Contract Management Essentials for Every Organization

Benefits

Contracts have been used to validate agreements in writing since time immemorial, but the world has come a long way from clay tablets and papyrus scrolls. With the advent of digital transformation, creating and enforcing contracts have become more streamlined, ensuring relevant processes are aligned with the company’s broader Governance, Risk, and Compliance framework.

Here are some of the specific benefits of effective contract management:

• Enhanced Risk Mitigation – Companies can take the necessary precautions or proactively address concerns by following an organized contract management process that thoroughly reviews documents to identify potential risks, such as financial liabilities and operational challenges.
• Improved Performance – Organizations can better track contract management Key Performance Indicators (KPIs), ensuring agreed-upon obligations are being met. This helps them identify potential issues early and take corrective actions to avoid breaches and subsequent disruptions.
• Improved Regulatory Compliance – Following a contract management plan according to the National Contract Management Association (NCMA) standards ensures that all parties adhere to regulations and uphold standards, reducing legal risks and protecting business interests.
• Reduced Costs – Aside from reducing risks that may result in non-compliance, a robust contract management system streamlines routine tasks, such as optimizing approvals, tracking deadlines, and sending reminders for renewals. By automating administrative workflows, companies can reallocate resources to improve their operations.
• Better Stakeholder Relationships – With clear insights into the specific terms and performance of the vendors, businesses can collaborate more closely, resolve disputes promptly, and renegotiate or terminate in good faith.

7 Elements of a Contract

As business relations grow more complex, organizations across industries should take up the most effective contract management strategy that upholds accountability and transparency. The process begins by understanding the fundamentals:

1. Offer and Acceptance – Considered the foundation of a contract, this element ensures mutual agreement after one party makes an offer and the other accepts. The contract is unenforceable without creating a binding agreement.
2. Consideration – This value exchange between parties involves monetary compensation and the provision of services and goods. Consideration separates a legally binding contract from verbal promises.
3. Mutual Consent – Also known as the meeting of the minds, this ensures both parties clearly understand and agree to the terms without conflicts or coercion.
4. Legal Purpose – According to regulatory standards, contracts should be for a lawful purpose. This fundamental element prevents companies from entering into deals that involve illegal activities.
5. Competency and Capacity – All parties should be of sound mind, legal age, and not under undue influence when participating in a deal. Proving competency and capacity prevents issues related to invalidations.
6. Terms and Conditions – This outlines the details in the agreement, such as obligations, timelines, payments, and other critical information, providing a road map for compliance and accountability. With clearly detailed terms and conditions, ambiguities that could lead to disputes or breaches are eradicated.
7. Termination and Renewal Clauses – The provisions specify conditions for ending or extending the contract, helping companies manage expectations for contract duration, particularly to renegotiate terms and avoid unintentional extensions on unfavorable terms.

The Contract Management Life Cycle

Efficiently managing contracts entails following a structured process to ensure visibility that aids in better decision-making. Each phase in the contract management cycle is critical for maintaining compliance, reducing risk, and maximizing the value of partnerships.

Contract Management Life Cycle

1. Contract Creation

Well-drafted contracts set clear expectations for both parties, minimizing misunderstandings and preventing disputes. This phase involves drafting and preparing the initial document, specifying terms, conditions, and obligations.

Here, legal and procurement teams collaborate to draft terms that meet business and legal requirements. Standardized templates for background checks and risk assessments ensure consistency and reduce contract management risks.

2. Negotiation and Approval

Potential partners should hold continuous discussions to align expectations so everyone can agree on mutually beneficial terms. The negotiation stage involves finalizing terms and clarifying responsibilities before securing stakeholder approvals.

3. Execution and Storage

This phase formalizes both parties’ commitment and makes the contract legally binding. After authorized representatives from both parties sign the document, it should be stored in a secure, centralized location.

One of the most recommended contract management best practices is to leverage technology for execution and storage. Software solutions have capabilities like secure digital repositories, quick searches, e-signatures, task management, and analytics that streamline numerous contract management workflows.

4. Performance Monitoring and Compliance

Regularly reviewing contractual obligations and comparing them with actual performance upholds accountability, maintains transparency, and ensures compliance with regulations.

In this phase, relevant managers track milestones, deliverables, payments, and quality by looking into KPIs and utilizing scorecards to measure the effectiveness of the contract and detect possible negligence or outright breaches.

5. Amendments and Modification

Organizations can rework contracts to adapt to evolving needs, changes in scope, and other unforeseen circumstances. Adjusting terms allows both parties flexibility and fairness without violating the terms.

6. Renewal or Termination

Once the completion date of the contract has been reached, the company can decide to either renew or terminate it. Proactively managing this task allows for reassessment and avoids unintentional extensions.

Automating contract management ensures this phase is proactively accomplished. Software solutions for enterprises send alerts on approaching expiration dates and provide relevant data for evaluation.

7. Post Contract Evaluation and Reporting

Assessing the contract’s overall success is one way to improve contract management. Strengths, weaknesses, and lessons learned should be documented and reported as these guide future decisions.