Contracts are the lifeblood of any business, providing the foundation for all business relationships and transactions. But managing contracts effectively can be a complex and time-consuming process. That's where contract management checklists come in. By having a contract management checklist in place, businesses can stay organised and ensure that every step in the contract management process is managed appropriately. Be it a startup or a large corporation, contract management checklists can help businesses save time, reduce risk, and ensure that their contracts are managed effectively every step of the way.
In this blog, we will explore why contract management checklists are important, their benefits, and some best practices that could help you establish effective contract monitoring checklist protocols.
What is contract monitoring?
Contract monitoring is the process of overseeing and ensuring that the terms and conditions of a contract are being met by all parties involved. This includes verifying that the goods or services provided are of the expected quality, that they are delivered on time and within budget, and that the parties are complying with any legal or regulatory requirements.
Importance of contract monitoring
By implementing effective contract monitoring, organisations can avoid costly mistakes, reduce risks, mitigate potential legal risks, prevent disputes and non-compliance, and maintain positive relationships with their clients or vendors. Moreover, contract monitoring can help companies with the following:
- Ensuring compliance: By monitoring the performance of each involved party, any breaches or deviations from the contract terms can be identified and addressed promptly.
- Mitigating risks: By monitoring KPIs and contract milestones, potential issues can be detected early, minimising the impact of any risks.
- Improving communication: Regular contract monitoring allows for a collaborative approach to problem-solving, thereby preventing disputes.
- Enhancing contract performance: Contract monitoring can help identify areas for improvement and can lead to the optimisation of the contract terms.
- Providing accountability: Contract monitoring provides a framework for accountability and creates a sense of ownership, clarifying who is responsible for what and when.
Who is typically responsible for monitoring contracts?
Contract monitoring is typically carried out by the contract manager, who is responsible for ensuring that the contract is being adhered to and that any issues or disputes are resolved in a timely manner.
However, depending on the organisation and its structure, contract monitoring might be done by legal, finance, or customer success teams.
Top 5 challenges in contract monitoring
Contract monitoring can be arduous for several reasons - volume & complexity of contracts, inconsistent language, changing regulations, time constraints, etc. Here’s a dive into the top 5 challenges pertaining to contract monitoring.
#1 High contract volume and complexity
Organisations process contracts in bulk, so the volume of contracts requiring vetting is high. Consequently, contract managers and legal teams are always low on bandwidth when processing contracts. Additionally, certain contract types include complex technical terms. Hence, monitoring those becomes a critical challenge.
#2 Inconsistency in contract language
In several companies, contracts are not standardised. This absence of standardisation leads to an inconsistency in contract language. Therefore, it becomes tough for legal teams to compare contracts and spot mistakes.
#3 Changing regulations
Regulations and laws are prone to rapid changes, making it difficult for the legal teams and contract managers to keep contracts compliant.
#4 Technology limitations
Required teams usually do not use cutting-edge tools to monitor contracts. Instead they use manual methods, which are time-consuming, ineffective, and prone to errors.
#5 Lack of visibility into the contract pipeline
Legal teams may not have access to all the relevant data and information needed to monitor contracts effectively, impacting their ability to identify and manage risks.
These challenges make contract monitoring difficult for legal teams and contract managers. What legal teams can do is strategise beforehand and take an informed approach to streamline contract monitoring. A common approach is to have a contract monitoring checklist.
Contract monitoring checklist to monitor contracts effectively
Organisations leverage a contract monitoring checklist to stay on top of their contractual obligations and mitigate potential legal and financial risks. It is a document that outlines a contract's key terms and obligations and provides a framework for tracking compliance and performance over time.
Contract monitoring checklists typically include contract terms, key timelines, reporting requirements, performance metrics, compliance requirements, risk management, communication plan, record keeping, and review and update schedules. Organisations can use a contract monitoring checklist to improve their contract management processes, reduce the likelihood of contractual disputes, and ensure that all parties meet their obligations.
Contract monitoring checklist: What to monitor?
The specifics of contract monitoring checklists vary depending on the nature of the contract and the organisation's needs. Here’s what you should regularly monitor:
- Contract parties
- Contract terms
- Contract timeline
- Performance metrics
- Compliance requirements
- Risk management
- Communication plan
- Record keeping
- Review and update
By having this contract monitoring checklist in place, it becomes easy for companies to stay on top of their contractual obligations, mitigate potential risks, and maintain effective communication with all contract partners.
#1 Contract parties
List the parties involved in the contract and their respective roles and responsibilities.
#2 Contract terms
Identify the key terms of the contract that need to be monitored.
- Deliverables: Products, services, or outcomes the parties agree to provide during the contract period.
- Milestones: Specific dates or events that mark the progress of the contract.
- Payment terms: Payment schedule and any penalties/incentives for meeting or failing to meet performance standards.
- Other clauses: Force majeure, confidentiality and non-disclosures, etc.
#3 Contract timeline
Create a timeline of key dates and deadlines, such as the start and end date of the contract, delivery deadlines, and payment due dates.
By following pre-established reporting guidelines, parties can informed about progress and identify any issues that must be addressed.
- Frequency: Check how often progress reports are generated - weekly, monthly, quarterly, or annually.
- Format: Check if the format of the progress report is as per the pre-determined reporting guidelines.
- Content: Check if all the required information is included in the progress report - a summary of progress against KPIs, an overview of milestones achieved, any issues encountered, and any recommendations for improvement.
- Recipients: Check if the progress report is sent to the right stakeholder - senior management, project managers, or other parties to the contract.
- Deadlines: Check if or not progress reports are submitted timely.
#5 Performance metrics
Gauge the following metrics to see if the contract is performing as expected or not.
- Quality: Defect rates, customer satisfaction, or compliance with industry standards.
- Timeliness: Delivery of goods or completion of services, against agreed-upon deadlines.
- Cost-effectiveness: Total cost of the goods or services provided compared to the original budget.
- Productivity: Number of goods or services produced or delivered within a given period.
#6 Compliance requirements
See if the parties are complying with all legal and regulatory requirements.
- Legal compliance: Labor laws, environmental regulations, and data protection laws
- Regulatory compliance: Safety standards, licensing requirements, and financial regulations
- Contractual compliance: Deliverables, deadlines, and quality standards
- Information security: Data protection, IP, and confidentiality
#7 Risk management
Assess the potential risks associated with the contract and develop a plan to mitigate those risks. Ensure that the risks are clearly defined, measurable, and aligned with the objectives of the contract.
- Financial risks: Risks related to non-payment or delayed payment and unexpected price increases.
- Performance risks: Risks related to quality, delays, or failure to meet specifications.
- Legal and regulatory risks: Risks related to non-compliance with environmental regulations or data protection laws.
- Intellectual property risks: Risks related to infringement of patents or trademarks.
- Cybersecurity risks: Risks related to data breaches or cyber-attacks.
#8 Communication plan
Check if all parties are following the predetermined communication plan or not.
- Communication frequency: Communication schedule - weekly or monthly updates and ad-hoc communications.
- Communication methods: Email, phone, video conferencing, or face-to-face meetings.
- Escalation process: Is there a transparent escalation process for reporting and resolving issues that cannot be resolved at the stakeholder level?
- Feedback mechanism: Do stakeholders have a feedback mechanism to provide feedback?
#9 Record keeping
Check if the mechanism to monitor and retain contract-related paperwork, including purchase orders, invoices, and change orders, is in place or not. Maintaining accurate records can help resolve several problems before they become significant issues.
#10 Review and update
It is important to create a timetable for regularly reviewing and revising the contract monitoring checklist to guarantee that it stays up-to-date and useful in the long run. Certain parameters are prone to change; therefore, it is essential to review and update regularly.
However, having a contract monitoring checklist in place may not be enough. Legal teams might have to go the extra mile to ensure that the contract monitoring checklist is effective and serves its purpose. Here’s what they can do.
Also read: The Perfect Contract Risk Assessment Checklist
6 best practices to fine-tune the contract monitoring process
To ensure consistency, reliability, and quality in the contract management process, it is essential to streamline contract monitoring. Here are a few best practices that could help legal teams with standardised approaches and guidelines for monitoring contracts, reducing the likelihood of errors, inefficiencies, and non-compliance.
#1 Understand what you want to monitor and define clear KPIs
As a pre-ritual, legal teams should objectively define the parameters that they want to monitor in any given contract. On top of that, they should also define clear KPIs to monitor the performance of contracts. By doing so, legal teams can allocate resources adequately and productively monitor contracts.
#2 Assign dedicated contract managers
Contract monitoring is a crucial and long-term process. If contract monitoring tools are not implemented in the company’s tech stack, legal leaders should hire dedicated contract managers to monitor contracts. By doing so, they will be able to monitor contracts effectively and optimise the bandwidth of other members of the legal team.
#3 Set up a contract monitoring schedule
Setting up a contract monitoring schedule ensures that contract monitoring activities are conducted regularly and systematically, minimising the probability of missed deadlines, overlooked issues, and non-compliance.
#4 Establish channels for effective collaboration & communication
Effective communication and collaboration between cross-functional teams can go a long way in monitoring contracts, and there will be improved visibility into the contract pipeline. With clear communication channels in the system, legal teams will be able to understand and address the potential challenges of stakeholders better.
#5 Centralise contracts
Centralising contracts enables legal teams to access and manage contract information from a single location, reducing inefficiencies. Centralisation also enhances collaboration, improves data integrity, and provides legal teams with a holistic view of the organisation's contractual obligations and risks.
#6 Use CLMs and other relevant tools for automation and analytics
Using CLMs can help legal teams automate a lot of mundane contract monitoring tasks and also help with analytics. It also becomes easier to track performance KPIs and manage contracts better. With all contracts centralised and standardised, the likelihood of errors reduces significantly.