Private sector businesses are always facing increasing pressure to reduce costs and improve financial and operational performance. Crucial to achieving this goal is ensuring that your business has effective contract management processes in place to optimise profitability and minimise risk. (Check out our guide on how to draft bulletproof commercial contracts here.)
Effective contract management ensures commitments and obligations from buyers and suppliers are effectively met and delivers value for money outcomes to assist businesses maintain strong business performance and growth. It also ensures both parties understand their obligations, there are no disputes or surprises, and that professional relationships are maintained, even where differences arise.
All too often, many businesses see contracts as little more than a formality which, once signed, should be consigned to a dusty shelf in a back office. A better philosophy to adopt, we suggest, is that a contract should be treated as a ‘living thing’. It should be used as an ongoing guide to remind all parties of the requirements, deliverables, roles, responsibilities and obligations they entered into this ‘marriage’ to undertake and to be held accountable for. With this in mind, an efficient contract management process ensures that:
- the contract is structured properly and reviewed appropriately;
- the contracting parties fully meet their respective obligations;
- business objectives such as profit and value for money are realised; and
- contract weaknesses are identified and addressed.
This User’s Guide is intended to provide a summary of tasks associated with contract management from the establishment of the business case and the confirmation of need, through contract administration and relationship management to the review of contract performance. The activities themselves are divided into two distinct but interdependent phases, upstream and downstream of the award of the contract.
Roles and responsibilities
There are three essential roles for managing contracts effectively. These should be assigned to employees with appropriate skills, experience and delegations of authority to manage the contract and enter into binding agreements with partners. Where necessary, the same person could be delegated to one, two or all three roles.
| Contract owner (CO) | Person accountable for the budget/cost centre that funds the contract Employee with delegation to approve contract payments and variations Recommended to be a senior employee from the business who is impacted by the contract outcomes |
| Contract manager (CM) | Manage contracts through post-award lifecycle as the single point of contact for suppliers on all contract matters Monitor contract performance and compliance. Recommended to be a representative within the business unit with the relevant commercial skills |
| Contract administrator (CA) | Perform administrative activities over the contract management lifecycle (e.g. information management, cost control, etc.) Recommended to be a representative from the procurement team (local, regional or state-wide) |
Stages of the contract management cycle
There are five key stages of the contract management cycle:
- Contract initiation
- Contract drafting and negotiation
- Contract approval and execution
- Contract performance
- Contract audit and analysis
1. Contract initiation
Contract life cycle management starts with contract initiation where one party initiates the contract negotiation process and subsequently embarks upon drafting or authoring the contract document. It is critical at this stage to establish open and strong dialogue with partners to ensure that both parties’ needs, capacities and expectations are met. Essential elements to be considered and agreed at this stage include the contract price, deliverables, start date, key milestones, end date, defaulting events, governing law and dispute management provisions.
2. Contract drafting and negotiation
Once agreed, the agreed terms of the contract should be formalised into an agreement, and then reviewed to ensure that it contingencies such as variations, delays and fluctuations in costs. If possible, ask your legal advisers to draft a ‘Hitch-Hikers Guide’ to your finalised contract, explaining in lay terms how to navigate it and the key provisions and mechanisms for its ongoing management. It is especially important that any KPIs or Service Credit regimes are all clearly explained.
Contracts can be incredibly complex documents and, therefore, to ensure that everyone understands their roles and responsibilities, to allow for simpler handovers, and ensure clarity in all known situations, a simplified summary or guide should be created to assist in interpretation and a shared expectation and understanding of its terms.
3. Contract approval and execution
Once the draft contract is finalised, it should be forwarded to the executive for review, approval and execution. Once copies are exchanged the contract takes effect and implementation can proceed.
Copies of the finalised agreement should be disseminated to responsible managers and electronic copies stores in a centralised database. Both contractual meta data and documents should be indexed and saved.
4. Contract performance
Once the contract has been signed and the work has begun it is easy to fall into the trap of thinking that the hard work is all behind you. The reality is, however, that each parties’ adherence to the contract terms should be monitored over the life of the contract.
Responsible managers should conduct risk monitoring, performance measuring, and milestone reviews. This ensures that the contract is performed in line with agreed promises and expectations. Regular monitoring is, therefore, a key element in the contract management process.
Once the job is completed the contract should be closed out. However, before doing so, make sure to process all final payments, and then document performance standards. Finally, it is important to engage a post contract audit.
5. Contract audit and analysis
Audits and analyses of contract processes, procedures and terms help a company:
- improve business performance;
- develop stronger relationships with its counterparties;
- increase the company’s reputation in the marketplace for efficiency, quality and good business practices;
- reduce risks, costs and delays;
- promptly identify potential problems and compliance issues related to the contract; and
- identify areas for improving the contract management process.
Close out review
Prior to the close-out of the contract, the contract manager should conduct a final performance review. The following should be included as part of the review:
- whether the contract achieved its objectives
- the supplier’s performance
- customer performance
- satisfaction of the users
- contract variations
- disputes that arose during the contract
- budgeted versus actual costs
- weaknesses in planning, management and procedures
- identification and analysis processes that went well, areas that did not go well and potential areas for improvement for future contracts
- audit reports.
Conclusion
Contracts should not be considered as just being there to permit the start of a project and to refer to when things go wrong. They should be monitored against, updated and maintained, adapted to meet the changing needs of the parties and changing circumstances. They can be used as effective mechanisms for keeping projects on track. Following the project management cycle and applying the principles outlined in this guide will not guarantee an incident-free relationship with your business partners but following them will certainly move the odds in your favour.
For more assistance, or guidance around contact management for procurement and other realms of your business contact the experienced team at Biztech Lawyers.
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