Companies, both large and small, rely on contracts as essential components of their operations. These agreements establish legally enforceable terms, defining and regulating mutual rights and obligations between parties.
Contracts have been a fundamental part of transactions long before the advent of commercialization and the establishment of capitalist economies. Even in historical times, during the reigns of kings and empires, agreements played a crucial role in determining the terms of a deal, with parties obligated to uphold these terms.
Throughout the years and amid significant societal changes, the fundamental principles behind contracts have endured. Contract Management, therefore, involves the systematic handling of contracts. This process encompasses the management of contracts from their inception through to their execution by the designated parties and eventual termination.
Given the multifaceted nature of contracts, Contract Management has introduced various levels and stages to address each aspect of the agreement. Key elements of contract management include performance analysis, aimed at optimizing operational and financial efficiency, while also identifying and mitigating financial and reputational risks associated with non-compliance with contract terms.
Principles of Contract Management
For effective management of both tasks and individuals involved in an agreement, the team must have a comprehensive understanding of the work, resources, and time needed to complete the project. A clear grasp of these elements serves as the cornerstone of contract management.
Advantages of Contract Management
Preservation of Work Quality: The entire contract management process is designed to uphold the quality of work performed. It ensures that tasks are executed efficiently within the appropriate time frame and that resources are utilized in the most cost-effective manner. This guarantees that the business receives the best value for money from every contract entered into, achieved by identifying and mitigating financial and reputational risks.
Enhanced Project Control: Effective project management is crucial for overseeing work during the initiation phase, ensuring that tasks commence appropriately.
Increased Revenue: Implementation of contract management contributes to higher revenue generation in two ways. Firstly, the company can maintain competitiveness in the market and secure more contracts. Secondly, the work performed by the company attains a higher quality, resulting in superior outcomes that allow the business to command premium charges.
Agreement Management Vs. Contract Administration
The scope of Contract Management encompasses the entire lifecycle, spanning from its creation to its termination. However, Contract Administration specifically involves the processes involved in designing agreements between the two parties. The cycle of contract administration concludes once the agreement is mutually agreed upon and signed. Simultaneously, contract management initiates after the signing and continues until the termination of the arrangement.
Contract Administrators are tasked with ensuring the satisfaction of both parties with the jointly created agreement. Conversely, Contract Managers ensure that all parties involved in the contract adhere to all the stipulated terms.
Phases of Contract Management
As previously mentioned, Contract Management goes beyond the mere act of getting agreements signed. It entails a series of steps that guide and establish procedures for handling every aspect of the agreement. This process is facilitated by maintaining clarity and comprehensiveness in the contract.
Development Stage
We recognize the pivotal role that planning plays in the success of any strategy. A proficient manager always prepares meticulously for their responsibilities. The development phase of contract management involves creating a flexible roadmap to accommodate potential contingencies.
The development phase serves as the initial step on the extensive and detailed journey of contract management. During this phase, an assessment of the company’s needs and resources is conducted. It involves conceptualizing the key components of the contract process, ensuring that all subsequent steps are well-structured and resilient to potential challenges. This preparation makes the process ready for improvisations during contingencies. The aspects to be addressed during the planning phase include:
- Types of contracts to be managed
- Criteria used in the negotiations
- Responsibility for each stage
- Requirements for the optimal performance of the project
- Issues/bottlenecks for each step and potential solutions
- Necessary resources for the execution of the contract strategy
The creation phase establishes the foundation for the subsequent stages/levels to unfold.
Partnership Stage
The collaboration phase ensues after the Creation, during which the structure of the contract management has been established. Its primary objective is to implement the established framework for new and upcoming contracts. This phase also involves the creation of new standard agreements for routine and commonplace situations. A common challenge faced by contract managers in this phase is formulating a formula that meets requirements while minimizing risks.
The phase proves to be straightforward for routine situations. Managers simply need to identify the appropriate contract type and input the relevant details, making minimal or no changes to the contract document. However, the task becomes more complex when dealing with intricate scenarios, necessitating the creation of a new document from scratch to address compliance, specifications, and rights. The agreement is finalized with an e-signature, concluding the Pre-contract State.
Signing Stage
The Signing Stage represents the subsequent crucial step in Contract Management. This is where efforts are made to execute the strategies devised in the preceding phase. It is also the phase in which contract management software is deployed to facilitate the execution of contract-related tasks. The software is recognized for its ability to transfer contracts to a central repository.
Contract Management Software is a digital tool that empowers users to monitor and oversee contracts throughout various stages of their life cycle. This software also facilitates features such as renewal notifications, compliance management, digital signature capture, and the management of contract templates.
Another significant aspect of the Implementation phase is onboarding. It ensures that every party involved in the contract comprehends the vision and goals of the agreement, as well as the contract manager’s vision, and is comfortable with the tools in use.
Following the completion of the Implementation Stage, along with the e-signature from both parties, comes the handover phase, wherein it is confirmed that the contract is free of errors and defects. Every function, responsibility, milestone, and objective is verified.
Tracking Stage
This is the stage where all the objectives outlined in your agreements come to fruition. Therefore, it is also the phase where you must pay closer attention to all the terms stipulated in the agreement and conduct regular monitoring to ensure that everything is proceeding as it should.
During the contract phase, the role of managers is to ensure that everything is on track and in accordance with the terms laid out in the agreement. They are responsible for identifying issues and establishing early warning systems.
Managers can draw inspiration from the Planning Stage for this task. One could create a properly ordered list of all the contract elements to be verified and reviewed. This not only prevents any part of the agreement from being overlooked but also serves as a quick method to identify discrepancies between the predetermined elements and the executed work.
Renewal Stage
The Renewal phase may not be inherently a distinct stage, but it becomes relevant to focus on it after the contract phase. However, the principles of the Renewal Stage should be applied across all domains.
In contract management, the Renewal phase primarily represents a juncture in your contract life cycle where you decide whether to renew your contract or terminate it. Given that there are provisions for penalties or default actions in case of non-compliance with the agreement, considering the proactive termination of the contract becomes more crucial in your overall contract decisions.
Renewal involves evaluating contract performance and exploring various options, including renewal and modifications to the contract if necessary. Stakeholders should be aware of termination and renewal dates and ensure that both parties have sufficient time to gather information before decisions are finalized for yet another contract.
Post-Contract Stage
The post-contract phase marks the culmination of the agreement. It follows the conclusion of contracts. During this phase, housekeeping procedures ensure that everything is handled properly, including the release or payment of final invoices and the archiving of contracts.
Moreover, many contract managers often conduct a post-mortem analysis of their contracts to glean insights for future agreements. This post-mortem provides valuable information and lessons learned that are sure to enhance the outcomes of subsequent contracts.
Conclusion
The effectiveness of contracts is only as good as the person overseeing them. Regardless of the quality of terms within contracts, neither party benefits from a deal that is not adequately managed. Therefore, it is crucial to adhere to guidelines in a disciplined manner to extract the maximum value from your contracts.
