A recent study found that poor contract management processes cost organizations an average of 9.2% of their annual revenue. These losses can be attributed to inefficient processes, lack of visibility, and poor communication between parties.
To overcome these challenges, companies must completely understand the contracting process.
That’s exactly what you’ll be learning in this guide. Let’s get started!
What is the contracting process?
The contracting process is a series of steps an organization follows to select a contractor or vendor for a specific project or service.
Contracting makes sure that the company selects a capable and qualified vendor or contractor and that the agreement's terms are clear, legally binding, and mutually beneficial.
This reduces the risks and uncertainties associated with outsourcing while promoting transparency, fairness, and accountability in the procurement process.
Common challenges in contract management
Effective contract management involves a wide range of processes and tasks, so it's understandable that organizations often face challenges that hinder their ability to manage contracts effectively. Some of these challenges may include the following:
- Limited visibility into contract details and tracking: Companies struggle to keep track of contract details, which can lead to missed deadlines, overpayments, and other mishaps
- Difficulty addressing contract disputes or issues: Problems can arise at any stage of the contracting process, and organizations should have effective procedures for resolving them
- Inadequate procedures for evaluating contract renewal or termination: Contracts are rarely static and must be reviewed regularly to ensure they continue to meet the changing needs of the organization
- Lack of communication and collaboration between parties: Good communication is key when negotiating contracts. Without this, there may be costly and time-consuming consequences
- Inadequate staffing and resources for contract management: A contract management process takes a lot of resources, so you need to plan for funding and prepare the right people for the job
There are a lot of factors to consider when managing contracts, so preparing ways to address these common challenges will minimize legal, financial, and operational risks.
5 Steps to mastering the contracting process
Contracting can be an intimidating process. Every agreement requires a lot of attention to detail and a deep understanding of the legal and business implications. But fear not! We're here to help you master the contracting process. Let's dive into the essential steps that you'll need to take to become a contracting pro.
#1 Drafting the contract
A well-written, legally binding contract outlines the terms and conditions of a business agreement, avoiding misunderstandings, disputes, and legal problems down the line.
Here are the key points to consider when drafting a contract:
- Parties involved: When setting up a contract, one of the first things to do is identify all the stakeholders who will be involved. This means getting their names, contact info, and any other relevant details. By doing this, you can accurately identify all parties involved and make sure that everyone knows what they're responsible for.
- Scope of the contract: The contract’s scope is essentially what the agreement is all about. Details include what goods or services will be provided, when they'll be delivered or completed, etc. Making sure the scope is crystal clear prevents misunderstandings down the road.
- Obligations and responsibilities: Each party should have clear roles in the contract. This includes specifying what each party is expected to do under the contract when they are expected to do it, and any other relevant details.
- Terms and conditions: These are the parts of the contract that spell out key information such as payment terms, delivery schedules, warranties, indemnification, and termination clauses. Having a clear understanding of the contract terms and conditions promotes transparency and trust and confirms that everyone agrees before moving forward.
- Risk allocation: This identifies the potential risks and determines who's responsible for them. Risks have to be allocated fairly, and each party has to be responsible for what they can control. With this, you can ease the process of contract risk management.
- Dispute resolution: It should be clear how disputes will be handled in a contract. All parties should agree on a fair and reasonable dispute resolution process.
- Governing law and jurisdiction: Before finalizing a contract, determine which laws will govern any potential disputes. All parties must agree on the applicable law and jurisdiction to prevent legal disputes and ensure that any disputes are efficiently resolved.
The process of drafting a contract can be overwhelming and time-consuming, but with the right tools and resources, it can be done quickly and efficiently. For example, pre-approved contract templates are available to help create a contract within minutes and save time.
Also read: How to Resolve Contract Disputes
#2 Negotiating the contract
Contract negotiations require collaboration and effective communication with all parties involved to finalize the terms and conditions of the agreement.
The following steps can ensure you a successful negotiation and reach a mutually acceptable agreement.
Preparing for negotiation
"Negotiation is 90% preparation, 10% talking."
~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
The real effort is in the preparation leading up to the negotiation. Miller points out that when you have a complete grasp of the facts, the contract, and the issues at hand, you have a significant advantage because it's likely that you're the only one who has put in that level of preparation.
Identify your objectives and priorities, understand the other party's needs and interests, and research industry standards and norms. Also, gather all relevant information and documents, such as previous contracts, market data, and legal requirements.
Identifying the negotiable terms
Once you have prepared for negotiations, it’s time to identify the negotiable terms of the contract. This includes the scope of work, payment terms, warranties, indemnification, termination, and other terms that may vary depending on the specific project or service.
Using effective negotiation techniques
When it comes to negotiating, the goal is to find a win-win solution that both parties can agree on. Here are a few tips to keep in mind that can help you negotiate more effectively:
- Listen actively: Listen to the other party's concerns and needs. By understanding their perspective, you can find common ground and build a better relationship.
- Be clear and concise: Communication is everything. Communicate your expectations and position clearly to avoid misunderstandings.
- Come to a compromise: Negotiation is a give-and-take process. Be willing to accept compromises on some terms if it helps reach a mutually beneficial agreement.
- Focus on common interests: It's essential to focus on shared interests rather than personal differences. This approach can help build trust and lead to successful negotiations.
- Take time to reflect: Before finalizing the agreement, pause to think about what has been accomplished. By doing so, you can help ensure that all parties are satisfied with the final outcome.
Reaching a mutually acceptable agreement
Once you've hashed out all the details and come to an agreement through proper discussion and negotiation, you can finally make it official.
By following these steps and using effective negotiation techniques, you can reach a mutually acceptable agreement that meets the needs of all parties involved.
Also read: Choosing the Right Contract Negotiation Software
#3 Executing the contract
When a contract has been executed, this means that all parties involved are now legally obligated to follow the terms and conditions outlined in the agreement. To make sure the contract is properly executed, follow these steps:
Review and finalize
Before you sign on the dotted line, carefully review and finalize the terms and conditions of the contract. Make sure that everything is accurate, comprehensive, and clearly understood by everyone involved.
Don't forget to double-check that all the standard clauses are included, and that there are no mistakes or key details left out.
Sign the contract
When everyone agrees on the terms and conditions of the contract, it's time to put it in writing and sign it. Each party should sign the exact version of the contract to show that they are all on board with the agreement. If possible, have a witness present when the signatures are added.
Communicate to all relevant parties
Once the contract has been signed, let everyone involved know about the terms and conditions. This could include your employees, contractors, or anyone else who might be affected by the contract.
Explain and outline the details of the contract extensively to avoid misunderstandings and ensure everyone fully comprehends what each party is responsible for.
Store and manage
Last but not least, keep the contract safe and well-managed. This involves keeping a copy of the signed contract, as well as any additional documents or attachments that are relevant.
You may also find it useful to use a centralized contract management system to keep track of your contracts, as this can make it easier to access them and keep track of relevant dates and obligations.
#4 Contract performance and compliance
Contract compliance means keeping an eye on how well all parties involved comply with the terms and conditions outlined in the contract. The process includes tracking progress, addressing issues that may come up, and keeping detailed records to make sure the contract is executed correctly.
To monitor contract performance, you should set clear goals and timelines for completing the contract. You'll also need to keep an eye on how well everyone is following the contract and address any issues or disagreements that come up along the way.
This could involve talking through changes to the contract, finding a mediator to help resolve conflicts, or even taking legal action if the contract is breached.
It's important to keep detailed records of contract performance and compliance to make sure everyone is doing what they're supposed to be doing. This means keeping track of all communications, progress reports, and any other significant documents related to the contract.
#5 Contract renewal or termination
Understanding the contract renewal process is a key aspect of contract management. You need clear procedures for renewing or terminating a contract, including deadlines, notice requirements, and communication with all parties involved. For a smooth and efficient process, take note of the following:
Evaluate the contract for renewal or termination
The first step in the contract renewal or termination process is to evaluate the contract to determine whether it should be renewed or terminated. By doing so, you can determine whether the contract is still serving its purpose and whether the performance of both parties is satisfactory.
Determine if any changes need to be made
If you decide to renew the contract, check the terms and conditions to see if they need updating. This could mean negotiating terms for revision or adjusting the current ones.
On the other hand, if you choose to terminate the contract, be sure to follow the procedures laid out in the contract and any relevant laws or regulations to ensure a smooth and lawful process.
Notify the other party of the intent to renew or end
When you decide to renew or end a contract, let the other party know as soon as you can. Provide them a notice of renewal or termination, as well as any documents they need. Keeping both parties on the same page and planning ahead eases the process.
Develop clear procedures for contract renewal or termination
To make sure renewing or terminating a contract goes smoothly, everyone should develop a plan that details what needs to be done, when it should be done, and who is responsible for what.
This way, everyone knows what is expected of them. Establishing clear procedures can help ensure that everyone is working towards the same goal and that the process runs smoothly.
Also read: Contract Renewal Process: Strategy + Best Practices
Overcoming the challenges by automating the contracting process
Contract management can be overwhelming. But with the right tools and strategies, it can be managed effectively.
Here are some solutions to common challenges in contract management:
- Deal with contract non-compliance and regulatory issues: Establish clear policies and procedures for monitoring and managing contract compliance, including regular audits and reporting mechanisms.
- Standardize and centralize contract management: Implement a central contract management system to ensure consistent processes and access to key contract data across the organization.
- Keep track of expiry and renewal dates: Set up automated alerts and notifications so you don't miss important contract deadlines.
- Enhance contract lifecycle management with modern solutions: Consider using a contract lifecycle management (CLM) solution that offers features such as streamlined contract analysis and automated workflows.
Did you know that Open migrated all data with the help of SpotDraft within 2 weeks? Learn more.
By implementing the right CLM solution in combination with a strategic approach, any business entity can optimize its contract management practices, mitigate risks, improve compliance, and drive better outcomes.
The bottom line: Streamline your contracting process with SpotDraft
Mastering the contracting process is crucial for any business looking to operate effectively and efficiently. By following this step-by-step guide, you can successfully navigate each stage of the contracting process, from identifying the need for a contract to managing contract performance and compliance.
As modern businesses become more complex, manually managing contracts becomes increasingly challenging. That's why you need modern solutions that can streamline your contracting process.
SpotDraft is a powerful contract management solution that automates your contracting process, saving you time and resources. With the right CLM solution in place, you can focus on growing your business while guaranteeing your contracts are compliant and accurate.
Learn how SpotDraft can help your business today by requesting a live demo.
