The Essential Guide to Effective Contract Management

Contract management touches every business and operations area of an organization. A consistent and efficient contract management process guides and streamlines the management of each contract through all its phases, from creation, negotiation on terms and conditions, and approval, through execution, performance, and compliance on deliverables and deadlines.

Contract management handles any modifications to the contract, as well as its termination. All phases should also ensure customer satisfaction.

The standards for contract management may be spelled out formally in a contract management framework (CMF), which can help guide your organization’s process at a high level. The CMF has four main components that cover a range of activities.

• Establishing Governance and the Contract Management Team: Identify the structure, roles, and responsibilities of the team, as well as the resources needed for contract management and any training.

• Planning, Establishing, and Executing Contract Administration: Establish and monitor the key components of contract administration in your organization, including checklists, payment standards, and strategies for identifying and mitigating risk.

• Managing Relationships: Drive engagement by using communication tools and processes, as well as developing conflict-resolution protocols that build relationships with team members, stakeholders, and partners.

• Managing Performance: Assess whether the contract’s deliverables meet the standards spelled out in the contract, and use performance improvement methods to address substandard work.

The scope of contract management covers strategy, sales, performance optimization, and your relationships with customers and suppliers. The National Contract Management Association (NCMA) defines contract management as “the process of managing contracts, deliverables, deadlines, and contract terms and conditions while ensuring customer satisfaction.” It involves many areas of the organization to ensure that you not only meet your operational, functional, and business objectives, but that you profit from every interaction and deliver cost-effective approaches.

The International Association for Contract & Commercial Management puts it this way: Contract management is “a critical vehicle for high-value management information that supports strategic decision making.”

The contract management framework is unique to your organization. Identify the key data and deliverables for every contract you manage.

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Contract management and administration cover all stages of a contract, from creation and implementation to analysis, in a way that helps your organization improve its performance, boost sales, and increase revenue. It supports the complete customer and sales cycle, as well as the contract life cycle.

This contract management process map walks you through the 10 steps of the management process. Use it to identify the key inputs, deliverables, and outputs for each step in the contract management process.

Favorable discussions or quotes with a potential business partner or vendor trigger the request for a legal contract. In this pre-award phase, focus on the reasons for the contract and whether both sides can fulfill the terms.

At this stage, make sure that senior management supports the request and the partnership or agreement. Doing this will keep you from running into roadblocks later in the process or killing the project because it didn’t align with management’s goals and strategy.

Here’s a list of tasks you should complete in the first stage of contract preparation:

• Identify the needs of the partner or vendor.
• Understand the background of the contract and the business relationship.
• Establish the goals of the proposed project, deal, or transaction.
• Identify and set expectations.
• Identify, define, and outline the terms to mitigate risk.
• Specify the actions both parties need to take in order to fulfill the agreement.
• Identify the key documents and contacts that will support the contract. (Typically, this information is accessible through an online, searchable library by way of an automated process.)

The inputs at this stage are the goals of the project, the information about the activities that support the contract, and the critical dates. The output is the initial documentation that saves the information and provides an early audit trail.

To create an initial draft of the contract, research the purpose of the project and be clear about its goals. You may need to gather documents during the quote process or early sales cycle to ensure you have the context you need to generate the contract. Contracts typically change during negotiations, so both parties need to be flexible with the draft. Here are best practices for the draft:

• The draft should be based on the contract request information.
• The draft should include all related documents needed to fulfill the contract, such as clauses, terms, and conditions.
• The draft should use clear and specific wording to avoid ambiguity or misunderstanding.

Templates with approved language from legal will speed up this stage and help you avoid bottlenecks that can occur when legal has to get involved in drafting every contract. Many automated contract management systems contain a searchable database of approved templates, clauses, and other legal documents.

Negotiations should begin with trust and transparency to ensure that both parties have the best possible agreement. In many cases, negotiators use playbooks that break down the contract’s terms, fallback positions, clauses, issue lists, and questions that both parties need to answer during negotiations. Here are the steps in the negotiation stage:

• Circulate the draft among internal stakeholders to ensure you’ve addressed all questions and issues.
• Circulate the draft among the partner or vendor’s main contacts to gather feedback and identify points of discussion.
• Review feedback on the draft, comparing versions and identifying the discrepancies that require negotiation.
• Negotiate the terms and conditions, determining what is acceptable to both parties.
• Circulate suggested revisions until both parties reach a final agreement on the terms and conditions.
• Document every change to the contract. (You can shrink the review time of these changes by using tracking features in software.)
• Finalize the changes, usually through a term sheet or letter of understanding (LOU) to make sure everyone approves of the terms and conditions before signing the final contract.
• Identify the people who have the authority to formally approve and sign the final contract, as well as other signing details.

When you’re done, you will have a final contract or agreement document that is ready for formal approval.

Once everyone has agreed to the terms of the contract, you can get final approvals. Depending on the contract’s size and scope, you may need to include your legal department, key executives and other internal management, external stakeholders, and the customer. The input is the contract document; the output is the final contract approval.

You may encounter another bottleneck when seeking management approval. To avoid that potential obstacle, make sure you’ve identified who needs to review the contract, and have policies and procedures to confirm the approval process.

Whether you use a manual workflow for approvals or an automated system that routes the contract and sends alerts, you must still oversee the process, so the contract can be completed and you can close the transaction. You can use parallel approvals (gathered by various departments at the same time) or serial approvals (sign-offs that happen in a consecutive workflow) to keep the process moving forward.

In this detail-driven phase of the process, approval tasks and checklists help you prepare for the transaction’s closing. Keep records of all the pre-closing, meeting, memoranda, and approval workflows. This documentation also helps you later, during your compliance and audit trails.

To finalize the deal, all parties need to sign the approved contract. The contract goes into effect with those signatures. At this point, everyone should understand how the contract will work. You can simplify the signature process with e-signatures, especially if you are working with parties in different time zones or on different continents. Next, give copies of the signed agreement to all parties and store them in filing cabinets or in an online server or document library (where you can search for and manage them).

Not only the source of truth for everyone involved in the project, each contract also contains a storehouse of data that you can use to grow your business. Gather all the signed contracts and supporting closing documents in a central system, so you can search, track, and retrieve the data. By organizing your documents this way, you can reap the following benefits:

• It’s easy to access for record management, contract visibility, quality assurance and awareness, and complex situations.
• It tags them with relevant keywords for easy search results and document retrieval.
• It structures them for machine-readable or robotic discovery of data, which may include optical character recognition (OCR) conversion of PDFs or JPEGs into text documents that you can search using machine learning or artificial intelligence (AI).
• It stores them securely to protect against theft or cyber attack.

Once everyone has signed the contract, all parties need to adhere to the agreement’s terms and conditions. Failure to meet any performance measures, payment, or reporting can put you in breach of contract and may result in liabilities or contract termination. If you don’t comply with regulations, you can face severe penalties and even damage your organization’s brand.

Throughout the contract life cycle, you need to ensure you are following the contract’s aims and sections (also known as obligation management or commitment management), and be on the lookout for any signs of noncompliance, including quality issues. One way to track and enforce compliance is by ensuring that a records management system is safely storing, accessing, and updating all your critical documents.

Reports and audits help you monitor the progress of a contract and alert you to potential problems and compliance issues. The contract should spell out the scope of any report or audit, but this can be tricky to monitor if the contract itself is stuck in a filing cabinet or desk drawer. With digital files and cloud storage in a searchable database or contract repository, it can be easier for you to know what you need to track and when you need to deliver the information.

Once you’ve established the best way to quickly and efficiently find the information, consider using an audit or report checklist that includes these details:

• Payment, billing, and invoicing
• Project expenses and spending
• Project milestones and deliverables
• Quality testing
• Customer service
• Systems and documentation used for audit trails

Reports and audits can reveal deficiencies or conditions that put the contract at risk, and you can put strategies in place to eliminate, mitigate, or transfer any potential risk.

Use the information in your reports to review your progress and identify whether you need to make changes to the contract. Establish a plan and time frame to review the performance of the contract. Revisions, changes, and amendments are common in the contract life cycle. Here is a list of typical changes:

• Cost or price
• Scope of work
• Deliverables
• Schedule or timeline
• Overlooked items

A contract manager uses their skills in change management and document management to identify these areas, manage the relationship between the parties, and capture the details of the changes to which both parties agree. Some problem areas may be too severe to solve with a contract amendment. In those cases, contract termination may be the best solution for poor vendor performance or other issues.

At the end of the agreement, you have the opportunity to consider extending the business relationship and renewing the contract. Make sure you’ve set alerts before the contract expires, so you can consider your option to let the contract lapse and end the relationship, renew the agreement, or renegotiate and create a new contract. You can rely on the performance reports to identify the best business — and revenue — opportunities, which feed back into the sales cycle.

The process of managing contracts covers almost every industry, government agency, commercial business, academic institution, and more. All kinds of businesses, from public agencies to private companies, rely on a range of contracts that require contract management. Here are some examples of agreements that require contract management:

• Commercial Contracts
  • Employment letters
  • Purchase contracts and orders
  • Sales contracts and invoices
  • Utility contracts
     
• Complex Agreements
  • Construction projects
  • Highly regulated or technical goods or services
  • Intellectual property
  • International trade
     
• External Parties
  • Clients
  • Distributors
  • Freelancers
  • Suppliers
  • Partnership agreements
  • Vendors
     
• Internal Parties
  • Contracting
  • Employees
  • Legal
  • Sales and finance

Procurement relies on contracts to buy the supplies and services your business needs. Sound contract management improves your procurement cycle and management. Here are the most common types of procurement contracts:

• Cost-Reimbursable or Cost-Plus Contracts: When you haven’t fully defined the scope of work, use this agreement to pay the vendor or service provider for expenses related to developing the goods or services.
• Fixed-Price Contracts: This is an agreement to provide goods or services at a set price and delivery schedule.
• Time and Materials Contracts: This is a contract you use on smaller projects with high uncertainty. It includes an agreement to pay an hourly rate for work, plus the cost of resources or materials and a percentage of the total cost.

Contract management helps you identify and define your purchasing strategy, as well as manage the relationships with your vendors and service providers. Here is a list of some of the benefits of contract management in procurement:

• Establish detailed master agreements with each vendor.
• Ensure the vendor fulfills the agreement.
• Monitor performance and quality.
• Track related agreements to ensure you receive the best value for supplies and service.
• Manage the vendor relationship to establish both long-term supply chains that are mutually constructive and a seamless acceptance of services and supplies.
• Centralize procurement documents within the general contract portfolio.
• Improve risk management by monitoring for delivery delays, late payments, or insufficient inventory.

Construction contracts typically govern goods or services that are part of the built or physical assets, such as infrastructure; structural, electrical, or mechanical systems in buildings; the transportation fleet; or the plant machinery. Contract management covers three phases:

1. Pre-Contract: Prepare tender documents, seek tenders, and conduct contract negotiations.
2. Contract Execution: Prepare the final contract documents for execution.
3. Post-Award: Measure performance against the terms and conditions of the contract, ensuring policy and regulatory compliance and timely payment.

Here are the most common types of construction contracts:

• Cost Plus: This refers to payment of the actual costs or expenses that construction activity generates, plus a pre-negotiated amount that covers the contractor’s profit or overhead, such as a fixed percentage or fee, or a guaranteed maximum price or bonus.
• Lump Sum or Fixed Price: This is a contract with a fixed-price total for all construction work, which can include incentives for early completion.
• Time and Materials: This establishes an hourly or daily rate for work, plus additional expenses that could come up during construction.
• Unit Pricing: This is a predetermined price for specific materials or quantities that you set during the bidding process to avoid a cost increase during the construction process.

Nonprofits have to balance regulatory requirements or mandates from the granting organization with the needs of those who benefit from the mission and work of the nonprofit. Granting organizations and others who fund the work of nonprofits require precise contract management of spending and deliverables.

Much of the work of grant management relies on compliance with the terms of any grant or contract award. Nonprofits risk losing funding if they struggle to comply with the terms of the grant or are not transparent about the management of the contract. Here are some best practices for nonprofit contract management:

• Ensure that the work covered by the contract aligns with your organization’s mission and strategic goals.
• Update your policies, procedures, and systems to ensure compliance with the requirements that the funder set out in the contract.
• Dedicate sufficient resources to write reports, attend meetings, and provide close oversight of activities covered by the contract.

Government contracts follow a typical path: The agency (or customer) identifies a need; organizations submit proposals; the agency selects a proposal; and the contract is executed. Government contracts also have considerations that are not typical in private-sector contract management:

• Federal contracts are governed by the Federal Acquisition Regulation (FAR) System, which guides recognition of needs, acquisition planning, contract generation and approval, and contract administration.
• Federal agencies must comply with strict contract evaluation guidelines, spending requirements, and contract management.
• State and local governments must follow certain federal or state laws, but may not be required to adhere to FAR regulations.
• Government contracts often include a large oversight team of procurement staff, advisers, consultants, engineers, operations managers, and others.
• Federal agencies use past performance evaluation (PPE), a report that summarizes how an organization fulfilled previous contracts, as a reference when awarding new contracts.

Contracts are the lifeblood of your organization, governing your internal and external relationships, as well as ensuring that your business benefits from every agreement and achieves optimal financial returns. Use these best practices to get the most from every contract and improve your contract management.

One person in your organization should be responsible for contract management. This will save your entire staff from scrambling to identify who has the data you need and the approvals you want. At the same time, train key staff members in the process, so they know how to do the following: gather needs and requirements; use the best templates to draft approved contract language; follow guidelines for negotiating; and oversee contract management.

Not sure where to start? Take a look at your existing procedures and see who holds key information. This can help you plan, design, and implement a mature contract management system. Involve other stakeholders and senior management to identify what’s working, where bottlenecks exist, and what steps to take to improve communication. Here are some details to consider as you establish your contract standards, documentation needs, and schedules:

• Contract Management and Reporting: These include contract schedules, audits, reports for deliverables, and fiscal accountability.
• Contract Renewal: Consider the standards that guide your decisions about whether to renew or terminate the agreement at the end of the contract.
• Contract Requirements and Review: These include standard templates that form the basis for the contract, specific outcomes and deliverables accepted and documented by all parties, and the approval and signature process.
• Procedure Requirements: These include the internal policies and procedures you need to manage the contract and avoid bottlenecks, the reporting guidelines to monitor quality and cost, and any conflict resolution strategies.

When you’re done, you should have a contract management process to ensure that everyone handles contracts in the same way and that every department knows what role it plays in that process.

A contract management reporting template helps you organize and track each contract for your organization. With this template, you can create a separate document for each contract you manage, complete with a project description, key dates, and deliverables, plus the information you need to ensure the contract stays on track or to create alerts if your project is falling behind.

‌ Download Contract Management ReportingTemplate - Excel

Contract management can rely on project management principles to enhance a robust and complete system once you have a full understanding of every step in the contract process. Consider how you can accomplish these tasks:

• Manage Service Delivery: Vendors should deliver goods and services in the quality and quantity that you’ve stipulated in the contract and on the schedule to which all parties have agreed.
• Manage Relationships: Communication between your organization and the vendor or service provider should be frequent, fair, and transparent to avoid misunderstandings and keep the door open for future contracts.
• Manage the Contract: Day-to-day contract administration and oversight ensures that all parties are meeting the terms and conditions, as well as identify and mitigate potential financial and regulatory risks.
• Conduct Assessments: Reports and audits can help you identify gaps between the written contract and the actual implementation, as well as ensure that you follow your organization’s contracting process.
• Protect the Contract’s Value: Look for issues that could affect your revenue or margin, including unrecorded liabilities, underreported revenue, or overpayments. Make sure the value of the contract to your business doesn’t deteriorate during the contract life cycle.
• Manage Change: Most contracts require adjustments or amendments during the deployment of deliverables. Your organization needs to effectively document, communicate, and handle all changes.
• Seek Improvements: Once you complete the contract, evaluate what worked, how you can improve your contracting process, and how you can enhance your relationship with the vendor or service provider.

Data drives decisions concerning your success in contract management and performance. You can’t know how well your process works without having clear goals and establishing key performance indicators (KPIs). While every contract may be different, you can use certain metrics with your vendors to evaluate contract management.

• Contract Life Cycle Length: Measure the number of contracts in each life cycle stage (pre-award, award, and post-award) and the duration of contracts in each stage. Look for bottlenecks in your process, and identify vendors that may create delays. Determine an acceptable range for a particular internal department or external vendor, as well as for specific products or deliverables.
• Contract Value: Measure your overall contract value (average revenue per contract) on a monthly, quarterly, and yearly basis. You can compare the annual value of recurring contracts with that of new contracts, as well as with the lost revenue from contracts that you terminate or don’t renew.
• Contract Trends: Measure the number of contracts by type, partner, customer, program, or geographic region. Look for growth opportunities or established business that you can build upon.
• Contract Compliance: Measure how well you and your vendors meet the terms and conditions of your contracts. Missing milestones can be costly in relation to revenue or other regulatory guidelines, while missed payments or overpayments can cost you money. Also, look at the number of changes needed for your contracts and identify any amendments that are issued on a regular basis. You may identify needs in your contract templates or pinpoint issues with specific external vendors or internal departments.
• Quality: In manufacturing, quality is easy to measure. A product meets the specifications or acceptable number of defects per number of parts. In service contracts, you can measure quality by the number and type of customer complaints and by response times. Look for any exceptions that you make on a consistent basis, and note whether you are exposed to additional risk.
• Cost Effectiveness: This starts with the contract’s price terms but extends to the length of the contract cycle, performance metrics, and the quality of the goods or services.
• Contract Execution: Measure how effectively and accurately you gather signatures, and make sure they are the right signatures. Contracts without the appropriate authorization can carry unforeseen consequences, especially if the products or services are highly regulated or expose you to increased costs, added risk, or even lawsuits.
• Renewal Rates: The percentage of contracts that you don’t renew can help you identify revenue loss from existing clients. That means your sales department has to work harder to gain new clients, and it can increase your customer acquisition costs. Determine the acceptable range of renewal rates for your organization.

A KPI dashboard can help you track everything from your total number of contracts to trends per contract or partner/vendor. Once you know what you want to monitor, choose the dashboard that will provide the right data presentation to guide your business. Use this template to create custom KPI dashboards for your business.

‌ Download Key Performance Indicator Dashboard - Excel

Mature contract management establishes a steady feedback loop between your contract portfolio and your business performance. Your goal is to maximize financial and operational performance.

Examine your current processes (the group of activities or tasks you need to manage a contract) and your workflows (how the tasks are organized and who completes them). Identify and eliminate tasks, steps, and obstacles that waste your organization’s time, money, and resources. Analyze your contracts for benefits to your organization, whether they are of financial or strategic value. Using your KPIs, you can also identify vendor performance.

Contracts touch many departments in your organization. Ensure that teams don’t work in silos, and collaborate smoothly and transparently. A shared system or document library provides real-time access to information, and it streamlines communication and decision making. Contract management is easier when all stakeholders can quickly make decisions.

If your legal department or general counsel is considered the “department of no,” you’ve already identified one roadblock to successful contract management. Start the contract management process with up-to-date templates that account for all the legal aspects. Use these templates to create consistent contracts that help you avoid financial and compliance risks. By doing so, you free up legal counsel to focus on the critical, unique aspects of a contract, rather than the standard boilerplate that’s required to execute and monitor the contract terms and conditions.

Document the role of counsel in your contract management. In some organizations, lawyers work behind the scenes to draft, finalize, and monitor contracts. In others, lawyers are active negotiators. Use their expertise to establish legal playbooks that you can use during negotiations.

Aberdeen Group, an international market intelligence company, found that organizations with contract management solutions perform at a higher level than their peers. The best-in-class companies have more than 75 percent of their contracts in a searchable repository, enabling them to gain greater insight into contract performance, mitigate risk, and improve their contract renewal rates.

With manual contract management, you run the risk of bottlenecks in the sales or approval cycle that could result in missed renewal opportunities and lost business revenue. Manual contract management exposes you to manual errors and inefficient filing systems that bog down your organization.

That’s why many organizations accept, trust, and rely on cloud-based applications and software. These systems can feature central document repositories that function like a digital version of a filing cabinet. Here are a list of features:

• Organized and searchable contracts that give you greater visibility into the data and details of your contract portfolio
• Self-service portals
• Electronic signatures (e-signatures) and approvals
• Pre-approved contract templates, which are especially useful for larger contracts that require coordination among multiple departments and parties
• Standard legal playbooks
• In-depth tracking and reporting tools
• Software storage that securely protects contracts and processes

The more robust systems bridge the gap between your company’s customer relationship management (CRM) and enterprise resource planning (ERP) systems. Automated systems allow you to accomplish a range of tasks, including the following:

• Streamline contract management processes, giving management, stakeholders, and general counsel greater confidence.
• Create contracts quickly and accurately, shortening your sales cycle, improving contract flexibility, and decreasing contract disputes.
• Increase revenue by collecting payment sooner and improving contract renewal rates.
• Track compliance quickly and improve legal, vendor, and supplier compliance.
• Cut your administrative costs and free up staff time.
• Decrease revenue leakage.
• Mitigate risk quickly.
• Grow sales due to more time for lead generation and managing customer relationships.
• Improve your KPI analysis and spend optimization, identifying business opportunities and cutting costs.

You can take steps to move to an automated process, which combines your collection of paper and digital files to create an online repository that helps you grow your business and optimize your contract administration process.

Put your files in one location with these steps:

• Conduct an audit of contract locations. Identify where your files are currently located and who manages, stores, and accesses them.
• Identify the digital systems used to store and monitor contracts.
• Gather supporting contract management tools, such as contract templates and checklists.
• Determine how you want to structure a single system that creates a central repository of contracts, templates, amendments, and vendor information. Include key terms that you will use to search the data.

Improve your contract workflow with these steps:

• Identify which departments or areas need to review contracts.
• Map the order for contract approval.
• Determine how you will add contract language and version control.
• Build a library of legal playbook talking points and tools.
• Evaluate which processes can be automated to free up manual stakeholder and legal reviews.

Establish your contract execution process for all stakeholders with these steps:

• Gain process efficiencies with alerts and notifications.
• Implement an e-signature process.
• Determine how you will distribute final contracts to all parties.

Monitor contract performance with these steps:

• Build and use role-based dashboards for real-time performance data.
• Use compliance tracking to identify and mitigate pain points.
• Create alerts that monitor milestones, invoicing, and renewal deadlines.