract. In some cases, the contract will specify specific dates during the life cycle of the product delivery in which a minimum number of units must be shipped to the client. The total number of units named in the contract that are scheduled for future delivery is considered the balance of contract, meaning that the contract cannot be considered fulfilled by either party until all 1,000 units of the good have been delivered to the customer.
A number of factors can affect the current balance of contract. For example, if a client is late making payments on previous shipments, the vendor may choose to delay an upcoming shipment until the account is no longer in arrears. With a volume purchase agreement (VPA), the customer may fail to purchase the minimum number of units to satisfy the terms associated with the discounted pricing. When this is the case, the customer may be assessed the balance of contract, resulting in a charge that offsets the difference between the contractual commitment and the remaining units that must be purchased in order to comply with those terms.
Monitoring the balance of contract is very important for both suppliers and customers. For suppliers, the goal is to use this information to ensure enough units are on hand as of the scheduled shipment date to comply with the customer’s order. At the same time, customers will want to monitor the balance of contract to make sure they are purchasing enough units to retain the discounted pricing extended in the terms of the contractual agreement, effectively avoiding any type of penalties or additional charges when that contract reaches its expiration date.
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