There are eight steps in overseeing and administering the various stages of a contract, from creation to execution and beyond, that business owners must pay attention to.
A good process ensures all parties involved fulfil their obligations and meet the contract terms and conditions.
The goals of contract management are to optimise the value of contracts and minimise risk.
It is crucial in business operations, enabling organisations to manage contractual agreements and relationships effectively.
Good process mitigates risks, improves financial and operational performance, and ensures that contracts align with business objectives.
There are several key steps that organisations must adhere to to ensure success.
Effective management of each step will minimise risk, enhance contract performance, and foster successful business relationships.
1. Define the needs in your specification
Understanding the requirements and goals of the organisation will help create effective contract specifications.
Setting up a contract management team that understands the business needs should clarify the purpose and desired outcomes.
Their work will include identifying the specific requirements the organisation needs to fulfil through the contract management process. By clearly defining these needs, organisations can establish a solid foundation for their business contracts.
Developing detailed contract specifications sets the expectations and standards for the contracts. This work involves outlining the scope of the contract, including the tasks, activities, and deliverables that are needed. It also entails establishing timelines and performance measures to ensure contracts are executed efficiently and effectively.
By considering these key factors, organisations can develop comprehensive contract specifications. This process enables them to align the contracts with their business needs, maximise operational efficiency, and achieve their desired goals.
2. Drafting smarts
Contract drafting involves carefully crafting the terms and conditions of the agreement, including contract milestones and obligations that ensure all parties’ expectations get captured and risks are addressed adequately.
The advent of contract management systems has introduced the ability to automate the creation of contracts, saving time and reducing human errors.
These systems provide templates and pre-approved clauses that are easily customised to suit the specific needs of even more complex contracts.
All parties must review the contract thoroughly to ensure that the contractual arrangement covers their expectations and addresses any potential risks.
A contract management tool can facilitate this review by providing a platform for collaboration and document sharing.
It allows all stakeholders to access the contract, make comments or suggestions, and track changes. This step ensures that the requirements and interests of all parties are reflected in the contract, reducing the likelihood of disputes or misunderstandings.
3. Negotiation and redlining explained
This step plays a crucial role in finalising the terms and conditions of a formal contract.
It will involve discussions and compromises between the parties to reach a mutually beneficial agreement and contractual relationship. This process requires careful consideration of each party’s interests, expectations, and potential risks.
A contract administrator or manager serves as the primary point of contact during the negotiation process. The contract manager is responsible for facilitating communication, addressing concerns, and ensuring the contract aligns with the parties’ intentions.
Additionally, they may need to consult with legal or purchasing teams to clarify specific terms or resolve any disputes that arise during the negotiation.
Redlining is a process during contract negotiation where edits and revisions are made. This step involves identifying and highlighting sections that need modification, addition, or removal to help build the initial buyer and supplier relationships.
A contract management system can simplify this process by providing a platform for collaborative editing and document sharing. All parties can track changes, suggest revisions, and make comments – streamlining the negotiation process and ensuring a clear audit trail so the final contract accurately reflects the agreed-upon terms.
4. Thinking about risk and resilience
Risk management ensures the sustainability and success of various types of contracts. By effectively managing and controlling risk, organisations can identify potential issues, contract risks, mitigate them proactively, and drive positive outcomes.
The contracts team plays a crucial role in supporting risk assessment and decision-making throughout the contract lifecycle. They collaborate with stakeholders to identify and evaluate risks associated with the contract, including legal, financial, operational, and reputational risks.
By thoroughly analysing these risks, the team can develop strategies to minimise their impact and increase the chances of successful contract execution.
Moreover, the contract manager and wider team facilitate positive change and evolution of the contract over time. They continuously monitor and assess the contractual agreement, identifying areas for improvement or modification.
By actively engaging with the parties involved, the team can propose changes that address emerging risks or adapt to changing circumstances.
5. Signing
Signing is a crucial stage in the contract management process as it signifies the parties’ agreement and commitment to the terms and conditions outlined in the contract.
The aim is to ensure a smooth and efficient process. Determining the contract signing method is a crucial decision – it can be either electronic or written, depending on the preferences and requirements of the parties involved.
The signing stage involves several steps to ensure the proper execution of the contract. First and foremost, all parties involved should be satisfied with the final draft before proceeding with signing.
Remember to capture copies of the signed contract for reference and future needs.
6. Contract performance assessment
This step will ensure the effectiveness of the original contract, and identify areas for improvement.
By utilising key performance indicators (KPIs), organisations can measure the success of their contract management practices and make data-driven decisions to enhance efficiency.
One important aspect to evaluate is the relationship with contract partners. KPIs such as customer satisfaction and supplier performance can gauge the strength of these relationships. Regular feedback and communication can help identify any issues and improve collaboration.
Meeting milestones and deadlines is another critical factor in assessing performance. KPIs like on-time contract delivery and adherence to project timelines help measure the efficiency and effectiveness of the contract management process. Consistently meeting these milestones indicates a well-managed process.
The contract cycle length is also a valuable KPI to evaluate. This metric tracks the time it takes to complete the contract process, from initiation to signing. A longer cycle length may indicate inefficiencies in the process that need addressing.
Cost-effectiveness is another crucial KPI to consider. By analysing the costs associated with the contract management process, organisations can determine if they are achieving the desired outcomes within the allocated budget.
Assessing both the challenges and successes of the contract management process is crucial. Identifying areas of improvement can lead to process automation and optimisation.
By leveraging technology and implementing contract management software, organisations can streamline workflows, reduce manual errors, and enhance overall performance.
7. Renewal
Contract renewal is a critical aspect of contract management that involves reviewing and renegotiating contracts upon their expiration. When contracts reach their end date, organisations must carefully evaluate their terms and conditions to determine if any changes or updates are necessary.
This process typically starts with a thorough review of the existing contract. This work involves assessing the performance and outcomes achieved during the contract term and identifying areas that need improvement. It is also an opportunity to reassess the goals and objectives and make adjustments as necessary.
Automated renewal reminders play a crucial role in streamlining the contract management process. By setting up notifications, organisations can ensure they are aware of upcoming renewal deadlines well in advance, allowing sufficient time for review and renegotiation.
Reminders eliminate the risk of contracts inadvertently expiring and help organisations stay on top of their contractual obligations.
Contract management software provides a centralised platform to store and organise contract documents, making it easy to access and review contracts nearing expiration.
8. Exit and Termination
Exit and termination of a contract can be a complex process that requires careful planning and execution.
When a contract ends or needs to be terminated, organisations must navigate the challenges and risks associated with demobilising the current supplier and introducing a new one.
One aspect of contract termination is the presence of break clauses. Break clauses allow either party to terminate the agreement under specific circumstances, such as poor performance or a significant breach of contract.
However, these clauses need to be carefully reviewed and invoked following the contract’s terms and conditions.
Demobilising the current supplier involves winding down operations, transferring assets or services, and ensuring a smooth transition for both parties.
Challenges can arise from transferring knowledge and expertise, managing contractual obligations, and addressing potential disputes.
The exiting party also needs to carefully assess the impact of termination on their operations and ensure minimal disruption to their business.
In addition, introducing a new supplier requires planning and preparation, including identifying potential suppliers, evaluating their capabilities, negotiating new contracts, and onboarding them smoothly.
Allocating sufficient time and resources to this process is crucial to mitigate risks, ensure a seamless transition, and maintain continuity of services.