Contract management is at the heart of effectively building relationships with partners; ensuring compliance with local, state, and federal laws; anticipating and eliminating potential deal delays; and increasing profitability. Not surprisingly, the importance of effective contract management cannot be overstated. And yet, it’s a process that’s paid little attention to until an issue arises. In order to proactively manage the negotiation, execution, performance, and termination of your contracts with various parties, implement these 4 steps to get a contract management system in place.
1. Implement a Pre-Big Process
Before drafting a contract or undergoing any negotiations, it’s essential to have a clear understanding of the following:
- A background of the potential project/agreement.
- Who the involved parties are.
- A timeline for the completion of work or ongoing scope of work.
- What your company’s role in the contract is.
Once the background process is complete, you should engage counsel to discuss what contract terms you need to protect your interest. This may sound like common sense, but clients oftentimes ask us to review a contract or certain provisions after a contract has been negotiated or even signed, at which point you’ve lost your bargaining power.
Finally, it is important that you have steps in place for contract review, approval, and signature authority to ensure full visibility in the process and there are no negative repercussions to your existing obligations and business relationship.
Each of these steps will help with the development of a contract checklist.
Keep in mind that it’s beneficial to have your own core contracts that can serve as a starting point for negotiation with terms that meet your company’s needs for the relationship.
2. Create a Contracts Checklist
In order to expedite the contract review process and empower your team to make good contract decisions that protect your business, it’s helpful to use a contracts checklist. Your checklist should have a list of standard contract terms that you have accepted and can “check off” without additional negotiation — and those that need to be escalated for approval. These types of checks may include:
- Insurance coverage limits
- Specifications and definitions
- Payment terms
- Indemnification provisions
- Change order process
A checklist can also be used to consider optional terms to add to a contract (e.g. non-disclosure provisions, different payment terms, etc.)
Creating a checklist empowers employees to negotiate on behalf of company management with terms that are pre-approved and expedites the contract review process. Management only needs to become involved to agree and/or negotiate variances to standard provisions
3. Compare the Bid Proposal vs. Contract Asked to Sign
After reviewing a bid proposal against the checklist, you’ll need to compare the approved bid proposal terms against the contract terms provided by the other party in the written contract to be signed. At this stage, you need to review any documents that are incorporated into the contract by reference. Again, the checklist can assist you with a review of the contract terms to determine which provisions can readily be agreed to and which provisions may need additional approval and/or negotiation before signing.
This is a very important stage in contract management because often companies assume all terms negotiated end up in the final written agreement. This is not always the case — especially when a contract is very complex and the signatory may not have been the person who bid or negotiated the terms. For complex contract, it may be useful to keep a spreadsheet to track negotiated and agreed upon terms since they may change numerous times during the negotiation period. This way, you’re not having to sort through numerous drafts and emails to determine what was last agreed.
4. Execute the Contract
Once the contract has been signed, you need procedures for ongoing review of the performance of both parties under the agreement. These procedures include tracking deadlines, performance milestones, change orders, payments, etc. It’s particularly important to develop and have an internal change order system to document and manage changes to a project’s scope or timelines.
Contract management is an important tool to manage contract negotiation, creation, and performance. And Equinox can help you design a contract management system that will maximize operational and financial performance and reduce risks. Call us today to get organized and start making the most of your agreements.