What Is Contract Management? Understanding The Fundamentals
For companies that live and die on their contracts, it's important to get them straight. Managing contracts is a frequently overlooked part of good business management, even though it's arguably one of the most important things for your company to be good at. There's a reason why plenty of large companies hire some of America's highest paid lawyers to oversee their contracts. It's a really big deal.
So, what is contract management? It's a set of practices you undertake to make sure your contracts are all clear, specific, enforceable, and likely to be upheld by the court if there's ever a dispute. A contract lifecycle management system can ensure this works, with all kinds of details you need to be good at and plenty of tools to help you do it right.
What Is Contract Management?
Contract management, sometimes known as contract administration, is the work your management team does to draft solid contracts, develop them through the pre-signature phase to get them in good shape, then monitor compliance after they're signed. It's not to be confused with contract negotiations, where you and the other party haggle over the terms and deliverables, or with compliance management, where your staff watches to make sure your company complies with a contract or legal requirement.
To see it better, imagine you're a plumbing company that just landed work with a general contractor to build some houses. The general contractor only wants you to use PEX pipes instead of PVC or copper. Whether that's acceptable or not is up to the negotiator and the procurement teams, not the contract manager.
The manager's job is to come in after the agreement over pipes has been reached to make sure that part of the deal is clearly spelled out and enforceable. After that, a good contract management professional hands contract compliance over to somebody else, often the compliance manager or the code enforcement officer or whatever they're called at your company, to make sure the terms are being observed.
The contract manager isn't just a proofreader. This person is generally responsible for contract lifecycle management from initiation to closure. They might, for example, be the one who initially proposed the deal with the general contractor, and they might be responsible for renewing the deal when it expires. It's even possible, especially at small companies, that your contract manager is also your negotiator and compliance officer, though, strictly speaking, these are different roles.
Why Is Contract Management Important?
Why does it have to be a big production to get a contract initiated, signed, and enforced? You know the saying, "The devil is in the details?" That's never more true than in business contracts, especially in a situation where a clever legal team can save or extract millions of dollars because of a technical foul in one paragraph of a 14-page legal contract.
Whole businesses depend on successful contract management for their continued existence, and it's worth it to pay someone good to make sure your contracts don't kick back and surprise you one day.
Let's say that general contractor brings you onboard to do the plumbing installations for him. It's great at first, but after about 3 months, there's a supply chain problem and your PEX doesn't get delivered. Now you have a hard choice to make.
You can delay, which might incur a cash penalty under the contract terms, or you could substitute the PVC or copper pipes you have in stock to keep everything on schedule, which would also be a violation of the contract. Either way, you're in trouble because a truck didn't show up on time at your warehouse. What should you do?
This is where effective contract management saves your bacon. During the negotiation phase, your contract manager should have asked what would happen if this very issue arose. Ideally, there should be some kind of fallback option in case of uncontrollable violations of the deal, or at least a conflict resolution option. It's your contract manager's job to include something like that at contract creation to make sure everyone has clear expectations in advance.
The bottom line: protect your business! Understand the factors that can void a contract.
Who Is Responsible for Contract Management?
The whole contract management process is complicated, and you really need a specialist who does this and almost nothing else. Your contract manager might be a lawyer, but they don't have to be. You could just lean on the most experienced manager at the company to handle it, assuming that person has prior experience with legally enforceable contracts. In a broader sense, however, you could say that everybody is part of the contract management team.
The details of the contract management process vary from company to company and even from one deal to the next, but don't get hung up on formalities. Anybody who can usefully contribute should feel welcome to chip in to make sure you have good contracts.
Go back to that plumbing company. At the extreme, you might have different employees networking for the gig and initiating the business relationships (sales), talking out the terms of the deal (contract negotiator), reviewing the paperwork before signing (contract administration), and enforcing its provisions both internally (compliance) and externally (legal department).
Of course, all this could just be one person. You might be a one-person plumbing company, in which case this is all on you. Your company might have half a dozen licensed plumbers, their helpers, and one receptionist, which means you either share the contract management process or outsource to a professional firm. When you start working with very complex contracts, however, it might be worth it to have a whole contract lifecycle management team in-house.
Understanding the Contract Management Process
However you're managing contract approval, you should make sure certain workflows are part of the process. The basic contract lifecycle management process works in six stages, which are conveniently split between three pre-signature stages and three post-signature stages. At every stage, you should be trying to get all the relevant stakeholders involved, even if it's just to listen in and stay up to speed so their own work is better informed at a later stage.
Pre-Signature Stages
Contract Creation
Contract drafting is where it all starts. This may be a formal process, such as when you're bidding on a government contract or applying to be a vendor for a major corporation. It could be super-casual, like when your buddy needs development work done on his website. For most companies, contract authoring is somewhere in between, with a sales team developing leads and getting preliminary agreement to deals, then passing the file to the contract management system for the next steps.
In the contracting example we've been using, you'd probably meet the general contractor at a convention or other networking event and strike up a conversation (casual). You might cold-call him and ask if he has any work you can do (semiformal). You could also apply for work installing pipes in public schools, in which case you probably have to complete a bidding process before the contract stage can begin (formal).
Contract Negotiation
However the lead is generated, eventually you're going into negotiations. Again, there's a lot of variation here. Technically, you're fulfilling a contract when you buy bread at the grocery store because you (the customer) are making an offer to buy bread at the listed price, followed by the store's acceptance of said offer and your payment. Business contracts tend to be more formal than this, and for anything that takes longer than a year or costs more than $1,000, you definitely want it in writing.
Some deals come with standard contracts. If you drive an ambulance, Medicaid pays what it pays per mile, and there's no negotiating that. Other deals have some wiggle room, but not a lot. Providing silicon deliverables to Intel for its microchips isn't what you'd call flexible work, so probably the only negotiations are over volume, pricing, and enforcement terms.
Smaller companies can get away with more wide-open contracts. You might sign a deal to provide plumbing with the general contractor, but either you or they might be responsible for buying the supplies, paying for insurance, interacting with customers, and so on. You're usually free to negotiate whatever you can for pricing, payment details, arbitration versus mediation, and so forth. This is where your contract negotiation team can really shine.
Honorable mention here has to go to a sort of half-phase in the contract management lifecycle: editing. No document is perfect on the first pass, and a legally binding form that can cost somebody a fortune really needs to be perfect before it's signed. Good contract management software can go a long way, with standard templates that don't take a lot of revisions to perfect, but make sure you've got somebody editing the paragraphs and reviewing the entire contract. It could be really important someday.
Contract Approval
With the contract initiated, negotiated, and edited, it's time for approval. Your contract manager and other stakeholders need time to go over the entire contract before a new contract can be signed. Approval can come from a central repository, such as the legal department, or it can be widely distributed among the various stakeholders. If it's just one manager, make sure they take their time and talk to the relevant people at your company before granting approval to sign.
At the plumbing company, the negotiator might pass the contract for services to management for the final okay, followed by a week-long review period. This is a good time to talk to the procurement manager and find out whether the PEX pipes the contractor wants are affordable at the proposed prices or to iron out those details about delays and supply chain stuff. Get answers before approval because after is usually considered too late.
Post-Signature Stages
Monitoring
Your CLM work continues even after the contracts are signed, whether in person or through electronic signature. Every contract has terms, some simple and some not-so-simple, and somebody has to be in charge of making sure it all gets delivered. Again, this may be your contract manager, or if you're a bigger employer, you can use your legal and compliance people to do it for you.
Let's say your general contractor friend has agreed to pay a certain amount per house and once a month in advance of the work being done. If August rolls around and there's no payment, your monitoring team needs to be on that fast. A phone call with the general contractor's office reveals he has a banking glitch and payment didn't clear the way it's supposed to.
Your contract might have a clause that fines the contractor or allows you to pay your people out of the contractor's credit until it gets resolved. A breach like this could even allow you to terminate the contract without penalties to yourself.
Contract Renewal
Most contracts eventually end. You might be okay with that, or you might want to keep a good thing going. In some ways, renewal is easier than initial contract creation because you already work together and know what to expect. In other ways, it can be even more complicated, such as when you want to negotiate a different price or insert a clause that wasn't present in the original.
Close
The point of the whole CLM process is to get to the close. Ideally, this shouldn't be the end of the process but just a stage in the full cycle of initiation, negotiation, implementation, monitoring, and renewal. It's up to you how to close the deal, such as who can sign your company onto contractual obligations, but it's a good idea to have the person who managed the process sign off on it. If you're using online templates, they can usually apply an e-signature remotely, in case you're outsourcing to a CLM who's not in your office.
Contract Management Solutions Can Help
No matter how big or small your contracts are or what type of contract you deal with, you can streamline the time-consuming process with automation through advanced contract management software. In fact, the benefits of contract management software are many. Think smart online templates that can help you optimize the terms you're seeking, edit revisions in minutes instead of days, add customized amendments, and clear bottlenecks that threaten to derail the whole contract cycle. These templates lay out standard contract data in an easily readable format that makes sense at a glance and assist day-to-day monitoring of contract performance with simple, intelligible reports.
Any good contract has an offer and an acceptance element. This paragraph, for example, offers you inside information and advanced insights into the world of smart online business forms. All you have to do to accept it by subscribing to our newsletter. It's fun, informative, and free!
