Contract monitoring & evaluation: What entity professionals should know
Contracts are the legal ligaments of all transactions in modern business. This goes whether you're the employer or the employee, whether you're the large organization expecting goods and services from a client or the vendor who promised to perform a service.
The contract is the center around which all of these relationships revolve. Contracts establish trust between individuals and institutions that they are on an equal playing field. Contract management processes exist to make sure both parties get what they expected out of a deal by monitoring and evaluating performance.
A recent government-related mishap sheds light on the grave consequences that may result from improper contract management. In August 2017, the New York City Comptroller's office revealed that the NYC Department of Education had been 'playing by its own rules' with respect to service contracts. Contracts had been awarded without bids, renewals were made without review, and documentation was filed after the work had started or even long after it was finished.
The liability of a private organization for contract mismanagement is much greater than that of a public institution, which will need to be reformed but is guaranteed to continue in more or less the same function. This is why negotiating and maintaining contract compliance is one of the top priorities of businesses' legal departments. According to one survey, one out of seven corporate legal departments listed tracking contractual obligations as the most important challenge or the major priority with which they deal.
As an organization grows, it is inevitable that it will enter into more and more binding and actionable contracts. This post discusses the basic methods successful organizations, managers and legal departments use to monitor and evaluate contracts they engage in, turning grunt work into an easily applied and money-saving venture.
Know the Responsibilities for Contract Monitoring & Evaluation
Every organization has the legal responsibility to manage a vendor's compliance with the contract once the contract has been entered. There are three levels to this reporting, monitoring and evaluating:
- Reporting: Vendors selling to your organization need to provide regular reports on their progress. Each contract should have a point person or a contract manager on your team who uses these reports to evaluate performance.
- Monitoring: Effective contract management involves site visits to make sure the vendor is carrying out the project according to the terms stipulated by the contract.
- Evaluating: Organizations must have a consistent procedure to evaluate the performance of each vendor. You need both ongoing evaluation and, after the completion of the contract, a system that can help you determine whether they should be employed again in the future.
Centralize Contract Data Collection
Different operations in your organization will enter into different kinds of contracts. To help ensure you're getting what you paid for, you should have a central repository of information suited to your organization's requirements. This will contain information on all ongoing and past contracts, most importantly performance reports, dates for inspection and renewal. This technology allows contract managers to monitor and evaluate your vendors systematically and effectively.
Standardize and Automate
Even the smallest firm will have a boilerplate contract for procurement purposes. Larger organizations have templates ready for all of the different variations they encounter in these deals. These must be updated with every change in regulations. Automating this process can save you time that could be better spent on improving your core competencies rather than attending to details of compliance.
Effective contract management revolves around a standardized workflow for contract creation and approval, with the proper hierarchies in place so that it can operate effectively. As almost every contract can be subject to negotiation, it's also important to identify which clauses are mandatory or not, and to keep records of all customizations. This brings us to a central part of contract compliance.
Deal Proactively With Problems Through Auditing
Contract auditing should be a regular practice. For example, vendor overpayment (through fraud or error) in even small amounts over time can slow or cripple an entity. By establishing a consistent auditing practice, you can eliminate this risk. Over time, these audits will help your organization as a whole to learn the best practices to avoid unnecessary spending, reduce the risk of costly disputes and keep your business on the right side of regulatory agencies.
Control Your Budget
Doing contract management right carries a number of rewards. Effective contract management can reduce the costs to your organizations, as it relentlessly monitors project expenses. If a vendor goes over budget, you will know immediately and be able to effect a solution.
At the height of the last recession, Aberdeen Research found that firms adopting contract management solutions saved as much as 83% on their outgoing expenses over their competitors, many of which remained in the dark ages of manual contract writing and entry. Even today, the economic ground remains subject to rapid shifts. Cutting the fat from your bills through contract management helps immediately as well as in the long term.
Conclusion
If your organization has consistent methods of writing and approving contracts, establishes practices to evaluate and audit them once they are in place, and keeps track of all this in an effective manner, you stand to save a tremendous amount of time, money and organizational resources.
