What is contract management? understanding the fundamentals

Many organizations struggle with managing contracts efficiently, often encountering issues such as missed deadlines, compliance failures, and poor collaboration.

These challenges can slow down business operations, increase costs, and expose organizations to unnecessary risks. The lack of a structured contract management process can also lead to missed opportunities and strained relationships with partners and vendors.

By understanding and mastering the stages of the contract lifecycle, organizations can streamline their contract processes, ensure compliance, and maximize the value of their agreements. 

This guide will walk you through each stage, from creation to renewal or termination, providing best practices and actionable insights to help you manage your contracts more effectively and efficiently.

Main takeaways from this article: 

• Effective contract management drives efficiency, compliance, cost savings, and stronger vendor relationships.
• Understanding the stages of the contract lifecycle is crucial for optimizing contract processes.
• Implementing best practices, such as using a contract management solution and regular performance audits, enhances contract outcomes.
• Overcoming challenges like volume overload and compliance issues requires a strategic approach and clear communication.
• Utilizing tools like DocJuris can streamline your contract management process and provide actionable insights.

What is contract management?

Contract management refers to the systematic process of handling contract creation, execution, and analysis to maximize operational and financial performance while reducing risk. This involves everything from the initial proposal and negotiation phase to the compliance checks and renewal or termination of the contract later on. 

Why is contract management important?

Contracts, from vendor agreements to employee contracts, are at the foundation of countless business interactions. Effective contract management is essential to ensure these agreements deliver their intended benefits. This means identifying and mitigating risks and penalties, optimizing costs through clear terms and streamlined processes, and avoiding hidden expenses. 

Additionally, clear and consistent contract processes build trust and promote collaboration with vendors and partners, strengthening long-term relationships. Contract data offers crucial insights for strategic decision-making, helping businesses make informed choices about future negotiations, vendor selection, and overall strategy.

However, failing to manage contracts properly can lead to a cascade of problems, such as:

• Missed deadlines: This can result in penalties or delays in project completion.
• Non-compliance issues: Overlooked regulations or legal requirements within contracts can lead to hefty fines and reputational damage.
• Hidden costs: Unclear terms or poorly negotiated contracts can result in unexpected expenses that eat into profits.
• Disputes and delays: Miscommunication and misunderstandings stemming from unclear contracts can lead to frustrating disputes and project delays.
• Missed opportunities: Expiring contracts without proper renewal considerations can lead to missed opportunities to renegotiate better terms or secure long-term partnerships.

Benefits of effective contract management

If you're wondering why investing time and resources into contract management is worth it, here's why: 

Improved compliance and risk management

Concerned about missing critical regulations in a contract? A structured contract management approach mitigates this. Regular reviews ensure all agreements adhere to legal requirements. Identifying possible risks ahead of time helps you deal with them before they become problems, protecting your business.

Cost savings

Effective contract management starts with effective negotiation. By clearly defining terms and negotiating favorable conditions upfront, you can save significant money throughout the life of a contract. Furthermore, streamlined processes and clear communication minimize the potential for misunderstandings, leading to fewer contract breaches and associated costs.

Enhanced visibility and control

Centralized contract management systems offer a clear single source of truth. You gain instant access to all your contracts, their status, and obligations. This transparency empowers informed decision-making and ensures everyone involved is on the same page.

Stronger relationships with vendors and partners

Clear and consistent contract processes build trust and encourage collaboration with vendors and partners. When everyone understands the terms and expectations, it forges a smoother working relationship and paves the way for long-term success.

Dispute resolution

Disputes happen, but effective contract management helps minimize them and resolve them efficiently. Clearly defined communication channels, documented procedures for handling disagreements, and readily available contract details all contribute to quicker and more equitable resolutions.

Scalability

As your business grows, so too can your contract management practices. A well-designed system can handle an increasing volume of agreements efficiently. Automated workflows and centralized repositories ensure you can maintain control and visibility even with a complex web of contracts.

Data-driven insights

By analyzing contract terms and performance metrics, businesses can gain valuable insights. This data can inform future negotiations, vendor selection, and overall business strategy. Effective contract management allows you to make data-driven decisions that optimize your business relationships.

Contract management vs. contract lifecycle management (CLM)

The terms "contract management" and "contract lifecycle management" (CLM) are often used interchangeably, but they encompass different scopes and functionalities within the realm of handling contracts.

• Contract Management refers to the administrative tasks involved in handling contracts, such as drafting, reviewing, negotiating, and storing them. The focus is on ensuring contracts are accurate, secure, and easily accessible. Key activities include maintaining legal compliance, ensuring contract accuracy, and managing renewals and amendments. The goal is to streamline the management of individual contracts to enhance efficiency and reduce risks.
• Contract Lifecycle Management takes a broader approach, covering the entire contract lifecycle from initiation and negotiation to execution, performance monitoring, and renewal or termination. It includes strategic elements like contract analytics, performance tracking, and risk management. The goal is to provide a comprehensive view of all contractual obligations and their impact on the organization. CLM systems often feature automation, workflow management, and advanced analytics to improve decision-making throughout the contract’s lifecycle.

Understanding the stages of the contract lifecycle

Every contract goes through a defined lifecycle. Understanding these stages is essential for effective contract management. Let's explore the key phases that make up a contract's journey. 

1. Contract creation

This is the foundation stage, where the groundwork is laid for the agreement. Here's what it entails:

• Gathering requirements: The first step involves understanding the need for the agreement. This involves discussions with internal stakeholders, potential vendors, or other relevant parties.
• Drafting the agreement: Using the gathered requirements, a draft contract is created. This may involve internal legal counsel or standardized templates for common contract types.

2. Contract negotiation

Once a draft is in place, it's time for negotiation. This is a collaborative process where both parties aim to reach mutually beneficial terms. Here are some tips for successful negotiation:

• Do your research: Understand market rates, industry standards, and the other party's terms.
• Prioritize and communicate: Identify your must-have terms and communicate your priorities clearly.
• Focus on value: Negotiate for terms that deliver value to your business, not just the lowest price.
• Build relationships: Maintain a professional and respectful demeanor throughout the negotiation process. A positive relationship can lead to better outcomes.

3. Contract execution

Once the terms are finalized, the contract is formally signed by all authorized representatives. This signifies a binding agreement between the parties. Here are some steps to ensure enforceability:

• Valid signatures: Ensure all parties with signing authority have signed the final agreement.
• Proper consideration: Consideration refers to the exchange of something valuable between the parties. This could be money, services, or a promise to perform a specific action. Without consideration, a contract may not be enforceable.
• Compliance with formalities: In some cases, specific formalities, such as notarization or witness signatures, may be required for enforceability.

4. Ongoing management and fulfillment

The contract is now in effect, but the work isn't over. From this point onward, you will need to invest time and effort in:

• Performance monitoring: Both parties are responsible for fulfilling their obligations as outlined in the contract. Regular monitoring ensures everyone is meeting their commitments.
• Risk management: Proactive identification and mitigation of potential risks that could impact contract performance is essential.
• Dispute & change management: Clear communication channels are crucial for addressing issues during the contract period. If changes are needed, always follow a formal amendment process.

5. Auditing and reporting

Regular reviews are essential to ensure the contract remains compliant and delivers the expected value.

• Contract audits: Periodically review the contract to ensure adherence to its terms and identify any areas for improvement.
• Performance reporting: Track key performance indicators (KPIs) to assess how well the contract is meeting its objectives. Generate reports to analyze trends and identify areas for optimization.

6. Contract renewal

As the contract nears its end, a decision needs to be made:

• Renewal considerations: Evaluate the past performance of the contract, the value it delivers, and any changes in business needs. Consider renegotiating terms if necessary.
• Renewal process: If renewal is desired, initiate the process according to the terms outlined in the contract. This might involve renegotiation, signing amendments, or following a formal process.

7. Contract termination

In some cases, contracts may need to be terminated. Here's what to keep in mind:

• Termination clauses: Most contracts outline procedures for termination under specific circumstances.
• Closure and resolution: To formally end the agreement, follow the defined termination process. Address any outstanding obligations or fees.
• Documentation: Make sure to document the entire termination process for future reference.

11 contract management best practices

By implementing the best practices listed in this section, you can streamline processes, minimize risks, and maximize the value you get from your agreements.

1. Centralize contract storage

Centralizing contract storage is the first step toward effective contract management. By maintaining a single repository for all contracts, organizations can ensure easy access and improved visibility over their agreements. This practice minimizes the risk of losing critical documents and allows for quick retrieval of contract information when needed.

A centralized storage system can be physical, such as a dedicated filing cabinet, or digital, using contract management software that allows for secure and organized storage. This setup ensures that all stakeholders can access the necessary documents from any location, facilitating better collaboration and communication.

2. Standardize contract templates

Using standardized contract templates helps maintain consistency and compliance across all agreements. Templates should include essential clauses and terms that align with the organization's legal and business requirements. By standardizing contracts, companies can streamline the drafting process, reduce the likelihood of errors, and ensure that all necessary provisions are included.

This practice not only saves time but also enhances the professionalism and clarity of the contracts, making them easier to negotiate and understand. It’s important to regularly review and update these templates to reflect changes in laws, regulations, and business practices.

3. Implement contract management software

Implementing contract management software is a game-changer for organizations aiming to enhance their contract processes. This powerful tool automates and streamlines the entire contract lifecycle, from drafting and negotiation to execution and renewal. By integrating contract management software, you eliminate the inefficiencies of manual processes, reduce the risk of errors, and ensure that every contract is handled with precision and consistency. This not only saves valuable time but also enhances the overall productivity of your team, allowing them to focus on more strategic initiatives rather than being bogged down by administrative tasks.

With contract management software like DocJuris, you can centralize contract storage, ensuring easy access and improved visibility over all agreements. Features like automated reminders for key dates, real-time collaboration tools, and AI-powered analytics ensure compliance and minimize risks, transforming how contracts are managed.

4. Establish clear roles and responsibilities

Defining clear roles and responsibilities for contract management within the organization is essential for accountability and efficiency. Each team member involved in the contract process should understand their specific duties, whether it’s drafting, reviewing, approving, or managing the contract.

Clear roles help prevent duplication of efforts and ensure that each aspect of the contract lifecycle is handled by the appropriate person. This structure also facilitates better communication and collaboration among departments, such as legal, procurement, and sales, ensuring a seamless contract management process.

5. Monitor contract performance

Regularly monitoring contract performance is crucial for ensuring that both parties fulfill their obligations. Organizations should establish KPIs to measure the success of their contracts and track these metrics throughout the contract's lifecycle.

Monitoring performance helps identify any issues or breaches early on, allowing for timely intervention and resolution. It also provides valuable data for evaluating the effectiveness of the contract and making informed decisions about renewals, amendments, or terminations. Continuous performance monitoring ensures that contracts deliver the expected value and support the organization’s strategic objectives.

6. Maintain a contract review and approval process

A structured contract review and approval process is vital for ensuring that all contracts meet the organization’s standards and requirements. This process should involve thorough reviews by relevant stakeholders, including legal, finance, and department heads, to ensure that all terms are clear, fair, and compliant with internal policies and external regulations.

Having a formal approval workflow helps prevent unauthorized agreements and reduces the risk of errors and omissions. It also ensures that contracts are thoroughly vetted before execution, safeguarding the organization from potential legal and financial risks.

7. Track key contract milestones and deadlines

Keeping track of key contract milestones and deadlines is essential for timely contract management. Organizations should use automated reminders and alerts to ensure that important dates, such as renewals, expirations, and performance milestones, are not missed.

This practice helps prevent contract lapses and ensures that all contractual obligations are met on time. By proactively managing key dates, organizations can avoid costly penalties, take advantage of renewal opportunities, and maintain strong relationships with their partners and vendors. Effective deadline management is a critical component of successful contract administration.

8. Facilitate real-time collaboration

Facilitating real-time collaboration among stakeholders involved in the contract management process enhances efficiency and accuracy. Contract management software with collaboration features allows team members to work on contracts simultaneously, track changes, and provide comments and feedback in real-time.

This collaborative approach reduces the time required for contract drafting and review, minimizes the risk of miscommunication, and ensures that all parties are on the same page. Real-time collaboration tools also enable better coordination between different departments, such as legal, procurement, and sales, leading to faster and more effective contract management.

9. Conduct regular contract audits

Conducting regular contract audits helps ensure compliance and identifies areas for improvement in contract management processes. Audits should review contract terms, performance, and adherence to internal policies and external regulations. This practice helps detect any discrepancies, non-compliance issues, or inefficiencies that need to be addressed.

Regular audits also provide an opportunity to assess the effectiveness of the contract management system and make necessary adjustments. By routinely auditing contracts, organizations can maintain high standards of compliance, mitigate risks, and continuously improve their contract management practices.

10. Use a dynamic clause library

Maintaining a dynamic clause library is essential for efficient contract drafting and negotiation. A clause library contains pre-approved clauses and terms that can be easily inserted into contracts, ensuring consistency and compliance.

This resource saves time by providing a repository of commonly used clauses, reducing the need to draft from scratch. It also helps ensure that all contracts include essential provisions and reflect the organization’s standards and policies. Regularly updating the clause library to incorporate new legal requirements and best practices keeps contracts current and relevant.

11. Provide ongoing training and support

Providing ongoing training and support for employees involved in contract management is crucial for maintaining high standards and ensuring the effective use of contract management tools and processes. Regular training sessions help keep team members updated on the latest best practices, legal requirements, and software functionalities.

Offering support resources, such as user guides and help desks, ensures that employees can efficiently handle any challenges they encounter. Continuous training and support foster a culture of excellence in contract management, enabling organizations to maximize the value and effectiveness of their contractual agreements.

Overcoming challenges in contract management

Effective contract management is not without its hurdles. Here are some common challenges organizations face:

Volume overload 

Managing a high volume of contracts can lead to delays and oversight, as keeping track of numerous agreements and their various deadlines becomes overwhelming. A practical strategy to overcome this is to implement a robust system of prioritization and delegation. Assign specific team members to oversee different contract categories and use a centralized dashboard to track key metrics and deadlines. Regularly reviewing contract statuses in team meetings ensures that no contract is overlooked and that deadlines are consistently met.

Compliance conundrums 

Ensuring that all contracts comply with legal and regulatory standards is essential to avoid severe repercussions. To tackle this, organizations should establish a compliance checklist that is reviewed and updated regularly.

This checklist should cover all relevant legal and regulatory requirements and be used by the legal team during the contract review process. Additionally, conducting periodic compliance audits can help identify and address any gaps, ensuring ongoing adherence to standards.

Accuracy assurance

The risk of errors such as missing critical clauses or making inconsistent changes increases with manual handling of contracts. To enhance accuracy, develop a system of peer reviews where multiple team members check each contract for errors and inconsistencies before final approval.

Creating and using standardized templates for common contract types can also help maintain consistency and reduce the likelihood of mistakes.

Siloed departments 

When legal, procurement, and sales teams work in isolation, communication breakdowns and inefficiencies are common. A strategy to overcome this is to establish cross-functional teams that include members from each department.

These teams can work together on contract-related tasks, ensuring better communication and collaboration. Regular interdepartmental meetings and shared communication channels, such as a dedicated project management tool, can further enhance cooperation and streamline the contract management process.

How DocJuris addresses these challenges

Contract management software plays a crucial role in overcoming various challenges associated with managing contracts. Here's how DocJuris addresses each specific challenge:

• Volume overload: DocJuris centralizes contract storage and automates tracking, ensuring all agreements are easily accessible and deadlines are never missed. With features like a comprehensive dashboard and automated reminders, it streamlines the management of large volumes of contracts, reducing the risk of oversight and delays. Teams can quickly find, review, and manage contracts, significantly improving operational efficiency.
• Compliance conundrums: Built-in compliance checks and automated audits help ensure that every contract adheres to legal and regulatory standards, minimizing the risk of non-compliance. DocJuris’s AI-powered tools can flag potential issues early in the process, providing an additional layer of security and ensuring ongoing adherence to compliance requirements.
• Accuracy assurance: DocJuris uses standardized templates and AI-driven error-checking to maintain consistency across all contracts, reducing the likelihood of human errors. These tools automatically detect and highlight discrepancies or missing clauses, ensuring that all contracts meet the organization's standards and legal requirements.
• Siloed departments: Real-time collaboration tools within DocJuris enable multiple stakeholders to work on contracts simultaneously, ensuring that legal, procurement, and sales teams are always aligned. This cohesive approach enhances communication and collaboration, reducing inefficiencies caused by departmental silos and leading to faster and more accurate contract management. 

By leveraging DocJuris’s contract management software, organizations can effectively address these challenges, resulting in enhanced efficiency, accuracy, and compliance in their contract processes.

Streamline your contract management process with DocJuris

Understanding the stages of the contract lifecycle is the first step toward efficient and effective contract management. However, implementing these practices can be challenging without the right tools. 

This is where DocJuris comes in. DocJuris offers a comprehensive solution that addresses each stage of the contract lifecycle, ensuring your organization can manage contracts with precision and ease.

DocJuris Key Features:

• Screening Reports: Conduct a 30-second analysis to quickly identify compliance issues.
• AI-Powered Playbooks: Ensure consistency and compliance using AI-driven tools and established playbooks.
• One-Click Markups: Generate contract edits with the push of a button for efficiency.
• Realtime Collaboration: Track comments, edits, and internal approvals seamlessly.
• Automate Amendments: Draft amendment language from redlines automatically, reducing manual effort.

DocJuris is more than just software; it's a strategic partner in your contract management journey. 

Ready to transform your contract management process? Request a free demo today and see for yourself how DocJuris can help you achieve seamless and effective contract management.