What is Contract Management?
If you are a Professional in any type of organisation, you will have heard of Contract Management. But what is it, exactly?
Definition of Contract Management
At its core, Contract Management is the process of managing contracts. The process involves managing legal agreements with suppliers, customers, partners, contractors, and employees – depending on which Contract a Contract Manager is managing.
While many people refer to the steps required to plan, draft, negotiate and execute a contract as being a part of Contract Management, the better view is to see Contract Management as the process of managing a contract after it is executed. This includes monitoring compliance and extensions or renewals of the Contract, supervising the Contractor’s performance, and helping to resolve Contract Disputes.
Effective Contract Management is crucial for organisations of all sizes. It helps to improve outcomes and realise maximum value from contracts. By managing its contracts effectively, organisations can reduce risk, increase efficiency, ensure compliance with legal and regulatory requirements and minimise disputes.
What does Contract Management involve?
Contract Management involves a range of activities, from administrative tasks such as document storage and retrieval, to strategic decision-making around contract terms and conditions, to leading the resolution of Contract Disputes. Contract Managers ensure that the other party performs in accordance with the requirements of the contract throughout the term of the Project.
The phrase “Contract Management” is often used interchangeably with “Contract Administration.” However, in our view, Contract Manager is the more onerous role that requires a holistic approach being taken to management of a Contract. Contract Administration, on the other hand, relates to the more administrative parts of managing a Contract – a Contract Administrator (or several on large Projects) often reports to a Contract Manager.
Depending on the size and complexity of your organisation, you may choose to handle Contract Management in-house (by appointing a Contract Manager for each Project) or outsource it to a third-party provider. (Keep in mind that Contract Management and Project Management have different meanings – we discuss this in our post about Contract Managers vs Project Managers).
Whatever your approach, it’s essential to have a clear understanding of the key principles of Contract Management in order to get the best outcome for your organisation from the Contract.
Importance of Contract Management
Effective Contract Management is essential for any organisation that wants to protect its interests and avoid potential legal issues.
Contracts are the foundation of business relationships and govern the terms and conditions of those relationships. Poor Contract Management can lead to missed deadlines, unmet obligations, and disputes that can damage business relationships and result in financial losses.
Benefits of Contract Management
Implementing a robust Contract Management process can provide numerous benefits to your organisation, including:
- Reducing risks and ensuring compliance
- Improving operational efficiency
- Enhancing business relationships
- Maximising value from contracts
- Streamlining contract processes and reducing costs
By effectively managing contracts, organisations can ensure that they are meeting their obligations, minimising risks, and maximising the value of their contracts.
Key Components of Contract Management
Contract Management involves several key components that are essential to its success.
These components include:
- understanding the Contract that you are managing;
- monitoring the Contract;
- regularly meeting with representatives of your counterparty;
- resolving disputes early; and
- analysing lessons learned at the end of the Contract.
Each component plays a vital role in ensuring that the Contracts is managed effectively and efficiently, and that both parties involved in the Contract are satisfied with the outcome.
1. Understanding the Contract
A lot of work will already have been put in to plan, draft, negotiate, and execute the Contract that is now being managed. Many people say that these steps are part of Contract Management, but in our view, they have their own place within The 7 Pillars of Contracting.
Once a Contract Manager has been assigned a Contract, it is essential for the Contract Manager to read the Contract in detail and understand how it works. All contracts have their own language and intent, and the Contract Manager needs to be across these before the contract performance begins.
It is important that the Contract Manager understands the key dates applicable to the Contract, including the Commencement Date, the End Date (if any), the Date for Practical Completion (if applicable), dates for the Contractor to make payment claims, and so on. Chart these up, on paper if you don’t have Contract Management Software.
2. Contract monitoring
Once the Contract has been executed, the next step is monitoring.
This involves keeping track of the Contract and ensuring that both parties are fulfilling their obligations. Contract monitoring is important as it helps to identify any potential issues or problems that may arise during the contract period, and allows for timely resolution of these issues.
The Contract Manager will be responsible for all Contract monitoring, and is the key person to ensure that any issues are identified early. Building a strong relationship with the Contractor can help the Contract Manager to perform this role more effectively.
3. Regular meetings with counterpart
Holding regular meetings with your counterpart within the Contractor helps to build a stronger contractual relationship and also helps to resolve issues before they become disputes. Contract Managers can encourage an atmosphere of cooperation and openness with their counterpart, which can help both parties get the most out of the Contractual relationship.
This is a critical step in the Contract Management lifecycle.
4. Early dispute resolution
It is imperative for Contract Managers to identify, assess and seek to resolve issues in the performance of the Contract early, before they become formal Contract Disputes. With a strong relationship, the Contract Manager and the Contractor’s Contract Manager are often able to discuss, resolve or escalate issues for resolution without the need to resort to the formal dispute resolution provisions of the Contract.
Once the formal dispute resolution clauses are activated, there is often a defined dispute resolution process that must be followed contractually, and it becomes more difficult for frank and open discussions to lead to early resolution. In addition, more senior management usually becomes involved, which can lead to some disconnection from the strong relationship that the Contract Manager has built with the Contractor.
Wherever possible, Contract Managers should do their best to resolve problems and issues in the performance of the Contract early and informally (provided of course the terms of the Contract can be followed).
5. Analysing lessons learned at the end of the Contract
This is a very important step that unfortunately many organisations overlook. By gathering information about things that went wrong during the Contract, or places where a different approach could have been taken, the Contract Manager is able to disseminate to their organisation the things they have learned – the idea being that other people in the organisation can also learn from those lessons.
Organisations who have a formal process for Lessons Learned tend to do better in the next Contract they enter into, in our experience.
Contract Management Best Practices
Implementing best practices for Contract Management can help organisations streamline their processes, save time and reduce costs.
Here are 4 key best practices of Contract Management:
A. Effective Communication;
B. Risk Management;
C. Contract Performance Metrics; and
D. Using Technology and Automation.
A. Effective Communication
Effective communication is essential for successful Contract Management. It is important to establish clear lines of communication between all parties involved in the Contract. This includes regular meetings, updates and progress reports.
It is also important to ensure that all parties understand their roles and responsibilities, both at the start of the Contract and during Contract performance.
B. Risk Management
Risk management is another important aspect of Contract Management. It is important to identify potential risks under the Contract and which may arise during performance, and develop strategies to mitigate them. This includes identifying potential risks in the Contract itself, as well as external risks that could impact the Contract.
Many organisations carry out a Risk Assessment during the Contract Planning and Contract Drafting process, and Contract Managers should ask to review that document so they are advised about the specific risks for the Project they are managing.
If that document doesn’t exist, it is best practice for a Contract Manager to do their own Risk Assessment (working with their Legal Division and relevant members of the Project Team as required).
This is also something that should be brought up in the Lessons Learned at the end of the Project – your organisation should be undertaking Risk Assessments. If they don’t have the staff with the necessary experience, they can engage a Contracting Consultant like Rachelle Hare to prepare the Risk Assessment for them.
In addition to considering likely risks, it is also important to have a contingency plan in place in case of unforeseen events. This will likely be the responsibility of the Contract Manager to prepare.
C. Contract Performance Metrics
Measuring Contract performance is important to ensure that the Contractor is performing appropriately and so as to meet the Contract objectives.
Where there are Key Performance Indicators (KPIs) in the Contract, Contract Managers should monitor these regularly. This can help identify areas where improvements can be made and ensure that the Contract continues to deliver value for money (which is particularly important for government contracts).
It is more difficult to measure the Contractor’s performance where the Contract does not contain key performance indicators or other performance metrics. In these cases, it is advisable for the Contract Manager to discuss performance with the Contractor and establish how the Contractor intends to measure its own performance. There may be potential for the parties to informally refer to those performance measurements, which will then help the Contract Manager to assess the performance of the Contract.
Keep in mind that, if the Contract doesn’t contain express performance metrics, the Contractor cannot be held to task for failure to meet informal performance metrics – they are a useful tool only.
D. Using Technology and Automation
Technology and automation can help streamline the Contract Management process. This includes using Contract Management Software to automate tasks such as contract storage, tracking and reporting. With key dates input into the Contract Management Software, the program can generate reminders to make the contract administration task easier for the Contract Manager.
Such Contract Management Software can also help improve collaboration between the parties and ensure that all they have access to the latest information about the Project, which can be critical on larger projects with more than one Contract involved.
Implementing these important best practices can help organisations improve their Contract Management processes and achieve better outcomes from their Contracts. If you have any other best practices you think we should add, tell us about them in the Comments.
Contract Management Challenges
While Contract Management is a critical process for most organisations, it comes with its own set of challenges.
Here are some of the most common challenges you may face when managing your Contracts:
Lack of Standardisation
One of the biggest challenges in Contract Management is the lack of standardisation across contracts. Each Contract may have its own terms and conditions, and different risk allocations, making it difficult to manage them effectively.
Without standardisation between Contracts in an organisation, it can be challenging to compare Contracts, track performance, and ensure compliance. This is one of the tasks that Rachelle Hare assists organisations internationally with in her role as Strategic Contracting Adviser and Contracting Consultant – drafting (or working with the Legal Division to draft) a set of contracts with similar provisions (to the extent applicable) and consistent risk allocations that take the organisation’s needs into account.
Poor Contract Visibility
Another challenge is poor contract visibility. When contracts are stored in different locations, it can be challenging to access them quickly and efficiently.
This can lead to delays in Contract Management processes, missed deadlines, and even lost contracts. These days, it is an essential to have a good Contract Management Program to help you out as Contract Manager – while you can still perform the task manually, it can be quite painful and inefficient.
Limited Resources
Contract Management can be a time-consuming process that requires significant resources. While a Contract Manager is able to manage more than one Contract, they become stretched after about three or four. And if one of those Contracts is high-value, requires intensive relationship management, or involves disputes, it becomes harder for a single Contract Manager to cope without burning out.
Many businesses struggle to manage their contracts effectively due to limited resources such as time, staff, and budget. Unfortunately, this can lead to delays in the Contract Management processes across multiple Projects, deadlines that are not met by the Contract Manager (even to the point of delays in approving the Contractor’s payment claims, which is a common source of disputes), and even lost contracts.
How to solve this? Organisations do need to prioritise finding the budget for an experienced Contract Manager. If you don’t have the internal staff, you can engage a contracted Contract Manager for a particular Project.
Inadequate Technology
Inadequate technology can be a significant challenge in Contract Management.
Without the right tools and Contract Management Software, it can be challenging to manage contracts effectively. Investing in the right Contract Management Programs can help organisations streamline their Contract Management processes and improve their overall efficiency.
Over time, we’ll be carrying out an assessment of some of the best Software and will let you know our thoughts.
Conclusion
Contract Management is a critical process that organisations must implement to ensure that they comply with all requirements under an executed Contract. It also provides an organisation with certainty that their Contractor is performing their obligations under the Contract.
Effective Contract Management supports operational and financial performance of an organisation, and it reduces financial risks. By standardising contracting workflow, businesses can save time and money.
Contract Lifecycle Management is an intricate oversight process that follows contracts from pre-award to execution to completion, including Contractor selection, issue detection and control, tracking and processing. When implemented properly, Contract Management processes ensure that budgets and abilities are in alignment with Project objectives.
Implementing an effective Contract Management strategy is important because it can help to reduce risk and improve operational efficiency. It is essential to have a clear understanding of the Contract Lifecycle and the best practices for managing contracts. This includes monitoring and maintaining them, and analysing them to maximise operational and financial performance.
Contract Management Software can help to streamline the process and provide a centralised location for all Contract-related information. It can also automate workflows and provide alerts for important Contract milestones, such as renewals and expirations. By using Contract Management Software, organisations can save time and reduce errors – use of such programs is now considered best practice.
Overall, Contract Management is a crucial business function that can unlock competitive advantage. And the Contract Manager’s role is key to ensuring successful management of a Contract. By implementing best practices and using Contract Management Software, Contract Managers can help ensure that the Contract is successful, that the Contractor provides all negotiated services and benefits, and that financial risks for their organisation are reduced and operational efficiency is improved.
FAQ
If you’re new to Contract Management, you may have some questions. Here are some frequently asked questions and answers:
What is Contract Management?
Contract management is the process of monitoring and managing all of your organisation’s contracts to ensure that there is compliance with deadlines, deliverables, and all other terms, conditions, provisions and clauses. Effective Contract Management helps organisations to improve outcomes and realise maximum value from their agreements.
What are the benefits of Contract Management?
The benefits of Contract Management include:
- Improved compliance with Contractual obligations;
- Reduced risk of Contract Disputes;
- Improved Contractor and Supplier relationships;
- Increased efficiency and productivity over the term of a Contract; and
- Cost savings through better management of contracts.
What are the steps of Contract Management?
There are 5 key steps of Contract Management:
- understanding the Contract that you are managing;
- monitoring the Contract;
- regularly meeting with representatives of your counterparty;
- resolving disputes early; and
- analysing lessons learned at the end of the Contract.
What is Contract Management Software?
Contract Management Software is a digital platform designed to help organisations easily create, negotiate, maintain, and renew agreements.
Contract Management Software streamlines your Contract Management Lifecycle. It helps you with each step of the Contract Management Process, particularly ensuring that reminders are automatically generated for key deadlines over the term of the Contract.
What are some best practices for Contract Management?
Some best practices for Contract Management include:
A. Effective Communication;
B. Risk Management;
C. Contract Performance Metrics; and
D. Using Technology and Automation.
