With the rising complexity in business transactions, contract management has become an indispensable part of the business process. Contract management is that part of the business that deals with the management of formal agreements between the business and its partners such as employees, shareholders, customers and suppliers. Any agreement or transaction entered into by a business that is covered by a contract becomes the responsibility of contract management.
The objective of contract management is to minimize legal and financial risks that may arise out of the contract, and optimize the benefits that a business may get out of the contract.
Studies have shown that for over 40% of business enterprises, the measurement and reduction of risks to the company is the main motivation behind improving the system in the management of contracts. Other studies have shown that for more than two-thirds of businesses, the proper management of contracts throughout their life cycle has improved the company’s position in terms of legal and financial risk.
The basic principles and practices of contract management cover the following areas:
Creation and negotiation – Aside from routinary business transactions, contracts must be crafted to reflect specific projects, terms and conditions. To arrive at these, negotiating the substance and wording of the contract to conform with applicable law is the responsibility of contract management.
Performance indicators – Contract management is tasked with ensuring that clear and specific measurements of performance are adequately covered in the contract. The indicators should cover all aspects such as timing, costs, safety and coverage that have a material impact on the contract.
Compliance capability – The ability of both parties to comply with the terms and conditions of the contract is a concern of contract management. The resources, both physical and financial, on the part of the participants of the contract must be analyzed and verified by contract management in order to ascertain their ability to comply with the contractual obligations.
Information management – The contract management function includes ensuring that all parties involved in the contract, direct and indirect, are provided all the necessary information. Proper communication at every stage of the contract life cycle must be controlled by contract management to ensure transparency and enable inputs that may affect risks to all parties of the contract.
Sales growth measurement – In the case of contracts specifically related to sales, contract management includes the monitoring of compliance with agreed-upon targets in terms of volumes, values and product breakdowns. Contract management is also tasked with initiating adjustments to the contract whenever deviations from contractual milestones are detected.