Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees. The personnel involved in contract administration required to negotiate, support and manage effective contracts are often expensive to train and retain. Contract management includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution. It can be summarized as the process of systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk.
Common commercial contracts include employment letters, sales invoices, purchase orders, and utility contracts. Complex contracts are often necessary for construction projects, goods or services that are highly regulated, goods or services with detailed technical specifications, intellectual property (IP) agreements, outsourcing and international trade. Most larger contracts require the effective use of contract management software to aid administration among multiple parties.
A study has found that for “42% of enterprises…the top driver for improvements in the management of contracts is the pressure to better assess and mitigate risks” and additionally,”nearly 65% of enterprises report that contract lifecycle management (CLM) has improved exposure to financial and legal risk.”
A contract is a written or oral legally-binding agreement between the parties identified in the agreement to fulfill the terms and conditions outlined in the agreement. A prerequisite requirement for the enforcement of a contract, amongst other things, is the condition that the parties to the contract accept the terms of the claimed contract. Historically, this was most commonly achieved through signature or performance, but in many jurisdictions – especially with the advance of electronic commerce – the forms of acceptance have expanded to include various forms of electronic signature.
- A sales contract is a contract between a company (the seller) and a customer where the company agrees to sell products and/or services and the customer in return is obligated to pay for the product/services bought.
- A purchasing contract is a contract between a company (the buyer) and a supplier who is promising to sell products and/or services within agreed terms and conditions. The company (buyer) in return is obligated to acknowledge the goods / or service and pay for liability created.
- A partnership agreement may be a contract which formally establishes the terms of a partnership between two legal entities such that they regard each other as ‘partners’ in a commercial arrangement. However, such expressions may also be merely a means to reflect the desire of the contracting parties to act ‘as if’ both are in a partnership with common goals. Therefore, it might not be the common law arrangement of a partnership which by definition creates fiduciary duties and which also has ‘joint and several’ liabilities.
Areas of contract management
The business-standard contract management model, as employed by many organizations in the United States, typically exercises purview over the following business disciplines:
- Authorizing and negotiation
- Baseline management
- Commitment management
- Communication management.
- Contract visibility and awareness
- Document management
- Growth (for Sales-side contracts)
- Contract compliance/governance
There may be occasions where what is agreed in a contract needs to be changed later on. A number of bases may be used to support a subsequent change, so that the whole contract remains enforceable under the new arrangement.
A change may be based on:
- A mutual agreement of both parties to vary the contract, outside the framework of the existing contract. This would be an independent basis for changing the contract.
- A unilateral decision to vary the contract, contemplated and allowed for by the existing contract. This would normally have notice periods for fairness and often the right of the other, especially in consumer contracts, to cease the contractual relationship. Be careful that any one-way imposition of change is contractually justified, otherwise it may be interpreted as a repudiation of the original contract, enabling the other party to terminate the contract and seek damages.
- A bilateral decision to vary the contracting, within the variation or change control process outlined in the existing contract. These are often called change control provisions.
Phases of contract management
Contract management can be divided into three phases namely
- pre- contract phase
- contract execution phase
- post award phase (often referred to as contract compliance/governance)
During the post-award phase, it is important to ensure that contract conditions and terms are met, but it is also critical to take a closer look for items such as unrecorded liabilities, under-reported revenue or overpayments. If these items are overlooked, margin may be negatively impacted. A contract compliance audit will often commence with an opportunity review to identify the highest risk areas. Having a dedicated contract compliance (and/or governance) program in place has been shown to result in a typical recovery of 2-4% and sometimes as high as 20%.
Current thinking about contract management in complex relationships is shifting from a compliance “management” to a “governance” perspective, with the focus on creating a governance structure in which the parties have a vested interest in managing what are often highly complex contractual arrangements in a more collaborative, aligned, flexible, and credible way. In 1979, Nobel laureate Oliver Williamson wrote that the governance structure is the “framework within which the integrity of a transaction is decided.” He further added that “because contracts are varied and complex, governance structures vary with the nature of the transaction.”
A collaborative governance framework has four components:
- A relationship management structure (how the parties work together to make both day-to-day operational decisions as well as strategic decisions)
- A joint performance and transformation management process designed to track the overall performance of the partnership
- An exit management plan as a controlling mechanism to encourage the organizations to make ethical, proactive changes for the mutual benefit of all the parties.
- Compliance to special concerns and regulations, which include the more traditional components of contract compliance
- Commercial management
- Contract management software
- Document automation
- Government contract
- National Contract Management Association
- Group purchasing organization
- Office of Federal Contract Compliance Programs – for contracts with the United States government
- Uniform Commercial Code – United States
- United Nations Convention on Contracts for the International Sale of Goods
- Relational contract
- Vested outsourcing
- “Best Practices in Contract Management: Strategies for Optimizing Business Relationships<“. Aberdeen Group. Retrieved 2008-07-10.
- “Contract Management: Optimizing Revenues and Capturing Savings”. Aberdeen Group. May 2007. Retrieved 2008-07-10.
- “Contracts<“. Cornell University Law School. Retrieved 2015-07-22.
- Contract & Commercial Management – The Operational Guide, Van Haren Publishing, October 2011, ISBN 978 90 8753 627 5
- “California Energy Commission:2008 Energy Efficiency Standards”|http://www.energy.ca.gov/2008publications/CEC-400-2008-016/CEC-400-2008-016-CMF-REV1.PDF%7Caccessdate=2016-08-16}
- Williamson, Oliver E.|1979|”Transaction-Cost Economics: The Governance of Contractual Relations,”|Journal of Law and Economics: Vol. 22: No. 2, Article 3|accessible at: http://chicagounbound.uchicago.edu/jle/vol22/iss2/3
- Vitasek, Kate; et al. (2011). The Vested Outsourcing Manual (1st ed.). New York: Palgrave Macmillan. ISBN 0230112684.