Introduction
Every organisation that uses contracts needs to have an effective Contracting Strategy in place if they are to protect themselves from potential risks, reduce disputes, and ensure that their business operations remain on track.
Contracts are essential tools for organisations to ensure that their business operations run smoothly and efficiently and, perhaps more importantly, predictably.
By clearly outlining the terms, responsibilities, and potential liabilities of all parties involved within their business contracts, as well as how their staff should be reviewing, negotiating, and managing contracts, organisations can reduce confusion, minimise disputes, and protect themselves from potential legal and financial losses.
Each contract can also provide organisations with the ability to set clear expectations, terms, and conditions, both for their own staff and with their contractor or supplier.
This in turn ensures that all parties involved understand their roles and responsibilities, as well as any potential risks associated with a particular contract or project.
But without a written and approved strategy that governs all of the business contracts of the organisation, there is no global and overarching document that provides guidance to the organisation on how it should contract.
This can increase the risks that the organisation faces and can lead to a jigsaw of contracts that do nothing for the organisation’s bottom line—and may even end up costing the organisation money.
What is a contracting strategy?
A contracting strategy is an overarching plan for how an organisation intends to enter into, review, negotiate, manage, monitor, and enforce its contracts. This written document should be prepared by a strategic contracting adviser and should outline the process by which the organisation will approach all aspects of its contracting.
The contracting strategy aims to ensure that the organisation can minimize risk and disputes across the lifecycle of each contract while having a clear understanding of its obligations under each contract it has entered into.
Who should draft Contracting Strategies
Contracting strategies should be prepared by strategic contracting advisers with specialty skills in contracting in the same industry as the organisation.
Management consulting skills are also required in drafting contracting strategies, as the drafter needs to be able to analyze all contracting processes and procedures across the organisation, identify gaps, and make holistic recommendations that take into account financial, stakeholder, legal, sales, marketing, staffing, commercial, procurement, and many other considerations.
Who needs to be consulted about these documents?
Contracting strategies need to be prepared in consultation with all relevant stakeholders within the organisation, including the legal division, finance, procurement, sales, and commercial departments.
To which Contracts will the Strategy apply?
Types of Contracts in your Organisation
It’s almost guaranteed that your organisation will have contracts of many different types:
Employment Contracts
Purchase Orders
Procurement of Office Supplies Contracts
Procurement of Internal Services Contracts (Cleaning Contracts, Mailroom Services, Photocopying Services, Security Services)
Engagement of Consultant Contracts (to engage a consultant like me)
Sales Contracts (selling your services to clients)
Supply of Goods Contracts (selling your goods to clients)
Services Contracts (providing your services to clients)
Services Contracts (someone performing services for your organisation)
Works Contracts (your organisation providing works for a client)
Works Contracts (someone carries out work for your organisation)
Subcontractor Agreements (engaging subcontractors to perform work for you)
Divisions you will need to deal with the Contracts
To deal with all these contracts, your organisation needs a legal division (or a large external legal budget).
You can also engage an external general counsel, like Rachelle, to work part-time on a retainer basis and carry out necessary contracting tasks.
Your organisation may need a sales division to manage the sales contracts.
You will need a procurement division.
You will need a commercial division.
You will need a Human Resources Division.
You will need a finance division.
So, which drives which?
And the interesting question when you look at things like this…
Are contracts driving your organisation?
Or is your organisation driving contracts?
The importance that needs to be placed on contracts
To maintain and grow your bottom line, you must structure your contracts in the right way.
Terms in your contracts that don’t reflect industry standards can hurt you commercially.
Risk allocations that aren’t “right” for the deal can cost your organisation money or ruin your relationship with the other side.
Scopes of work that aren’t clear can cost huge amounts through claims.
Staff who aren’t trained in the best ways to use contracts (and who don’t have standardized workflows to ensure there’s a common understanding of necessary processes) could cost your organisation substantial money and opportunities.
The importance of having an approved Contracting Strategy
Having a well-defined and approved contracting strategy helps organisations reduce confusion and ambiguity throughout their business processes.
It also provides legal protection in cases where disputes arise between parties involved in a contract.
In addition, having a clear set of rules through which all contracts must pass makes it easier for organisations to track compliance with regulatory requirements and other laws or best practices.
The 7 key reasons why organisations should place emphasis on their Contracting Strategy
1. Improves Efficiency Through Streamlining Operations
Contracting can help organisations streamline their operations by clearly outlining the obligations of the parties and the relevant timeframes that must be complied with.
A well-drafted business contract ensures that everyone involved is aware of their obligations under the contract. This reduces misunderstandings and eliminates unnecessary delays that could hinder progress.
Provided that contract management is carried out comprehensively and systematically, this can help reduce confusion and misunderstandings within the business and with the counterparty. It can also help to ensure that the work under the contract is completed efficiently and within the required timeframes.
Proper contract management, as documented in the contracting strategy, can also ensure that all payments are made in a timely fashion so that the business’s cash flow does not suffer and the work continues without interruption.
With comprehensive contract management, organisations will be able to maximize efficiency and productivity while minimizing delays and disruptions due to miscommunication or other issues related to contracts.
2. Establishes Boundaries to Protect Your Rights
An effective contracting strategy also helps organisations establish boundaries for how they will interact with their counterparties. These boundaries help to ensure that all parties involved have a clear understanding of what is expected of them and any consequences for non-compliance.
By clearly laying out the terms, responsibilities, and risks associated with a particular contract or project, organisations can protect themselves from potential legal liabilities. It can also help the participants establish the rights and obligations of the parties involved in an agreement so that they can comply with the contract and take appropriate steps to protect those rights if necessary.
3. Identifies Risks
A clear and detailed contract can help organisations identify potential risks associated with a particular agreement or project. By thoroughly examining the terms of the contract, organisations can ascertain up front what their obligations are to their customers, suppliers, and other parties involved in their contractual arrangements.
This allows them to anticipate any changes in circumstances that could affect their ability to meet those obligations.
4. Reduces risk
Another key benefit of having a comprehensive contracting strategy is risk reduction and mitigation. By clearly outlining the terms and conditions of each business relationship, organisations can protect themselves from legal disputes or financial losses due to unforeseen circumstances. Clear and well-written contracts can also reduce misunderstandings between the parties involved in the contract.
Placing emphasis on contracts (through a comprehensive contracting strategy) can also help organisations stay compliant with relevant laws and regulations. The consequences of non-compliance could include costly fines or other penalties, whether against the organisation as a whole or its directors personally—something to be avoided at all costs.
Additionally, thorough contracts can help protect confidential information from being shared outside of the organisation or inappropriately used by third parties who are not parties to the business agreements.
Properly written contracts help organisations mitigate risk by outlining the terms and conditions of each business relationship. Because of this, they are a key component in every business’s contracting strategy.
5. Increases cost savings
Carefully negotiated contracts can help organisations secure better prices and terms for goods and services with a contractor or supplier, leading to cost savings over time. The risk-reduction function of contracting can also have a direct impact on the bottom line of the organisation, whether it is carrying out projects or simply procuring office goods and services.
6. Improving communication
Clearly-written contracts can help improve communication between organisations and their contractor or supplier by setting out clear expectations around terms. This can help prevent misunderstandings and conflicts, as writing down the requirements for service delivery can help the parties “get on the same page.”
Often, it’s not until the parties’ lawyers draft and review the contract that they realize there is a fundamental divergence in understanding around the terms of the contract. Far better for the parties to discover this now, rather than only finding out after the contract is executed (and when it is too late to do anything about it).
7. Minimise Disputes and Legal Risks
Finally, having an effective contracting system in place can help reduce disputes and minimize legal risks. By properly documenting the terms of a contract before it is signed, organisations can help eliminate potential disagreements later on.
This avoids the costly and time-consuming process of resolving disputes through mediation, expert determination, arbitration, or litigation. It also helps them to mitigate legal risks, protect their financial interests, and keep costs low over time.
Conclusion
Having an effective contracting strategy is essential for any business looking to operate smoothly, protect itself from risk, and successfully manage its contractual relationships.
A comprehensive contracting process provides numerous advantages that benefit both parties involved, including increased cost savings
Organisations should make sure that they have comprehensive contracts in place for any business relationships they maintain if they want to ensure efficiency while reducing the potential risks associated with those relationships.
Properly written contracts will outline every aspect of the contractual relationships, including payment terms, confidentiality clauses, dispute resolution procedures, etc., so an organisation needs to develop an effective global contracting strategy if they wish to get the most out of each business relationship they create.
By doing so, they will be able to maximize efficiency while minimizing potential risks associated with their contracting arrangements.
