Contract management is defined as a process that manages the creation, analyzing and execution of contracts efficiently and systematically. This method is used for delivering optimal financial and operational performance and for minimizing the risk factor to the lowest level.
Meaning of contract management
The contract management is described in simple terms as the management of the contract with employees, partners, vendors, and customers. The system includes addressing any problem with the contract, monitoring and making necessary changes if required, actively interacting with involved parties to achieve desired objectives and to ensure that both the interested parties can surpass each other’s expectations.
Contract management is also known as contract administration as the process handles administrative activities associated with contracts like bid evaluation, an invitation to bid, contract implementation, award of contract, computation of payments and measurement of completed work.
A contract manager must have the necessary legal knowledge and training to handle the contract management process in an accurate manner. The precise wording is one of the most critical aspects of contract management and should be handled with care to maximize profitability and minimize risks.
Understanding contract management
When two organizations decided to work together for a common goal, they need a contract to define their relationship, objectives, work method and goals in explicit language so that issues do not arise afterward. It is the contract that specifies the activities both will be responsible for and the terms and conditions that each one of them will have to fulfill as part of the bargain.
Remember the contract has a direct impact on the profitability of a business. When it is phrased poorly, the firm can lose a massive amount over simple technical fault, or if it is one-sided, then the other side will lose a large chunk of its profit share. One must have an effective contract management process in place because it has the power to create a strong business relationship between involved parties that could down the road lead to better productivity and higher profitability.
Contract management is an on-going process that lasts throughout the contract life. It might seem that a contract is signed and the process comes to an end, but the fact is that the activities continue before, during and after the signing on the dotted line. It is the contract management system that ensures all the involved parties understand what is expected of them and continue to fulfill their contractual obligations and duties as per the terms stated in the contract.
Activities related to this process are grouped under two phases
- Pre-contract award phase
- Post-contract management phase
Both the phases are crucial, and equal emphasis must be given to them. If you lag, in the first phase, the repercussions will continue to the next one where you will be left with correction of omissions, and this will prove wastage of effort and time.
Some of the standard commercial contracts that are dealt with by personnel who handle contract management are for
- Utility contracts
- Purchase orders
- Sales invoice
- Employment letters
Some of the complex contracts are dealt for
- Intellectual property agreements
- Goods or services that have technical specifications in detail and have to be minutely dealt with
- Highly regulated goods and services
- Construction projects
- International trade
Elements of successful contract management
When a contract management strategy is implemented successfully, organizations are expected to:
- The delivery of services from all the interested stakeholders is satisfactory from the viewpoint of all the parties
- There are no surprises or disputes about the contract on the way
- The supplier that an organization has associated with is responsive to its needs and handles every part of his obligation co-operatively and efficiently
- The organization has some expectations from the contract, and the expected financial returns and benefits are realized.
Stages of contract management
Contract management is no doubt a time-consuming process where you have to spend considerable time in going through the nitty-gritty details; otherwise, any overlook will come back to bite and harm the business to a very great extent.
Everyone must follow all the steps of the contract management process correctly to reap financial advantages. Remember, whenever a person enters into a contract, he opens himself to several vulnerabilities and potential risks.
The different stages of contract management help in mitigating financial and legal risks hence follow them diligently.
1. Initial requests
The first stage of the contract management process is to identify your reasons for going after this contract. Why do you need this contract is one of the most critical questions that should be addressed at the first opportunity?
Once you have acknowledged the need and reason and the things you want to accomplish with this contract, then the rest of the decisions becomes easier. It is now the time to contact the other party who can help you in your endeavors and make the initial request
2. Authoring contract
The next stage of the contract management process is about authoring the contract. This is one of the most crucial steps and needs due diligence. Remember a legal contract is binding, so you must give it your consideration and approach it carefully. Make sure you are mentally prepared with your list of things that should be addressed at every cost.
Think about the possible scenarios that can happen in the future, for example, what happens when the other partner files for bankruptcy or sells his business to another party. Several other like-minded contingencies need to be addressed at this point. Do not give any leeway via your words as there must be no chance of misinterpretation. Be specific in your wordings and state every clause in a clear and precise manner to avoid confusion in the future.
An important thing to know about is whether the state laws of your state will guide the contract or the state laws of the other party and are the same or several differences need to be addressed. Conduct research and consider the state laws before writing the actual words in the contract. Gather all the pertinent documents that will be required for the contract.
If you are finding the writing of a contract a time-consuming activity, you can take the help of an automated contract management system so that the process becomes streamlined. Another option is to hire a professional contract manager, who also has the legal know-how to handle such cases.
A professional can see that your interests are fully protected and all the concerns are appropriately addressed in the contract.
3. Negotiating the contract
There has been due diligence, then research and planning and later authoring of the contract. It is not yet the final copy because a vital stage is still left, and that is of negotiating the finer points of the contract. The party that can negotiate appropriately comes out with the winning hand in the end hence have access to essential and relevant details that can help you on the negotiation table.
Be ready with reports about the capabilities of employees, vendors and potential partners along with the bid overview. All pertinent details must be at your fingertips to understand the intention of the other party. Go through all the information minutely to understand the viewpoint of the other party.
Pay special attention to details in the contract and think like your adversary so that you can know about the points that they can raise. Identify the points on which negotiations will take place and make sure you have your answers with you beforehand. Once you have drafted your contract, both involved parties must compare the versions and note any discrepancies to save time.
Some people believe in sending red-lined contracts back and forth through mail or email, but there is a chance or error. You can take the help of your professional contract manager for this purpose or can use contract management software so that both the involved parties can view and review documents and make changes in real-time.
This will save time and result in faster negotiations if time is a factor for the parties.
4. Approving the contract
The negotiations are complete, and the final draft has been rewritten because both parties are in agreement. Now is the time to get the approval for the contract. This is the stage where the chances of bottlenecks are the highest.
If you are a part of an organization that requires approval from board of control then you will have to gain it, if you are part of a company that needs managerial approval then get it if you have audit process then also acquire it, if your company issues procurement policies then make sure they have met before you seek the desired approval.
If you are a freelancer with no auditor or manager, then re-read the contract and make sure it is a perfect match to whatever conditions that were agreed upon. It is imperative to remove every impediment in your way to ensure all the requirements for the so-called approval are met before the next stage.
5. Execution of the contract
The next stage involved in the process of contract management is executing the contract. This part looks so simple because everything is ready; it just needs a couple of signatures and viola the contract is prepared to be implemented. Are you aware that the simple process can take a turn and cause severe issues if both parties are located in two different states or parts of the world?
If you are operating on a strict deadline, then there are bound to be issued. Some people can consider overnight delivery or express mail, but there exists a chance of a mishap. As times are changing, companies are relying on electronic signatures that are equally binding.
The signature process is admirably shortened through the usage of electronic signature, and as its validity is not in question, it is the perfect way to validate your contract mainly if you belong to different time zones or are situated in different parts of the world. Remember a contract is not valid until all the involved parties have signed it; hence, why take unnecessary risks because of such an inconvenience.
6. Obligation management
As the name of the subheading suggests this stage of contract management ensures that all the obligations are managed on time and that too effectively. It takes skill to make sure that each party is meeting their deliverables, and no one has forgotten their obligation towards the contract.
It is an early phase where it will take time to be in sync, and it is up to the process manager to see that the contract’s value is not minimizing. Take the help of schedule reminders so that every stakeholder can keep to his part of the bargain, and there is compliance from your end.
7. Revisions and amendments
Leave some scope for modifications and corrections so that things can adapt to any significant change. Sometimes overlooked items or documents are found after drafting the contract, it is imperative that after deciding on its importance they are added to the contract as part of amendments.
There are bound to be revisions with changing environment throughout the life of the contract hence it is better to implement a reliable process that can keep track of things and decide which revisions and amendments should be added to the original contract so that it is still able to deliver optimal productivity and the highest profitability.
8. Auditing and reporting
Yes, the contract is signed, and the deal is through, but it is better to audit it to ensure all the involved parties comply with the set terms and conditions. Sometimes some parties do not take this stage of contract management seriously and later repents because failure in auditing can have repercussions and unforeseen issues like missed deadlines and lost revenues.
Set alerts as a reminder for renewals and deadlines so that they can are met timely.
The most crucial stage of a contract management process is the stage where you can renew your contract. Stay alert and set alarms to remind you of renewal timelines because it can have dire consequences if you fail to do so on time.
You can also automate the process because if you fail to renew the contract, then it can lead to lost revenues, back-end operations and even setbacks in your operating system.
Dangers of failing to manage a contract
The contract management process is essential as it helps in making clear-cut decisions about the contract so that any of the involved parties do not have to suffer for inefficiency. In case the contract is not managed correctly then it can lead to the following adverse outcomes –
- Both the involved parties, the buyer and the supplier, want to win this game of tussle because whoever gains the upper hand will be in control of the contract. If anyone wins, then it will result in unbalanced decisions that will prove harmful from the word go. This scenario is a possibility if both or any one of the parties fail to manage the contract properly
- When a contract is not executed correctly, the progress is slow and does not move forward as per the set expectations
- Sometimes decisions are not made in a timely manner, and this leads to changes in a contract at a later date. It causes inconvenience, and this is because of wrong handling of the contract
- Failure to manage contract can lead to misunderstandings and differences between the buyer and supplier
- The relationship between a buyer and supplier can be damaged to a great extent if the contract is not managed correctly.
- It can also mean failure to meet responsibilities and obligations stated in the contract
- The expected advantages and value will not be realized if the contract is not managed in a proper manner
- When a contract is not executed as per the needs, then there is a higher chance of missing out on future opportunities
Process of a contract management
The process of contract management includes the following steps
1. Enabling contract management
This phase ensures shared understanding as well as the distribution of responsibilities and dealing with potential disputes and changes. For this proper processes and procedures are kept in place to keep the efforts focuses and monitor performances.
2. Contract performance monitoring and control
The procurement officer, must collect relevant information, monitor performances and measure contract achievement after the contract has been awarded. The techniques and the resources are dependent upon the nature of the contract work, the availability of the resources and the complexity and size of the resources.
3. Change management
Change management is the process that allows integrating the necessary and relevant changes into the contract and avoiding the unwanted changes that will not have an impact on the contract. There should be formal procedures in place for controlling modifications, for making changes and limiting the number of people who are entitled to make changes.
It is essential to keep in mind that it is the written agreement that is valid and legal and undocumented and informal conditions will not be entertained. Any modifications will have to be formally modified to have legality.
4. Dispute management and resolution
There can be numerous reasons for disagreements between the involved parties, and these are considered a normal part of a contract. There can also be a difference of opinion amongst the professional in the course of execution of the contract.
The process of contract management must have a procedure in place that can help to resolve disputes and disagreements regarding the interpretation and responsibilities of the contract. There also should be a provision for a request of change during contract execution and for reviewing any disputes. A process must be implemented where it clearly states which party has the responsibility of specific activities, and it is also vital that the other party respect that responsibility.
In no circumstances shall the involved parties allow disputes and disagreements to prevent the actual execution of the signed contract. There should be a definite inclination towards committing to the contract so that an amicable resolution can be reached whenever a dispute or disagreement happens. It is a fact that conflicts and claims are unavoidable but if inclined, can be resolved peacefully.
5. Financial management and payment
It is the right of the supplier to demand that payments are made as per the condition mentioned in the contract on time. It can be advance payment, holdback, final, progress or partial payment.
6. Contract completion and close-out
The contract close-out activities are straightforward for purchase orders and smaller contracts. This is not so for complex contracts that involve progress payments or securities.
There is a proper close-out process in place that ensures all contractual obligations are fulfilled and even the residual requirements like guarantees, warranties, and after-sales support and service are defined in respect of responsibility, timeframe, procedure, and liability.
The critical thing to understand is that the contract close-out will occur after the supplier meets the contractual obligations.
Best practices for contract management
Implementing the best possible practices will make the contract management process more useful and ensure that an organization will be able to reap maximum benefits from the contracts. Some of the steps necessary are as follows-
1. Centralized repository
It is imperative that an organization has taken the aid of a centralized repository and is keeping all the contracts in it. This makes it possible for the relevant stakeholders to gain access as per their wishes.
Moreover, this move will help in keeping track of various contract information for instance renewals, obligations, conditions and terms of the contract
2. Enable compliance
The best practice for contract management would be to ensure and enable compliance throughout the lifecycle of the contract that is created. This is very crucial as it assists in sticking to corporate and regulatory requirements and prevents operational and financial risk and loss
3. Ensure team collaboration
Usually, it is the responsibility of the legal department to oversee the process of contract management. This is to make sure that the wording and handling of the contract are as per the required norms and the interest of the firm has been represented in full.
A vital practice would be to make sure that there are also proper procedures in place to express the importance of every stakeholder. There should be communication and collaboration between business units so that a contract can be created that shows optimal productivity and minimal risks
4. Standardized processes
The best practice for contract management will be to set up standardized processes at various stages. This will help in reducing cycle times and inefficiencies in the system.
If an organization uses pre-approved templates that are updated regularly, it will improve the inefficient handling of the contracts.
Benefits of contract management
The benefits of contract management are as follows-
1. Aids in business functioning
If a company has implemented a contract management process, then it will simplify the working and the functions of the company. It will give the mechanism needed to meet and fulfill business expectations and organizational objectives.
The system offers insights to identify and analyze areas that can lead to cost minimization and optimization of revenues
2. Lower costs
The contract management process helps an organization in minimizing its business costs.
3. Increases visibility of suppliers
Suppliers are an integral part of business entities, and it is the contract management process that builds a collaborative relationship with the suppliers, assist in tracking their movement, assessing their performances and evaluating supplier risk.
4. Improved risk management
The contract management process helps to look for uncertainties, and this facilitates improved risk management
5. Nothing left to chance
It is the responsibility of the contract management process to make sure that the supplier’s compliance and commitment are met on time and are not left to chance.
6. Improves compliance
The contract management system helps to implement processes properly so that it ultimately enforces and enhances compliance amongst the stakeholders. This leads to risk mitigation within the company.
7. Relationship development
The contract management process makes sure that the relationship is ongoing between the involved parties for the development of the contract
8. Efficient administration
The contract management ensures efficient administration of the contract and this results in better performance and better value for money
9. Improves functional efficiency
The technique of contract management takes the help of numerous tools and software that aids in automating the contract management process. It reduces manual efforts, lessens the scope for errors and thus aids in improving the functional efficiency of a business entity.
The contract management concept gives the employees of a necessary firm time to put their onus on strategic aspects like identifying the areas that need improvement and evaluation of contract performance.
10. Improves spend visibility and reduces maverick spending
The contract management process helps in performance tracking. It boosts spend visibility and helps to identify opportunities for cost savings. It reduces maverick expenditures, which is one of the critical issues that an organization has to face.
11. Rebate management
The process aids in keeping track of rebates and ensuring the savings in sourcing cycle is captured
12. Helps in auto-renewal of contracts
An essential benefit of the contract management process is that it aids in renewing the contracts on time so that the organization does not have to incur any associated expenses
13. Standardized processes and procedures
The contract management aids in minimizing supply risk and the total effect is that buying as a whole becomes less expensive
Disadvantages of contract management
The disadvantages of contract management are as follows-
1. Loss of service control
One of the disadvantages of the contract management process is that a firm loses actual control over the services it offers to the clients
2. Potential time delays
It is easy to make estimates and set up deadlines, but the contractor might not be as vigilant as everyone thought him to be. When deadlines are not met it results in potential delays and loss of time and money
3. Loss of business flexibility
When a company outsources work to third parties, it minimizes its capacity to adapt to the changing needs of the business environment.
4. Loss of quality
An organization must check the reputation of the firm it is hiring for its contract management because others can’t maintain the same standards as the owner company
Benefits of using contract management software
Most of the organizations have started moving with the changing times, and this means incorporating the use of technology in most of its departments. An essential move in the right direction will be introducing and investing in the contract management software that suits the requirements of an organization.
Remember the right kind of CM software will have a long-lasting impact because of its effectiveness, efficiency, and productivity. Some of the key benefits of using contract management software have been outlined below
1. Automate the process
The contract management software will automate the whole process that deals with the lifecycle of a contract. This will ensure that the manual work is reduced in a significant proportion and ultimately, the move will result in minimizing human errors.
2. Access to critical information
The contract management software is the key through which an organization will be able to centralize the contracts in a cloud system. This will enable all the stakeholders to get access to critical information relevant to the contract and will lead to easy finding, evaluating and tracking the contract information with the help of a few clicks.
3. Reduce contract cycles
The contract management software is a useful tool that will boost the efficiency of every stage of the contract management process and thus ultimately assist in reducing the contract cycles.
It is a proven fact that manual labor from a legal team will prove time-consuming and the same process via an automated software process will reduce the time compared to manual intervention
4. Optimal performances and risk mitigation
The contact management software will be responsible for providing all the relevant information and notification to the stakeholders on time. It will link the contracts to the compliance management and ensure contract deadlines, renewals and payments are made on time. This will aid in optimal performance and risk mitigation to a higher degree.
5. Boost data analytics
The contract management software is powered with automated artificial intelligence that will help in boosting data analytics. Its predictive qualities will provide crucial insights and forecast revenues and cost and the easiest way to drive performances.