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Contract management is the process of handling legally binding documents from start to finish. Common steps in the contract management process include contract creation, solidifying contract terms, contract execution, and monitoring contract compliance.
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.
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:
Even if you don’t have a dedicated contract manager, contract management software can help you realize these benefits in your organization.
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:
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.
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.
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.
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.
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.
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.
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.
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.
Implementing effective contract management is important for compliance and productivity purposes. Here are some ways you can prioritize efficiency in your contract management function:
Efficiency relies on having the proper tools and technology at your disposal, which is why many companies choose to utilize a vendor management system.
Expanding on effective contract management, here are some best practices to implement in your organization:
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