Anaya Nolan
Contract management is a critical aspect of commercial management, encompassing the implementation, review, and oversight of legally enforceable agreements. It involves the processes and procedures that organisations employ to manage the negotiation, execution, performance, modification, and termination of contracts with various parties, including customers, vendors, distributors, and employees. Effective contract management is vital to the successful implementation of a contract and can be time-consuming, leading to the hiring of dedicated managers. It is a 7-stage process that includes creation, execution, and tracking to avoid risk and revenue leakage. Traditionally, contract management has been manual, but automation is increasingly being adopted to improve efficiency and compliance.
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What You'll Learn
Contract lifecycle management
Contract management is a discipline that supports commercial management through the implementation, review, and oversight of legally enforceable performance commitments. It involves overseeing transactional negotiations, implementation, and management of contracts. Contract management is critical for high-value management information that supports strategic decision-making.
The CLM process includes drafting, negotiation, approval, compliance tracking, performance monitoring, and record-keeping. CLM solutions typically include features such as contract templates, version control, collaboration tools, automated alerts and reminders, reporting capabilities, and integration with other enterprise systems. The primary goals of CLM are to reduce risks, improve compliance, increase efficiency, and maximize the value derived from contractual agreements throughout their lifespan.
CLM software enables dynamic contract creation from templates and clauses. Contract content is automatically assembled using criteria such as region, products, services, or price terms. CLM platforms can also automate the approval process, orchestrating sequential and parallel approvals. By automating workflows and centralizing contract data, CLM systems improve accuracy and efficiency in contract generation.
Overall, contract lifecycle management optimizes the entire contract process from initiation to execution, performance, and renewal/expiry. It helps organizations achieve greater efficiency, better collaboration, and improved compliance.
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Contract creation
The contract is then drafted, with legal professionals writing the contract's terms and clauses based on its requirements. These terms and clauses depend on factors like contract type, usage, and risk level. It is important to keep the language simple and free from jargon to prevent misinterpretation. Once drafted, the contract is reviewed and revised internally before being sent to the counterparty for review and negotiation. This stage often involves negotiation on the contract's amount, payment terms, milestones, and other clauses.
After the contract has been negotiated and agreed upon, it is ready for signatures. The relevant parties must sign the document to make it a legally binding agreement. Before the parties sign, the contract manager must ensure that the intended signatories have the necessary capacity to enter into the agreement. For example, under South African law, a married man will need written consent from his wife to dispose of his immovable assets.
The traditional contract creation process is lengthy and time-consuming, often delaying contract releases and requiring a lot of follow-up. However, modern contract lifecycle management (CLM) software automates the entire contract creation process, making it faster, more efficient, and reducing the risk of human error. CLM software uses computer-based forms and pre-approved templates and clauses to create contracts, doing away with manual, paper-based processes. This digital approach also improves security, as all contracts are stored in a single electronic repository.
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Contract execution
Before the contract execution stage, the terms of the contract must be negotiated and agreed upon. All parties involved must ensure they understand the terms and are satisfied with the written agreement. The contract manager must also ascertain whether the signatories have the necessary capacity to enter into the agreement. For example, under South African law, a married man must have written consent from his wife to dispose of his immovable assets.
Once the contract is executed, it is difficult to amend the terms, and the process can be costly and time-consuming. Therefore, it is essential to carefully review the contract before signing to ensure a clear understanding of the terms. AI risk scoring can be used to analyse the text of the contract and generate a risk assessment, aiding organisations in negotiating better agreements.
After contract execution, contract management software can be utilised to manage the contract effectively. This software can include tools such as automated reminders and calendar alerts for obligations and renewals, enhancing flexibility and security in the contract management process.
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Contract analysis
Preparation
Before initiating the review, analysts examine the parties involved, the purpose of the agreement, and potential areas of concern. This foundational step helps focus the analysis on specific elements, such as liability clauses or compliance issues, depending on the nature of the contract and the analysis goal.
Reading and Understanding
The reviewer meticulously studies the contract, grasping its scope, terms, and conditions. This stage requires a strong understanding of legal terminology and concepts, enabling a comprehensive interpretation of the contract's content.
Identification of Key Elements
The analysis then proceeds to identify the contract's key elements, such as liability clauses, compliance issues, obligations, penalties, and deadlines. This identification process is crucial for assessing potential risks and ensuring compliance with external laws and internal policies.
Risk and Compliance Assessment
The reviewer evaluates the contract for risks, including unclear obligations, penalties, or unrealistic deadlines. They also verify compliance with laws, regulations, and industry standards, ensuring the contract does not violate anti-trust or anti-bribery laws and includes essential clauses like data protection and privacy compliance.
Data Extraction and Presentation
Automation and AI
Advancements in legal technology have introduced AI-driven contract management software that automates and streamlines the contract analysis process. AI analysis tools can efficiently process large volumes of documents, identify patterns, and extract relevant information. These tools improve accuracy, speed, and workflow optimisation, reducing the time-consuming nature of manual contract analysis.
In conclusion, contract analysis is a meticulous process that ensures contracts are fair, compliant, and beneficial to all parties involved. By identifying risks, ensuring compliance, and extracting valuable data, contract analysis plays a vital role in effective contract management and strategic decision-making.
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Contract termination
There are several reasons why a contract may be terminated. One of the most common reasons is when one party breaches the contract by failing to fulfil their obligations or acting inconsistently with the rules set out in the contract. In this case, the non-breaching party is entitled to terminate and free themselves from their obligations, and the breaching party may still be required to pay damages. Another reason for termination is if the performance of the contract has become impossible. Contracts may also be terminated if circumstances change, such as the introduction of a new law that makes the obligations of the contract illegal.
In some cases, parties may terminate a contract simply because they are not receiving value from it or are finding it difficult to work together. This is known as termination for convenience, and it occurs when one party terminates the contract for practical reasons, without any breach by the other party. An example would be if the needs of one party change and they find another party to complete the contract. Termination for convenience is particularly relevant in government contracting, where the government has the unilateral right to partially or completely terminate a contract without being required to pay damages, as long as it is in the government's interest.
The procedures for terminating a contract can vary depending on the type of contract and the reasons for termination. For example, if a contract is terminated due to the fault of the contractor, it may be called "termination for default" in the case of noncommercial contracts and "termination for cause" in the case of commercial contracts. When terminating a contract, it is important to consult with relevant parties and consider alternatives, as well as any potential liabilities or post-termination obligations.
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Frequently asked questions
Contract management is the process of managing the creation, modification, execution and analysis of contracts to maximise operational and financial performance at an organisation, while reducing financial risk. It is a discipline that supports commercial management through the implementation, review and oversight of legally enforceable performance commitments.
The contract management process can be split into three stages: pre-award, award, and post-award. The pre-award stage involves identifying the business deal's goals, needs and setting expectations to foresee risk. The award stage is when the contract is negotiated and finalised, and the post-award stage is where the contract is maintained and managed.
Contract management helps to avoid risk and revenue leakage, and is a critical vehicle for high-value management information that supports strategic decision-making. It also helps to reduce any risks in business agreements and create strategic relationships.
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