When it comes to contracts, the importance lies in the way in which it is established, executed, and eventually concluded. This whole process is known as the contract management life cycle. If this cycle is not adequately managed in the most precise, clear, and organized manner, there may be severe consequences ranging from legal to financial. Thus, all business dealings must be done through a formal contractual agreement. Contract management is and can become an enormous task, especially if there are multiple suppliers and vendors involved.
While some businesses and corporations can afford to employ in-house or contracted legal counsel to manage all contracts, this is not a financial nor practical reality for most. It is also not the most technologically-savvy way either. Not to mention the amount of administration work and time that goes into the management of contracts. Contract management on a logistical level also requires significant space for filing and storage, another resource that many small enterprises do not have. Therefore, if you are not currently managing your business contracts adequately or utilizing a means of doing so, you are opening up yourself to many possible risks down the line. This discussion will look at why contract management is so important, and how you can best achieve it.
What Exactly Is Contract Management?
Contract management is a cyclical process of handling contracts from their creation, to amendments to carry out and eventual termination, and repeat. This exercise is conducted in such a way that is most financially viable while meeting the goals of all involved parties and increasing the business or organization’s performance outputs. The overall process is labor-intensive and involves an extensive amount of paperwork organization and administration. The team behind www.contracthound.com suggests using an online platform that allows you to store and manage all your contracts in a cloud-based storage system. Even more, it allows for reminders of expiring contracts so that you can stay on top of your deadlines and renewals. For organizations with an extensive list of suppliers and vendors, opting for this type of service is a no-brainer.
The Life Cycle Of Contract Management
The life cycle of contract management is an evolving model that outlines the basic steps involved in managing contracts. It is important to be aware of each step and how it informs the next and so on. While some steps are more necessary to certain organizations than others, the model loosely follows the same pattern across industries.
In this phase, the goals for both parties are set, the risks are identified and the needs and regulations for the contractual relationship are outlined. This process might seem unnecessary to some before the agreement begins, however, it is a particularly important step. This is the stage for mitigating risks by looking at any hypothetical scenarios that could potentially occur. It ensures both parties are aware of and have given thought to the risks.
This is the process of wording the contract. An especially critical point where any ambiguous language could lead to issues down the road. It is wise to consult a legal firm for this step if it is accessible, as they are experts at ensuring the contract is legally-binding and protective to all.
This is the part when both parties negotiate on the terms of the agreement, reviewing and adding where necessary. In a healthy scenario, there is trust and transparency, open communication, and respect for each other’s needs. This will pave the way forward for a mutually-beneficial business relationship. Unfortunately, however, in some less healthy situations, this part of the cycle can involve animosity, distrust, and resistance. This can also prove to be a costly and timeous process. It can also set the tone for the relationship going forward.
Once the above step is finalized and both parties are satisfied, they must both then sign the agreed terms. How each business chooses to handle this process will differ based on their regulations and legal counsel. For most, an electronic signature or handwritten signature is sufficient.
5. Tracking And Revisions
Contracts are fluid and terms will evolve during the execution process. Throughout the contractual relationship, the carry-out needs to be tracked to ensure both parties are following the contract clauses. It will also allow for monitoring so that adjustments and necessary revisions can be made. Just like the above steps, both parties need to agree on any revised terms as they occur and the contract will be updated accordingly. This step, like others, emphasizes the ease of using contract management software where you can easily amend the contract as needed.
At this point in the contract life cycle, as the contract draws to a close, it is an opportunity for both parties to decide whether to end the contractual relationship or to renew and/or begin a new one. The standing contract will either be updated to account for the new dates, with any needed revisions, as discussed above. Alternatively, both parties might opt to enter into an entirely new contract agreement. The cycle repeats itself.
The final stage of the contract management life cycle is the exit phase. At this point, either at the end of the contract span or due to another factor, both parties agree to end the contract. This might be due to a host of reasons. This exit step will have been outlined in the initial contract, such as if one party chooses to end the contract before it expires, or fails to renew it on time, or violates one of the terms. In these scenarios, there might be financial implications for the party who breaks the contract agreement, known as a breach. If the contract ends as a result of it reaching its lifespan, and neither party opts to renew, then there should not be any financial or other implications and both parties will walk away from the contractual relationship.
This discussion has carefully outlined the complicated and detailed process of contract management. It has also pointed out the need for effective contract management software to handle all the steps in the most efficient and organized manner. If you own a business and encounter any business relations with other businesses or contractors, then understanding this process is essential for you and the success of your operation.