Contract management basics
Contract management is an essential, but often overlooked, process within most organizations and procurement departments. From bills to tax related activities, management and compliance of contracts is a significant part of an organization’s operations. All businesses, commercial, governmental and scientific alike, have to manage contracts in some capacity. Contract management is the final phase of the contract life cycle, following contract formation (offer and acceptance of a contract’s terms) and contract administration (ongoing performance of the terms and conditions set forth).
Contract management is a systematic process with primary goals of keeping contracts affordable, ensuring compliance and minimizing risk. While it may seem like an unnecessary step after the execution of a contract, many negotiations fall short and do not account for implementable measures for effective contract administration, performance and termination. A sound contract management plan will provide clarity on how an organization will manage your agreement in general and on a contract-by-contract basis.
Managing a contract includes all aspects of tracking and enforcement. This covers everything from basic details such as who, what, where, when and why to monitoring compliance, assessing risk, reporting associated costs and managing issues that arise . Even a general understanding of what is expected from both parties is vital to an organization’s success.
There are several consequences of neglected contract management. First, mismanagement can decrease compliance with the contract, jeopardizing the business relationship. Second, the organization will be unprepared if there are disputes or audits. Third, it may be difficult to determine if the other party has not fulfilled their obligations. Fourth, compliance with other policies may be negatively affected. Finally, you may miss an opportunity to maximize the contract value.
As with many organizational strategies, implementation is key. The plan should be documented for training purposes. However, it doesn’t have to be a long and tedious document. A checklist can work just as well as a lengthy procedural document. Training should include the organization’s expectations and how it influences current business practices. The plan should be reviewed to ensure consistency and that it’s being followed. Updates should be looked at periodically, unless there are major changes to regulations or policies. Partially executed contracts may be an indicator that something is wrong with your plan. Finally, it’s important to hold staff accountable just as you would for any other policies.
Key components of a contract management plan
A well-crafted contract management plan aims to make it easy to ensure contract compliance for both a seller and a buyer of a good or service. The seller wants to be paid for its performance and ideally, the buyer wants to get the good or service it bargained for on time, within budget and with the expected quality.
For complex contracts, a contract management plan should facilitate contract lifecycle management, compliance monitoring and risk assessment. A contract management plan should also include dispute resolution systems, guidelines for the management of change and the means of documenting contract value in line with what was contracted for.
A contract management plan should provide an overview of the contract lifecycle and identify the front-end work, performance work, contract management and post-contract management work that needs to be done for the contract by the seller and the buyer. For example, front-end work includes the identification of customer needs and the allocation of risk. Performance work includes product development and quality assurance. Contract management work includes change management, the management of timeframes and dispute resolution. Post-contract management includes the lessons learned and how to benefit from the contract in the future. A contract management plan would also include guidelines for performance reward, the consideration of contract termination rights and close-out.
A contract management plan should provide a means of documenting contract value to be measured against in the event of a dispute. It should guide the actions to be taken under the contract and include the protocols for monitoring the parties’ compliance with the contract terms. A contract management plan includes the use of reporting systems and ensuring there is a change control log that identifies the changes that have occurred under the contract and whether they were agreed to by all parties.
A contract management plan should identify the disputes that can arise under a contract and the steps to be taken to manage the disputes. Managing contract disputes is about ensuring the parties reach an outcome that does not negatively impact the delivery of the goods or services. In addition, a contract management plan identifies the breaches that can occur under a contract. Breaches are failures to meet obligations under the contract. A contract management plan identifies the consequences of the breach, such as termination of the contract.
A contract management plan will also include a risk assessment to identify the risks and the potential outcomes of potential risks that can negatively impact the parties’ actions under the contract. Risk management involves taking steps to avoid or mitigate the risk and measures to manage the potential adverse impact of the risk.
A contract management plan will also include the protocols for the management of contract variations. While any resultant contract variation that is in writing would be easy to manage, a dispute can arise when one party believes a variation has been agreed to but for the other party, no variation has been agreed to at all. A contract management plan will include the steps to be taken to resolve the variation dispute and the consequences of not resolving such a dispute for both parties.
Benefits of having a contract management plan
The benefits of properly implementing a contract management plan are numerous and can manifest themselves in the form of better contract compliance, better auditor relationships, and improved pricing or less costly rates, in addition to more timely payment and collection of bills and a reduced risk of contractual issues and potential litigation. Organizations can see a remarkable difference in the productivity and morale of their personnel in the after effects of a well-structured contract management plan, and can receive substantial funds back into the budget as a result of its implementation. Good contract documentation should result in lower costs in the long run from negotiated contract rates, less money spent on outside counseling for litigation as a result of not having self-contained, timely records of the transactions, and less wasted effort in getting managers to sign off on invoices since everything is properly executed and authorized.
Steps to creating a contract management plan
The first step in drafting a contract management plan is to determine who will oversee the work performed under the contract. Cost-plus contractors or any contractor pursuing incentive payments such as share-in-savings should ensure that each entity involved has an appropriately qualified employee(s) that is responsible for maintaining and planning for the contract performance.
After determining who will oversee what, the next step is to define how the contract will be executed, measured, and monitored. This involves identifying existing resources and then proceeding to allocate those resources to all specific phases of the contract. The contractor should then identify key contract requirements and terms that are crucial in meeting the obligations and goals of the contract. Examples include the contract period, performance schedule, price schedule, and performance standards.
Next, the contractor must determine the different methods available for monitoring and measuring the contract. The contractor can employ various methods including: assisting contractors (that rely on NSF support), reviewing and approving contractors’ requests for funding, overseeing the contractor’s development of a detailed work plan and prospective allocation of labor and other resources, reporting progress to NSF and other stakeholders, conducting random on-site visits to review sampling plans, records, and status reports, analyzing internal and external controls such as costs and performance, and reporting cost and schedule variances through a variety of management reports and formats. The threshold for reporting will depend on the sensitivity of the contract; for example, Firm Fixed-Price A contracts require monthly reviews and reports while Large A contracts require quarterly reviews and reports.
Finally, the management plan should outline a plan for communicating with all stakeholders including additional contractors, NSF, and the public.
Tools and technology available in contract management
A range of tools and technologies are available to automate and streamline contract management planning and processes. There are both traditional software solutions and digital contract platforms. The increasing use of artificial intelligence (AI) technologies in this space is notable – for instance, in drafting, lifecycle analytics, and forecasting. Whichever tools you choose, make sure they fit your needs and those of your team and are cost-effective. Integrated platforms that automate as much as possible, centralize contract information, and can be cloud-based may be particularly useful.
There are many different ways to implement digital contract platforms, including tailored systems, standard solutions, shared local instances, and a Software as a Service (SaaS) approach. Often these types of systems, which can be complex and expensive, are implemented as part of a more holistic systems re-design driven by an organization’s business model.
It is also possible to implement a contract management system through collaboration among multiple organizations . An example of this is the INDRAPRASTHA platform, which has been endorsed by multiple ASEAN member states, including Singapore, as a regional contract management platform.
More familiar types of software or applications for automating some parts of the complex and long process of contract management planning and processes include:
The use of AI technologies is increasingly common for reviewing contracts and drafting new ones, and helps junior professionals develop skills more quickly, as well as speeding up internal procedures. AI can also be used to analyze contracts and provide insights for forecasting and analytics. AI also assists with risk assessment, whether by assessing quality and specific contract features, or sharking key clauses with external resources so that negotiated concessions can be analyzed for alignment with current market practice and informed decisions made.
The specific combination of tools and technologies that will work best for your organization will depend on various factors, including the size of your business, the work you do and the number of contracts you handle, and your specific goals for the contract management process.
Challenges in contract management and solutions
The journey doesn’t end with a contract. In fact, the post-signature phase is often fraught with difficulties such as compliance breaches, performance discrepancies, and enforcement issues. To make things more problematic, the methods and technologies that organizations use for contract management can sometimes obscure the realities of the contract lifecycle. In a 2015 paper, Ellen Danford and Zachary Spindler at the University of Georgia reported that even as contracts became larger and more complex, "the capacity of ‘construction legal contracting management systems’ has improved little, if at all, in the past thirty years."
For every step after negotiating and finalizing the contract, you’ll need to ensure that the contract continues to match up with its intended processes and procedures. When this does not happen, companies may be subject to litigation, penalties, or even incarceration (as in the case of Ingram Barge Company). While there are numerous cases in which a company found itself on the wrong end of post-contract litigation, these can often be avoided with a bit of attention and the right technology.
Once a contract is signed there are three major compliance issues that may arise:
As more and more contracts are stored digitally, data breaches become an even bigger issue than they once were. Recent research by Consulting firm PwC and conducted by Iron Mountain found that 42% of respondents admitted to losing data in their electronic format. This statistic is alarming in light of the fact that under the EU’s General Data Protection Regulation, data breaches can lead to fines up to € 20 million.
Even in the face of the threat posed by hackers, there are many issues that come from non-hacker breaches. Manual handling and printing of contracts can lead to misplacement, loss, and misinterpretation of important information. In order to avoid these problems, it is necessary to invest in a good contract management solution. When a contract management system is implemented, managing contracts becomes a lot easier, and as a result the likelihood of splitting and searching through paperwork is greatly reduced. Additionally, by encrypting, backing up, and storing contracts in a single location, an organization is able to minimize the chances of having a contract leaked.
The final key challenge faced during contract management is ensuring that the contract is being properly enforced and followed. Without a proper system of contract management in place, communication can break down and managing obligations becomes unnecessarily difficult.
To avoid the worst results of poor communication and uneven enforcement, technology that allows for transparency, negotiation, and clear documentation will be essential. Make use of collaborative tools, and shared calendars to track contract milestones. By using strong Contract Lifecycle Management (CLM) software, companies can ensure that contracts not only get negotiated clearly, but that they are also enforced efficiently and effectively.
Best practices in contract management
Maintaining an effective contract management plan is a proactive, hands-on process that typically becomes more involved with the growth and scale of the organization. For a simple contract, it may be enough to have a single document detailing who is responsible for what, but as the number and size of contracts increase, the effectiveness of your contract management plan will have to keep pace. The approach to keeping your contract management plan up-to-date may include assigning an individual or team specifically to this task. At a minimum, it involves reviewing and possibly revising the contract management plan periodically. As with any plan, it’s vital to ensure appropriate and ongoing training for those personnel that are involved. Personnel should participate in formal and informal contract management training, especially those directly responsible for oversight or managing the contract. This can be company-specific training in the form of regular internal meetings about the state the contract management plan; or external, formal contract management training. This ongoing training and reinforcement will help ensure that everyone involved knows what their responsibilities are and how to fulfill those responsibilities. Continual improvement in the contract management process should also be considered. This may involve updating existing contract management plans or applying lessons learned from recent contracting experiences to future contracting opportunities. With each new contract, including renewal contracts, you should engage in a review of the contractor performance from the previous contract. The outcome of that review may then be applied to refining the contract management plan so that what works well is carried forward and what is less effective is tailored or updated. This will keep your contract management plan relevant and effective.
Trends in contract management
Future trends in Contract Management will see a greater use of Artificial Intelligence (AI) and the implementation of Blockchain Technology.
Artificial Intelligence (AI) is changing the way contracts are drafted, signed and managed. Routers and approval trails can speed up the performance of a contract, while chatbots can guide users through the contract lifecycle. With AI, legal teams can request information from a contract using natural language, resulting in faster access to the information.
Blockchain Technology is already having some impact on the world of contracts. Blockchain is a digital ledger that provides a secure method of recording transactions. A contract placed on the blockchain is tamper-proof, cannot be altered, and will remain as an immutable record on the system. Blockchain works in a peer-to-peer (P2P) network , where all parties involved can see the same information at the same time, giving more transparency to all parties. Smart contracts, based on the use of a blockchain, could be the future. A Smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. When defined business rules are satisfied, a smart contract has the ability to immediately execute itself.
AI and blockchain technology are being developed in parallel for their potential impact on the use of audio-visual content rights management. The AI helps to identify content under copyright protection. Blockchain provides a ledger which validates and tracks purchases of content rights in a fully automated manner, allowing for better management of content rights. AI and blockchain can also help to increase overall transparency regarding the licensing of content.