Explained in the simplest terms, a “contract” is a legally binding agreement between two or more parties involving the exchange of money, goods, services, or promises. As organizations aim to get their business done faster while delivering the best services to their clients, contracts will continue to play a vital role in every industry imaginable.
In the past, contracting used to be a simple and relatively straightforward process; a contract started with an agreement to exchange and concluded when that exchange was fulfilled. But with some contract figures now running into millions of dollars and multiple parties across different continents involved in the contracting process, the need for methodical step-by-step contract management has become unavoidable. In fact, handling a major contract today without a clear contract management strategy and supporting tools such as contract lifecycle management systems (CLM) to help you accelerate and automate specific tasks would be ill-advised.
5 Stages of Contract Management
Before signing the dotted lines on your next contract, we have put together a brief guide on the stages of contract management and what you need to know about each one. This may differ slightly from one company to the next, but generally, the contract management process can be narrowed down to five key stages:
1. Contract Creation
The process starts when a need arises and one party approaches another to request that they engage in a mutually beneficial working arrangement. This process will be repeated over and over as more needs emerge, so the aim here is to develop a system that suits your company’s requirements on an ongoing basis. At this stage, it’s best practice to do the following:
- Draft contract documents using industry-specific terminologies and clauses.
- Speed things up by incorporating pre-agreed templates that capture standard agreements that you use repeatedly.
- Consider recurring contract issues experienced in the past and factor in as improvements.
2. Contract Negotiation
Negotiations can be time-consuming and will typically involve some back and forth between the major stakeholders in the transaction. The issues to discuss will mainly revolve around financial and legal terms. To make it easier on everyone, note your “deal breakers” beforehand. Also, decide how flexible the terms can be without jeopardizing the contract or breaking any laws.
Of course, detailed records should be kept of all discussions for review later. This is the ideal stage for cross-checking that all parties understand what’s required of them, agree on timelines, penalties, fines, or incentives, and that they are acquainted with any contract management tools or software that they will be expected to use.
Once everyone is unanimous, contract management can move to the next stage.
3. Contract Award
All approvals have been received, terms and conditions are confirmed and accepted. The parties to the contract sign the documents. An authorized representative from the organization finally signs off on the contract and it is now considered approved for execution.
4. Contract Execution
All of the previous stages are meant to make contract execution as smooth as possible. Attention to detail and regular monitoring are fundamental at this stage for the contract’s success. All the terms, conditions, and negotiations are tracked to ensure compliance.
Unfortunately, most contracts that fail begin to have major problems at this stage for a number of reasons. For example, with very small contracts, key milestones and performance metrics can be monitored with traditional paper records or simple spreadsheets. However, that’s a highly inefficient strategy for larger contracts. Applying the same strategy for a much larger contract means that it’s only a matter of time before challenges appear. To avoid issues, conflicts, and major losses, it’s advisable to use tools like a best-in-class CLM that can:
- Migrate all your contracts to a centralized and secure repository.
- Give early warnings before problems arise.
- Track any changes.
- Generate comprehensive reports.
5. Contract close-out or renewal
When a contract has run its course and the expiry date is due, the parties may choose to take several steps; they may terminate it (closeout), renew it and maintain the exact same conditions, or renew it but with different conditions.
It’s clear that every stage of contract management is important for success. However using the right tools such as Axxerion’s CLM software will significantly improve your chances of success.
Our CLM software is designed to help businesses like yours understand and mitigate contract liability risks. Contact us for a free demo today and enjoy the Axxerion contact lifecycle management advantage.Free DemoFree Demo