13 Best Practices for Contract Management
Poor contract management costs companies 9% of their annual revenues. Specifically, once contracts are signed, there is a laid back attitude and a tendency to react to issues late rather than addressing them proactively.
On the other hand, having good contract governance practices in place can result in cost savings of 30% to 50%, long-term relationships with contractors, and superior project execution. Here, we discuss 13 best practices that will help you establish the right systems and checks in place and reap the benefits of meticulous contract management.
1. Standardize Contract Creation
The impact of poorly drafted contract documents can be severe—companies could lose millions and reputational damages could jeopardize their customer base. Contract terms also vary based on factors such as region and type of service, further complicating the contract creation process. It’s no wonder then that legal teams tend to take weeks or even months to draft a contract accurately.
Building a central repository with standardized templates for individual scenarios and integrating them with lifecycle management systems that can automatically pull out specific templates based on requirements can reduce the time and money spent in contract creation to a negligible figure. The one-time effort spent in creating templates also ensures error-free drafts with complete coverage of all intended terms and legal clauses.
2. Track and Manage Contract Approval
After contracts are created, they are sent for approval from multiple stakeholders that include legal, finance, management, and product teams.
Automation of approval workflows can help you turn this into an efficient process while also maintaining audit histories. Leveraging technology that pre-approves standard parts of the agreement reduces the time spent gathering approvals by only bringing unique parts of the contract to the attention of the approvers.
Ambiguity in the list of approvers can lead to missing approvals or security incidents where a confidential contract is viewed by unintended parties. Defining a list of approver roles for different scenarios expedites the process considerably, while eliminating errors.
Finally, integrating digital signature software with the approval process removes all manual touchpoints.
3. Set Contract Management KPIs
Post-approval, as the contract rolls in motion, it’s imperative to define performance metrics that help measure the progress and success of a contract. Measuring and reporting metrics indicate whether contracts are delivering expected results or if there is a need to course-correct.
For example, efficiency can be measured by tracking the time taken for contract creation, approval, and finalization. A high number of renewals reflect a strong and successful vendor association. Contract execution KPIs such as deadlines adhered to, quality delivered, etc. give a sense of whether the contract needs to renewed or a new vendor sought out.
4. Assess and Monitor Contract Risks
Identifying potential risks involved in a contract is crucial before and after awarding a contract.
Risks can be financial (cost escalations), inability to meet schedule, not delivering features as per expectations, etc. Compliance and regulatory risks need to be monitored as well—for instance, compromising confidential information of customers by a contractor can result in heavy penalties.
Translating these macro risk criteria into specific parameters at a micro-level is essential to gain clarity on the risk quotient of a contract. Past data regarding a vendor can give insight into the parameters that need to be monitored.
5. Balance Information Security and Easy Access
Contracts are often confidential and for the eyes of certain personnel only. It’s therefore necessary to store them in an encrypted vault that cannot be breached. However, the idea is to not overcomplicate things to the extent that contracts cannot be accessed easily by those who need to. A central cloud repository allows everyone to readily access information.
Rather than assigning permissions at an individual level, you can create roles and groups with different privileges. Users can then be added to the role or group based on the privileges required. As a safeguarding measure, proper checks and continuous reviews need to be in place to delete users who no longer need access as well as flag unauthorized users.
6. Establish Good Contract Communication
Ineffective communication between an organization’s central procurement office and the contractors’ agencies can result in missed opportunities, incorrect drafts, and ultimately failed relationships. The traditional method of relying on individuals to foster relationships in an ad hoc manner just won’t do anymore.
It’s critical to establish guidelines on communication frequency and approved team collaboration channels (email, Slack, etc.) along with a list of the key stakeholders that need to be kept informed at all times.
These details need to be integrated into the contract lifecycle (before, during, and after a contract is awarded) so that stakeholders are in the loop in case of revisions in contract documents or when risks are identified.
7. Resolve Disputes Efficiently
When you assessing KPIs and monitor risks, you end up identifying issues that need resolution. Similarly, communication issues between teams can result in difficult conflicts. The best way to tackle such disputes and claims is to not let them simmer longer or leave them unattended and fix them quickly in an informal manner before they escalate.
The challenge in doing so is the ambiguity in roles—it’s often not clear who is responsible to resolve a particular issue. By creating a dispute resolution task force that includes representatives from both the organization and the vendor sides as well as from different departments (legal, HR, finance, etc.), you can assign accountability to specific individuals.
8. Conduct Regular Compliance Reviews
Frequent compliance checks can help companies avoid paying huge penalties. These reviews include validating adherence to external regulations such as HIPAA, FINRA, and GDPR (as applicable), as well as contractual obligations that are legally binding. Violators of the GDPR can incur fines up to 20 million euros or 4% of the company’s turnover.
It’s important to identify an exhaustive list of criteria and configure them in contract management systems so alerts are sent out for possible violations. Proactive identification can point to bottlenecks, and corresponding steps can be taken (e.g., assign more resources, replace an insecure technology solution).
9. Anticipate and Manage Change
Contractual terms do not remain static because of triggers such as changing business needs, industry standards, and federal regulations. Change management strategies help assess the impact of such changes and formulate concrete actions.
For example, ask questions such as: can the new annual budget accommodate the inflationary cost rise? The resulting action could be to (if yes) renew the contracts with new rates or (if no) renegotiate the contract or find a new cost-effective vendor.
This kind of impact analysis needs to happen, not only at the time of renewals, but at frequent intervals. It’s a great opportunity to take a closer look at vendor relationships and understand what’s working and what’s not.
10. Automate
Every best practice discussed so far can benefit from automation. In some cases, it’s simply impossible to execute them manually. For example, imagine gathering performance metrics from hundreds of contracts, or managing approvals, changes, and risks with manual spreadsheets, or securing contracts in a physical vault. This approach is inefficient, error-prone, and not scalable.
Automated triggers, alerts, and reports help catch issues proactively and resolve them before they escalate. Automation also allows viewing contract management as a holistic process rather than a set of isolated tasks. This end-to-end management gives the opportunity to scale quickly and make more cohesive decisions.
11. Go Mobile
If automation is the first step towards efficiency and flawless execution, mobile technology increases the reach of automation to almost everyone involved in the contracts process—from management to every member that executes contracts.
Mobile tech allows you to collect and disperse information quickly to a diverse team of contractors and people in the field, serving as a bridge between multiple companies and their teams. Its speed and ease-of-use keeps people connected and motivated, and enables them do things faster.
12. Benchmark Progress and Performance
Continuous monitoring of quantitative indicators such as contractual parameters and performance metrics renders plenty of data for analysis. Additionally, subjective data through informal communication channels, discussions on change and risk management, etc. is available.
All this data can be used constructively by benchmarking against historical data and industry averages.
Past data can reveal how spending patterns have changed through years of contractual engagement. It can then give a sense of whether the contract is progressing in the intended direction. Industry data reveal whether the company is managing contracts better or worse than others in the market.
The third kind of benchmarking is to compare notes with the data collected on the contractor’s end, acknowledge any variances, and work toward aligning the two sides.
13. Leverage Data through Integration
Collecting data from users on contract performance is useful when drafting future contracts for similar products or services. However, the benefits of data extend far beyond that.
The best way to bring all these practices together is to integrate data from each silo into a holistic project management platform. This allows you to build a connected approach where contracts are not just a set of agreements and clauses but part of a larger context—a project, which then rolls up into a portfolio of several projects.
This big-picture approach aligns contractual processes with the rest of the project controls environment and alerts about project overruns.
Enterprise Project Performance for Contract Management
In order to apply these 13 best practices in a streamlined manner to your contracts and integrate contractual data with the project and portfolio landscape, it’s essential to leverage an enterprise project platform.
EcoSys offers an enterprise project performance platform with the tools to manage contract lifecycle, control costs, increase compliance, facilitate collaboration between owners, agencies, and contractors, and ultimately deliver successful projects aligned with your organizational goals.
Learn more about how EcoSys can help: