Whenever partners exchange money, product, and services in different types of industries; then they develop contact. It’s a skillful art to write and manage an effective contract for the better outcome of your business. It would help you to improve your skill and find out new opportunities by learning about the contact managing process. Today, we’ll discuss what is contract management; its significance, strategies, benefits, and various stages in the process.
What is Contract Management?
The contract is a legal document that outlines the rights, obligations, roles, and responsibilities of various partners and parties. It’s the process of managing and fulfilling the contractual obligations of various parties like employees, clients, vendors, suppliers, and others. For instance, terms of conditions of software/application, employment contract, and apartment lease documents.
Significance of Contract Management
Legal contacts are the basis of every business relationship or deal because they cover various parts of the supplier relationship and the business deals from start to end. According to an estimate, Fortune 500 companies develop approximately 4000 contracts every day.
When we say 4000 contracts in a day, it means they require authorship, reviewing, negotiating, and approval from various departments. A single contract goes through various departments like procurement, legal, finance, and others and it requires manual handling.
If a company doesn’t make proper deals without proper contracts, then it results in the form of compliance and procurement issues, financial risks, and other penalties. A mistake of one word or a single-digit could cost your company billions of dollars.
Strategies of Contract Management
Some of the main strategies that would help you to handle contracts are as follows;
Develop Outcomes for Delays or Breaches
It’s a very good strategy for managing contracts by discussing outcomes and consequences in case of delays and breaches. It makes sure that the contract is meeting the values and requirements of every partner, and compels them to stick to the contractual points.
For instance, a company keeps on missing the deadlines, then the hiring company could mention the consequence of the delays in the form of low pay because the delays increase the operational cost of the hiring company.
Research Contract Parties
You should conduct thorough background research about the hiring company. It helps both business partners to safely enter into the legal contract. While conducting the research, you observe certain existing obligations of the hiring company that would impact your contract.
If your company’s communication strategy is clear, then it helps you to develop a contract with more clarity. All the partners involved in the contracts should be aware of the decision-making process. Usually, the board of directors hires their negotiators and representative to make decisions on their behalf.
For instance, a salesman has the authority to sell the product at the lowest price. If he has the negotiating authority, then he could discuss the price range with the customers. It would also be clear to the client about the decision-making person.
Lifecycle of Contract
The lifecycle and time period of the contract should meet the needs and requirements of the company. For instance, if a company operates on a semi-annual basis, then its contracts should expire in 6 months. You should also mention others details in the contract like automation and renewal of the contract.
Contract Review Process
The partners should also mention the review process in the contract; it would help them to manage time better.
Stages in the Contract Management
Some of the main stages in managing the contract are as follows;
The first stage is where both parties request for the placement of the contract. Some of the main elements that you should keep in mind in the preparation stage are as follows;
- Goals: both partners and parties should discuss their goals and objectives, it would help them to know what to include in the contracts
- Expectation: they should communicate in order to understand their expectation while preparing the contracts
- Needs: the needs and wants of every partner should be clear, it amplifies the effectiveness of contracts
- Risks: you should recognize the risk factors, it would help you to develop better contracts by keeping in mind the risky elements
For instance, if an apartment leasing and a cleaning company want to work together to clean the rooms before the arrival of the new tenants. Both partners should discuss their expectations, risk factors, needs, and requirements before finalizing the contract.
After discussing their needs, wants, and expectations in the initial preparation stage; next they should develop a draft of agreement based on their risks, expectation, and goals. Both partners should review the draft and check whether it is up to their expectations or goals.
The first draft serves as an ice breaker to discuss the terms and conditions of the contracts. They negotiate over the price and rates until both parties reach mutually agreeable and acceptable terms.
After negotiating on the price and other terms, both partners/parties sign the refined contract and agree on the date when it would be effective. Many businesses and companies follow the online tool of contract authorization; it makes it easier for you to manage the approval step.
For instance, the leasing company and the cleaning vendor mutually agree on the price, rates, terms, and the contract would be effective and become operational from the next month.
When all the parties approve the contract, then it becomes active and effective on the pre-described date. It also depends on the type of the contract in terms of activity and effectiveness.
The contractual manager starts checking whether parties are following the obligations or not after the execution of the contract. This step makes sure every partner that the contract has its value.
Once the agreement becomes active and effective; if both parties need to revise the contract based on the changing circumstances, then they should. For instance, if the leasing company wants the vendor to spend more time and cover more area, then they should revise the contract and add more clauses to it.
Termination or Renewal
When the contract expires, then both parties either should terminate or renew the contract. If they’re going to renew the contract, then they should consider adding new terms or not. However, termination means finishing the contract. For instance, the cleaning vendor and the leasing company are satisfied by doing business with each other. They both decide to renew the contract.
Who manages Contracts?
Some of the main professionals that handle and deals with the contract are as follows;
- Contractual manager: many businesses and companies hire contractual managers to manage their contracts of employees, vendors, and suppliers
- Finance manager: finance managers usually deal with the contracts of managers and vendors
- Lawyer: contract law is the specialization of many lawyers, and they offer their professional advice and suggestions for fee
Benefits of Contract Management
Some of the main benefits of contract management are as follows;
Many online tools, software, and applications are available that managers could use to automate the contractual processes. They help them to decrease the chances of human error and improve the efficiency of the process.
Promote Business Functions
The company would perform better if the contractual agreements are successful. It offers them an insight into how they negotiate for better results for their business, and it saves their money.
It lowers the risk rate of various businesses and companies by explaining the responsibilities and expectations to different partners. It offers companies more power in dealing with legal disputes. However, when you lower the risk, then they save their capital and resources from legal disputes.
Contractual management helps companies to keep tracking the performance of vendors and suppliers so that they could establish a better relationship with them by communicating all the terms. When you start tracking vendors and suppliers, then it lowers the risk rate.
It compels different parties to follow the contractual obligation. It has its outcomes and expectations that make partners comply with the contractual agreement.
Conclusion: What is Contract Management? Significance, Stages, Benefits
After an in-depth study of what is contract management; its significance, various stages, and benefits; we’ve realized that legal documentation is very important in business dealings. If you’re drafting the legal documents, then keep in mind the abovementioned guidelines.
Ahsan Ali Shaw is an accomplished Business Writer, Analyst, and Public Speaker. Other than that, he’s a fun loving person.