If your business has not already done so, now is the time to consider establishing a comprehensive contract management policy to manage all of your business contracts. According to the International Association for Contract & Commercial Management (IACCM), poor contract management costs companies 9% -- Bottom Line. A contract management policy is necessary to insure that your business maintains control over its contracts, which are the very lifeblood of your business. An effective contract management policy establishes a system to efficiently manage a contract's creation, implementation and completion. Even some top tier businesses that you would expect to have outstanding policies and execution still experience major issues with their business contracts when they fail to stay on top of this important issue.
Create a Comprehensive Contract Management Policy
No task is more essential to protecting a business than managing its signed contracts. There is no time like now to review all of your business' contracts and get control of them. The action items to consider for a contract management policy include: (1) establishing guidelines for determining who has the authority to sign contracts on behalf of your business and under what circumstances they may do so; (2) instituting a contract review process that is required for all new or renewal contracts; and (3) setting up a contract maintenance system/spreadsheet that will include relevant contract terms such as contract expiration, automatic renewal dates and notification periods.
Clearly Explain Who Can or Should Negotiate Your Contracts
Your contract management policy should clearly explain to your management and staff who can or should negotiate contracts on behalf of the company; and even more importantly, who can sign the contract once it is negotiated. Not everyone in management is a good negotiator. Decide who is best at negotiating the best terms for your business, and encourage your staff to include these persons in their contract negotiations.
In addition, your contract management policy should make clear who has the authority to sign which contracts and up to what dollar amount. While a basic guideline is that contract-signing authority parallels financial-signing authority, going strictly by the dollar amount is not always adequate. For instance, there may be a vendor providing services in exchange for client lists with no dollar amount specified. The question then becomes – who signs? Be aware that a vendor may need only to establish that a staff signature binds the business, so make sure that management and staff who don't have the authority to sign under certain circumstances know it and abide by the limitations.
Institute a Contract Review Process
Another important consideration for a contract management policy is instituting and enforcing a contract review process. Such a process is more than just deciding when there is a need for legal review of a contract. Having a lawyer review a contract doesn't in itself solve contract issues. There must be collaboration between your lawyers and business management to determine if your business and financial requirements are fulfilled by the terms of the contract.
It is important to understand that legal review may not be necessary for every contract. Your business should consider using templates when feasible to reduce legal review expenses and to reduce the risk of signing agreements unfavorable to the business.
Establish a Contract Maintenance System
One of the most important steps that you can take to safeguard your contracts is to establish a contract maintenance system that has a spreadsheet with a tickler system that includes relevant contract terms such as contract expiration, automatic renewal dates and notification periods. Contracts that automatically renew without their terms having been reviewed as part of a contract management policy can present real problems to your business. Payments by the business may continue as the accounting department processes payments for services that may be unnecessary. Or even worse, your business may not realize that a contract with unfavorable terms has continued, while at the same time a new contract is negotiated for the same services.
Equally as important is to include each contract's relevant and important terms in the system with which both parties need to abide. If these terms are easily reviewable and accessible, it is much easier to insure that the terms and conditions of the contracts are being fulfilled. In this way you can help insure that your business is taking full advantage of all of your business' contracts. Remember, now is the time to establish a system to efficiently manage your contract's creation, implementation and completion processes by establishing an effective contract management policy.
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