What is contract management? Definition and how to implement effectively

Most businesses will encounter contracts at some point. This could be a contract with one of your customers on their credit terms or a loan you are taking out through a financial institution. Having the right procedures in place ensures a smooth contract management process for all parties involved.

Why is Contract Management Important? 

Contract management is important for a variety of reasons. The right processes promote seamless communication between all parties involved, add transparency to your agreements, and guarantee you are in full compliance with all contract components. Here are a few more reasons that contract management is important:

• Maximize Contract Value – Part of the contract management process is establishing agreement terms. During your contract creation phase, you can ensure that you receive the most favorable terms surrounding payment dates, deadlines, interest rates, and covenants.
• Avoid Costly Court Debates – Contracts are legally binding agreements. Without the proper protocols in place, you could breach your contract, landing you in a costly legal battle. By fully understanding all details of your contract, you can maximize compliance with all parties involved.
• Promote Positive Vendor Relationships – Clarity in contracts between your vendors allows you to build a positive relationship. Let’s say you enter into an agreement with a vendor to purchase a set amount of inventory each month. Effective contract management will communicate all relevant details, like product re-order dates and when payments will be remitted, infusing transparency into your relationship.
• Eliminate Business Disruptions – Business disruptions can be costly, from lost revenue to a hindered brand image. Contract management closely monitors your supplier contracts, double checking that all orders are lined up and everyone is on the same page. Avoiding just one business disruption can be the difference between a profitable year and one plagued with financial losses.

Even if you don’t have a dedicated contract manager, contract management software can help you realize these benefits in your organization.

The Typical Contract Management Workflow

Contract management is a tiered process, starting with contract creation and ending with contract closure. The contract management workflow can be broken down into two main areas: pre-signature and post-signature. The pre-signature phase involves all of the work prior to a contract being signed, while post-signature manages your contract after a binding agreement is in place.

Pre-signature phases will include steps one through three, with post-contract management starting in step four. Both phases are crucial for overall contract management. Nevertheless, here’s the typical contract management process:

Step #1: Initiation

The first step in contract management is initiation. Here, you will start gathering preliminary information, such as information about your supplier or lender and other requirements. The initiation phase will also define the processes all parties are to follow, such as how communication will be handled.

Step #2: Contract Negotiation

Now, it’s time to start the contract creation process by outlining tentative contract terms and agreements. Here, you will work out the fine details of your contract, including solidifying dates, involved parties, and each party’s performance obligations. You might also enlist the help of lawyers and other professionals in this phase to verify the contract’s legal reach.

Step #3: Execution

In the execution stage, all parties will sign the contract, creating a legally enforceable document. All relevant parties must sign and finalized documents will be issued. You may choose between electronic signatures or a wet signature, depending on the nature of the contract.

Step #4: Begin Contract

After the contract is signed, parties will begin performing their obligations. Right after you have a signed contract, contract management will begin. Contract managers must add all relevant information to the central system document system, known as contract repository.

If you don’t have a dedicated contract manager, consider having a member of your administrative, payables, or receivables team handle the responsibilities. Regardless of who handles the contract management, all relevant team members should be informed of their duties in the contract going forward.

Step #5: Contract Monitoring

Part of creating a successful contract management function is monitoring with regular check-ins on performance. Have any target milestones been met? Are all parties still on the same page and upholding their obligations? Is revenue and spending within a reasonable range? These are all questions that should be answered during the contract monitoring stage.

In this stage, you will also update any relevant documentation pertaining to the contract. This could be a progress invoice received, information on the tasks completed by each team member, or a reminder of upcoming obligations. If any contract issues do arise, be sure you are going through the proper channels to resolve these obstacles.

Step #6: Contract Renewal

In many cases, there will be multiple contracts with a single vendor or supplier. Contract renewals offer you the opportunity to adjust pricing and terms to better fit the needs of your organization. For example, if your previous contract required the delivery of 500 goods per month, but you only used 250 on average, you can adjust the terms to better reflect your needs.

Contract renewals will require an open discussion between all parties involved, essentially starting over at the first step. This makes it important to take a proactive approach to contract renewals, avoiding auto-terminating agreements. Auto-terminating agreements void the contract on the end date. This can be detrimental if your business relies on the products or services to carry out normal operations, leading to costly disruptions.

Have reminders and team members assigned to contract renewals well before the deadline to minimize your risk of business disruptions and maximize the terms you are receiving.

Step #7: Contract Closure

The final step in contract management is closure. If you aren’t renewing a contract with a vendor, your contract will close out. Be sure you understand the terms you agreed to when you signed the contract. Does the contract have auto-terminating agreements or will you need to confirm contract closure?

Knowing this information helps you avoid any unexpected fees or automatic renewals. In the contract closure phase, you should also evaluate the performance of the contract by calculating KPIs and checking for record gaps. This can help you streamline your processes and identify any weaknesses going forward.

Differentiating Between Contract Management and Contract Lifecycle Management

Contract management and contract lifecycle management handle different tasks. The first difference is apparent in the scope of work. Contract management focuses on the post-signature phase of a contract, ensuring compliance with all agreements and managing any changes. On the contrary, contract lifecycle management involves the entire contract management process.

The timeframe of contract management and contract lifecycle management also differs. Contract management handles the day-to-day tasks of a contract once performance obligations begin, while contract lifecycle management focuses on the entire contract from start to finish.

Moreover, contract management can be monitored using basic contract management tools, like spreadsheets and emails. On the flip side, contract lifecycle management often involves specialized contract management software to streamline operations and workflows.

How to Implement Effective Contract Management

Implementing effective contract management is important for compliance and productivity purposes. Here are some ways you can prioritize efficiency in your contract management function:

• Store all agreements and metadata in a central location, accessible by all involved team members.
• Deliver all negotiated contract benefits timely.
• Infuse collaboration between involved parties by utilizing the proper channels, like video calls and regular meetings.
• Plan for contract renewal negotiations ahead of time.
• Automate processes through contract management solutions.
• Monitor costs and revenue on a regular basis.
• Hold vendors responsible for compliance issues.

Efficiency relies on having the proper tools and technology at your disposal, which is why many companies choose to utilize a vendor management system.

Contract Management Best Practices

Expanding on effective contract management, here are some best practices to implement in your organization:

• Maximize Visibility with Central Contract Storing– Papers sitting in the back of an office aren’t very effective for any of the involved parties. Consider using a cloud-based program to store relevant documents.
• Include All Team Members– Oftentimes, business owners default to their legal team for contract management. However, by involving your entire organization, you are able to delegate responsibility and cover your bases with more hands on deck.
• Audit Your Contract Management– The best contract management systems go through frequent and rigorous audits. Audit your processes on a regular basis to pinpoint any inefficient areas or controls.
• Prioritize Data Security– Contracts can be complex and susceptible to different fraudulent attacks. By safeguarding your contract information, you are minimizing your risk of sensitive information falling into the wrong hands.

Summary

• Contract management involves the creation, carrying out, and closure of legally binding agreements.
• Contract management is important to maximize your contract value, avoid costly legal battles, promote positive vendor relationships, and avoid business disruptions.
• The contract management process generally involves seven steps: initiation, negotiation, execution, performance, monitoring, renewal, and closure.
• Contract management focuses on the pre-signature steps, while contract lifecycle management involves the entire contract process from start to finish.
• Visibility, inclusion, audits, and data security are four crucial components of running a successful contract management function.