Simply put contract management is the administration of contracts between a company and its vendors.
Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees. The personnel involved in contract administration required to negotiate, support and manage effective contracts are often expensive to train and retain. Contract management includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution. It can be summarized as the process of systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk.
Common commercial contracts include employment letters, sales invoices, purchase orders, and utility contracts. Complex contracts are often necessary for construction projects, goods or services that are highly regulated, goods or services with detailed technical specifications, intellectual property (IP) agreements, outsourcing and international trade. Most larger contracts require the effective use of contract management software to aid administration among multiple parties.
A study has found that for “42% of enterprises…the top driver for improvements in the management of contracts is the pressure to better assess and mitigate risks” and additionally,” nearly 65% of enterprises report that contract lifecycle management (CLM) has improved exposure to financial and legal risk
Contract Management Criteria.
- Creation: Whilst many companies work from standard contracts, they do have to be created in the first place and they often need to be changed as negotiations progress.
- Negotiation: Of the contracts to ensure that, the best possible contract is available to both parties.
- Adherence: To the contracts and all of its sections and aims.
- Service Level Agreements: (SLA) and Key Performance Indicators (KPI) are set to manage the day-to-day performance of the vendor.
- Managing Changes: that may be required as the relationship changes and problems arise.
- Documenting: Any changes that may have been agreed.
- Analyzing: The benefits that accrue or may be available from the contract.
Why manage a contract?
The answer to this question is that contracts need to be methodically managed in order to ensure that financial and operational risk is minimized and vendor performance maximized.
Once the contract is fairly negotiated and signed by both companies you need to set up a number of Service Level Agreements that measure service performance and let the vendor know what is expected of them.
Most procurement software programs allow you to manage the financial aspects and relationship management. Contract management can be managed by your legal team when problems arise or performance dips.
So what is contract management after all?
The answer is – a suite of management activities that ensure your vendor relationships are efficient and profitable.
Vendor Relations
You need to look at three distinct areas of vendor relationship:
- Contract Administration: This is the formal “nuts and bolts”, small print management of the physical contract and the adherence to the sections and aim of the contract.
- Service Delivery: This is the management of the delivery of the products by the vendor. It ensures that they meet the service performance and quality that is required. Service delivery is managed by adherence to several Service Level Agreements that are defined during contract negotiation.
- Relationship Management: This ensures that the relationship between the company and vendor is mutually constructive and problem free.
Areas of contract management
The business-standard contract management model, as employed by many organizations, typically exercises purview over the following business disciplines:
- Authoring and negotiation
- Baseline management
- Commitment management
- Communication management.
- Contract visibility and awareness
- Document management
- Growth (for Sales-side contracts)
- Contract compliance/governance
Phases of contract management
Contract management can be divided into three phases namely
- pre- contract phase
- contract execution phase
- post award phase (often referred to as contract compliance/governance)
