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Chris Roe | 31 Jan 2022 | 15 min read
The Ultimate Guide to Contract Management
It’s hard to find an organisation that doesn’t have some sort of contractual agreement, whether it’s with their clients, sellers, partners, or employees. That’s why it’s vital to know about how to best manage these contracts no matter the scale of your operations.
In this guide, we’ll provide a wide-ranging overview of contact management, answering every question you might have on the subject.
The History of Contracts
Contracts have been an essential part of human life since the dawn of civilization. The ancient Mesopotamians had written contracts as early as 2300 BCE.
These contracts covered things you’d expect today, ranging from sales and purchasing agreements to employment and labour contracts. Here is one example of an ancient contract, complete with a timeline, terms, and a defined quality standard!
“One coat of mail, insignum of power which will protect, is to be made by the woman Mupagalgagitum, daughter of Qarikhiya, for Shamash-iddin, son of Rimut. She will deliver in the month Shebat one coat of mail, which is to be made and which will protect.” – 488 BCE, from the Fordham University Archives
You can tell Shamash-iddin is very keen on the “protection” part of this deal being honoured, or else Mupagalgagitum would be in breach of contract.
For more proof of the importance of contracts, look no further than what you’re reading right now. One of the main reasons that writing was invented was for recording contracts.
While we give it no thought, contracts have shaped the world we live in. International treaties are simply contracts between nations at a grand scale, starting and ending wars or shaping trade.
On a smaller scale, the role of contract management within organisations has become more refined and important within the last thirty years, as detailed later in this guide.
What is a Contract?
A contract is an agreement between two or more parties. It can be anything from a handshake deal to a formal written document. It is formed when one party makes an offer, and the other party accepts it.
Generally, a contract is legally binding if it has the following five elements:
- An offer
- An acceptance
- The intention to create binding relations
- A consideration (usually monetary)
- Genuine consent of the parties (e.g. Not an agreement with a minor, who lacks capacity)
- The legality of the agreement (e.g. Not enticing someone to commit a crime)
If a contract lacks any of these elements, it is not a valid contract. There is no specific format a contract must follow, but it will generally include terms that will form the basis of the agreement.
What is Contract Management?
Contract management is when someone takes responsibility for managing the contracts between various parties.
When there is a dedicated role in an organisation for this, this person is referred to as a contract manager. Contract managers can work in all types of organisations, and are commonly found in government, organisations that work with government, and defence firms.
While many organisations may not have a dedicated contract management role, there is usually someone who handles contracts as part of a wider function.
Contract management is usually segmented into two stages: upstream and downstream activities.
- Upstream activities, also known as pre-award activities, are any tasks relating to the contract that happens before it is accepted.
- Downstream activities, also known as post-award activities, are any tasks that happen after the contract has been accepted.
While many people don’t realise it, a considerable amount of work needs to happen in each of these stages, ranging from providing the business case for why a contract is needed to ensuring the contract is delivered on.
How Do I Become a Contract Manager?
To become a contract manager, attention to detail is a must. Missing small things can lead to big problems further down the road, so previous examples of your aptitude in this area will carry weight.
Contrary to common belief, you don’t need to be an attorney or have a degree in law to be a contract manager. However, you will need to develop an understanding of legal terminology. Qualifications always help, particularly in the field of business, construction, or law (depending on the industry you are working in). There are also dedicated diplomas in contract management.
Having strong computer skills is vital as a contract manager. More and more tasks in the contract management lifecycle are being automated, so being (or becoming) familiar with contract management solutions is important.
Being familiar with current best practices is important too. Reading the rest of this guide is a great first step!
Is Contract Management the Same as Contract Administration?
It is very common to hear these terms used interchangeably. However, there are some who draw a distinction between the two.
Contract administration is generally used to refer to pre-contract activities such as the planning, drafting, and closing of the contract process.
In contrast, contract management is a broader term used to refer to managing the whole contract cycle. However, some people use it to specifically refer to only activities that take place after the paperwork has been signed.
Key Terms to Know
Contract management, like many fields, is not immune to jargon. Here are some important terms that should know to start off.
Bid: A response given to the buyer from the seller in a transaction.
Breach of contract: A failure by one or more parties to comply with terms or perform their obligations.
Buyer: The party looking to procure goods and services within an organisation.
Compliance: In contract management this can mean either conforming with a set of rules and regulations defined in the contract, or an organisation’s need to adhere to certain laws, policies, and regulations (determined internally or by the government).
KPI: Key performance indicators, a set of pre-defined factors that can help measure progress and achieve goals against contracts.
Maverick Spend: See ‘Off-Contract Spend’.
Outcomes: The deliverables purchased and required by the contract.
Off-Contract Spend: Purchases that occur outside of a contract. This sort of spend typically involves minimal to no negotiation, does not follow an organisation’s purchasing policies, and does not make use of existing arrangements. As such, it is widely seen as undesirable.
Parties: The people or organisations entering a contract.
Procurement: Procurement is the process of selecting, identifying, and acquiring goods and services from an external source, often via a tendering or competitive bidding process. This typically results in a contract.
Risk: A potential threat or event that could compromise the organisations’ position if it happened.
Seller: The party providing the goods or services that a buyer wants to purchase.
Scope: The description of the entirety of work to be done as part of a project or contract.
Specification: A list of requirements for the product or services being purchased.
Terms: The details of the agreement and the obligations or deliverables expected.
Vendor: See ‘Seller’.
To read a more comprehensive list of terms, read our article: “The Beginner's A to Z of Procurement Terms”.
What are the Benefits of Good Contract Management?
Whether an organisation is operating in the public or private sector, effective contract management offers significant benefits, such as:
1. Helping Meet Obligations & Track Performance
Making sure deliverables are being met helps the organisation get the most out of its contracts. Otherwise, your arrangements may suffer during the early phases as there is nobody keeping tabs on them.
2. Improving Operational Efficiency
With a dedicated contract management function, it is possible to identify areas for improvement, reduce errors and keep processes moving quickly. All of this can lead to time and money saved for the organisation.
3. Enforcing & Ensuring Compliance
It is important to make sure your organisation adheres to any regulations around contract management. This may be making sure everything is audit-ready and all compliance requirements have been met.
4. Reducing Maverick Spend & Improving Visibility
Most organisations want to make sure undocumented expenditures are kept to a minimum. Contract management is one way to make sure this happens. It also helps increase spend visibility and spend under contract.
Why Can Contract Management Sometimes Be Ignored?
Typically, this is a failure to convince executive leadership of the importance of contract management in general. As a result, those in charge of contract management are left understaffed and with multiple contracts to manage – often more than can be reasonably expected per individual.
The organisation may also not have someone who is in a dedicated contract management role, typically due to organisational size and budgetary reasons. In this case, the role of handling contracts may have fallen to someone who is either short on time or knowledge on how to effectively handle all these contracts.
What Are the Consequences of Ineffective Contract Management?
There are many consequences to ignoring contract management; some erode and cause problems over time, while others strike suddenly and cause catastrophic incidents. Neglecting a contract life cycle can cause the following issues.
It’s a well-researched fact that poor contract management costs organisations money. Research by the independent International Association for Contract and Commercial Management (IACCM) found a massive 9% of annual revenue can be lost from ineffective contract management.
This can be caused by project delays, cost overruns, claim and dispute settlements, and revenue leakage from liquidated damages.
Auto-Renewals & Missed Deadlines
When nobody is keeping track of your contractual agreements, the end dates of these can be fraught with peril. If you are only licensed to use a product for a certain time and keep accidentally using it after this time lapses, you could be exposed to liability risk.
Some contracts have an “auto-renewal” of their contract to make sure this does not happen. However, if nobody is keeping track of if the products or services covered by this contract is being used, the organisation could find itself paying for something it is not using. This is money running right out the door.
Having a dedicated contract management solution helps eliminate this risk by providing alerts and reminders about upcoming renewals, as well as giving visibility on what contracts exist. This subject is covered later in this guide.
No Review Trail for Audits & Reporting
Audits aren’t something you just deal with when they happen; the auditor is going to need historical data to do their job. Without that data, this can land you in hot water if there’s a contractual issue.
Compliance Failures & Risk
If nobody is managing contracts, this can lead to maverick spend and compliance failures. This may cause issues with data privacy, confidentiality, and other pitfalls. Particularly if you’re operating in the public sector, there are a myriad of compliance requirements that must be met.
When contract management is neglected, the terms may not cover what is needed or there may be loopholes. This can occur because they are not drafted, reviewed or negotiated appropriately.
Missed or Insufficient Delivery
If nobody is making sure suppliers are performing, they may intentionally or unintentionally fail to deliver as expected. Having someone track performance and KPIs helps make sure the organisation gets what it needs.
What are the Stages of Contract Management?
Every contract has a life cycle, and handling this is known as contract life cycle management (CLM). The stages of this cycle are listed below.
This stage starts when someone requests for or starts the contracting process. This includes planning and scoping activities such as defining what the contract will or won’t cover, as well as any performance criteria such as KPIs, actions and deadlines.
This is when all the information from the first stage is put into an actual document along with all clauses, terms, and conditions. The contract approvers and signers are defined.
You need to make sure all parties have seen the contract and signed off on it. This may also involve consulting with an in-house council or attorney if there are any uncertainties.
This stage can be difficult without a centralised platform that allows you to conduct version control or make sure all the relevant parties have been consulted.
Even if you spend time trying to make the first draft of the contract perfect, it’s almost certain there will be some negotiation. This stage involves the back and forward until both parties are happy with the arrangement.
This stage is straightforward; the respective parties are sent the contract document to sign either electronically or via a manual process.
Once the contract has been signed, making sure it is executed is a full-time job. This stage can include everything from:
- Storing the contract in a secure and accessible way
- Managing supplier performance, compliance, and risk
- Meeting auditing and reporting requirements
If you’re engaging in supplier relationship management, this is the phase this would fall under.
7. Renew / Exit
When the contract is nearing its end, it must be renewed to continue (unless it has an auto-renewal clause). This is the time amendments may be discussed, or even the possibility of ending the contract altogether.
What is a Contract Management Plan, and When Should I Write One?
A contract management plan is a document that contains key information on how a contract will be managed over its life cycle. It is a document that will be referred to during the length of the contract.
A plan is not necessary for transactional or routine contracts (lower value goods or services typically below a procurement threshold, requiring no modifications or special handling). However, if the contract is going to be complex or high risk a plan should be considered.
What Should I Include in a Contract Management Plan?
The golden rule is that the level of detail in the plan should match the complexity and risk of the contract.
A plan should provide references to any commonly needed information about the contract – it shouldn’t be duplicated from existing material. These references may include contract clauses, location of registers or plans).
A contract management plan may cover:
- Key activities
- Roles and responsibilities
- Risk management
- Contract governance
- Supplier reporting
- Performance management
- Delivery and acceptance
- Payment arrangements
- Specified personnel
- Supplier access and security
- Insurance and guarantees
- Contract variations
- Extension options or contract renewal
How to Create and Review Contracts
There are a lot of things that need to be ticked off when you’re creating or reviewing a contract. This can help avoid potential risks and a lot of headaches in the future.
Common pitfalls are not making sure everything has been captured, if there are automatic renewal clauses, and making sure there are key measurements in place.
We’ve written a handy digital checklist for contract creation and review that helps protect your organisation from financial and legal risk. To access it, click here.
How do I Write Specifications?
Specifications are essential for procurement, and later form the foundation of a contract. Because they are used to communicate and ensure the supplier delivers what you want, it must be clearly worded and carefully defined.
Since writing proper specifications is a sizable task, we have created a downloadable, comprehensive guide to the subject. Get it here: “Writing Procurement Specifications: A How-To Guide”.
How do I Make Sure Suppliers Deliver on Contract Outcomes?
One of the biggest fears a contract manager has is of a supplier not delivering on what was promised. Unfortunately, this can be a common occurrence. The way that specifications are detailed can make a big difference with this (detailed in the section above), but there are many other methods to ensure delivery as well.
Typically, contracts try to use disincentives to make sure suppliers provide what was promised. These can take the form of clauses: escalation, damages, insurance, warranty, liability, indemnity, and termination clauses. But deciding when to trigger these can be vital.
There are also positive incentives such as the promise of contract extension that can be used to make sure they do what is needed.
For a full rundown on ways to make suppliers deliver using positive and negative reinforcement, read our article: “Contract Management: How to Use ‘Carrot and Stick’ to Motivate Others”.
What is Supplier Relationship Management?
Supplier relationship management (SRM, also known as vendor relationship management) is an activity that can form an essential part of your contract management lifecycle. It helps minimise risk, lower total cost of ownership (TCO), improve outcomes and more. By strengthening your supplier relationships, you can get more visibility on them and better evaluate supplier risk.
To learn more about building these relationships, read our article: “Vendor Relationship Management in FY22: Best Practice Software, Tools and Methods”.
What is Contract Management Software?
Contract management involves dealing with legally binding agreements where any mistakes can have serious repercussions. It’s also often an intensive job with multiple contracts to generate, negotiate, approve, monitor, and track.
Modern organisations use contract management software, also known as a contract management solution or CMS, to help with this process. By digitising and automating these processes, greater efficiencies are gained, and risk is significantly reduced.
For a comprehensive explanation on everything you would want to know about contract management software, read our guide: “The Ultimate Guide to Contract Management Software”.
What is The Perfect Contract Management Solution?
As part of the VendorPanel platform, the Contract Management Solution can help improve your processes, reduce risk, and make you audit-ready. Since VendorPanel also can be used for procurement, it can be used as a complete source-to-pay solution.
To learn more about how VendorPanel can help with contract management and other organisational needs, contact the team today.
Managing Performance: Sustainable & Social Procurement
When it comes to managing contracts, there are many new forms of procurement that need to be considered, detailed below. These may affect the commitments that will need to be contained within a contract and that a supplier will need to agree to meet.
Sustainable procurement has the aim of reducing the adverse impact of goods and services throughout their life (social, environmental, and economic). These sustainability measures can play into contract management.
To learn more about sustainable procurement, read our guide: “Sustainable Procurement: Everything You Need To Know”.
Social procurement is a commitment to generate social value beyond the simple goods or services being procured.
This may take the form of buying from local businesses to stimulate a local economy or buying from businesses that are owned by or employ people from historically disadvantaged groups.
More than 86% of Australian and New Zealand organisations believe social procurement will be important in the future. However, many organisations hit barriers to adoption when it comes to implementing these policies.
To read about the most common obstacles to social procurement policy and how you can overcome them, read our whitepaper: “Seven Biggest Barriers to Social Procurement”.
Modern Slavery Risks
Many organisations are trying to actively combat modern slavery through procurement. From a commercial viewpoint, it is undesirable to purchase from a business that engages in modern slavery, both from an ethical and from a publicity standpoint.
For contract managers, contracts will need to be assessed to determine the risk of modern slavery. If this is high, then there may be clauses to make sure the supplier needs to notify or report any instances within their own operations or in their supply chain, as well as other preventative measures.
What are The Latest Innovations in Contract Management?
Contract management is a gold mine for any would-be innovator in an organisation, but legal professionals are traditionally risk adverse. However, there are several cutting-edge approaches on the horizon set to shake up the field.
To read about these changes, read our article: “Seven Contract Management Innovations to Consider for 2022.” Or for even more on the subject, download our whitepaper: “How to Drive Innovation in Contract Management”.
Contract management is a vast subject, one that is essential to discuss for any organisation. By properly optimising the life cycle of your contracts, greater efficiencies can be gained, money can be saved, and risks can be reduced.
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