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.
Contents
- Contracts
- Areas of Contract Management
- Change management
- Phases of Contract Management
- Contract ComplianceGovernance
- References
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."
Contracts
A contract is a written or oral legally-binding agreement between the parties identified in the agreement to fulfill the terms and conditions outlined in the agreement. A prerequisite requirement for the enforcement of a contract, amongst other things, is the condition that the parties to the contract accept the terms of the claimed contract. Historically, this was most commonly achieved through signature or performance, but in many jurisdictions - especially with the advance of electronic commerce - the forms of acceptance have expanded to include various forms of electronic signature.
Contracts can be of many types, e.g. sales contracts (including leases), purchasing contracts, partnership agreements, trade agreements, and intellectual property agreements.
Areas of Contract Management
The business-standard contract management model, as employed by many organizations in the United States, typically exercises purview over the following business disciplines:
Change management
There may be occasions where what is agreed in a contract needs to be changed later on. A number of bases may be used to support a subsequent change, so that the whole contract remains enforceable under the new arrangement.
A change may be based on:
Phases of Contract Management
Contract Management can be divided into three phases namely
Contract Compliance/Governance
During the post-award phase, it is important to ensure that contract conditions and terms are met, but it is also critical to take a closer look for items such as unrecorded liabilities, under-reported revenue or overpayments. If these items are overlooked, margin may be negatively impacted. A contract compliance audit will often commence with an opportunity review to identify the highest risk areas. Having a dedicated contract compliance (and/or governance) program in place has been shown to result in a typical recovery of 2-4% and sometimes as high as 20%.
Current thinking about contract management in complex relationships is shifting from a compliance “management” to a “governance” perspective, with the focus on creating a governance structure in which the parties have a vested interest in managing what are often highly complex contractual arrangements in a more collaborative, aligned, flexible, and credible way. In 1979, Nobel laureate Oliver Williamson wrote that the governance structure is the “framework within which the integrity of a transaction is decided.” He further added that “because contracts are varied and complex, governance structures vary with the nature of the transaction.” (See also relational contract). Eriksson and Westerberg (2011); Li, Arditi, and Wang (2012); Chen and Manley (2014), and Cardenas, Voordijk, and Dewulf (2017) have hypothesized, developed and extensively tested conceptual models in which relevant project governance instruments and factors were identified and related to the performance of construction projects.
A collaborative governance framework has four components: