The concept of contract management is often used in procurement departments. Procurement departments are responsible for negotiating, accepting, and entering into contracts with suppliers for goods and services for the organization. In doing so, they ensure that the company complies with the terms and conditions of the contracts entered into. The role of the procurement department in the negotiation process can play an important role in cost management practices, but most transactions in the economy are governed by some form of contract. Labor contracts, gross invoices, and purchase orders are examples of contracts that we encounter on a daily basis.
The term “contract management system” is made up of three words: “contract”, “management” and “system”. You may be familiar with the term “contract”. A contract is essentially a legal document that establishes a transaction between an employer and an employee, a company and a customer, or between two companies. Good contract management reduces administrative costs, provides more efficient services, and gives you an advantage in the next round of negotiations.
Why is contract management important?
Here are the main points that highlight the importance of contract management.
- It is essential to a healthy business environment.
- It documents all commitments so that contracts can be reviewed if there is any ambiguity or doubt.
- Ensure on-time delivery of goods and services. The contract also defines the quantity and standard of the goods to be delivered, as well as the time intervals at which the goods must be delivered.
- It guarantees the risk of the supplier not delivering the goods to the customer, not submitting the goods on time, or delivering poor-quality goods.
How does contract management work?
Below is a procedure to help you understand how it works.
- The management system creates standard contracts for the company.
- An efficient team is set up to create new contracts and execute them in the desired order.
- It controls the deadlines that suppliers must meet. Manages supplier partnerships and supplier interaction.
- It helps manage budgets and prices at all stages of the project.
- It legally confirms the agreement between the two parties and facilitates the suppliers’ signing of a contract specifying the duration of their activity.
Contract management steps
The stages of contract management are as follows.
- First, a contract is drafted.
- The second step is to agree on an optimal offer that is beneficial to both parties while respecting the terms of the contract.
- The next step is a “service agreement” in addition to “performance indicators” that often represent the supplier’s performance.
- Finally, the documents are reviewed and modified, the contract is reviewed and necessary changes are made by both parties.
Effective contract management requires regular monitoring of activities, transaction execution, and follow-up with suppliers. Only through proactive management can business units realize benefits without problems. These benefits include early termination clauses, additional discounts, and a range of other benefits depending on the type of contract.
Sally Hickman Green is a 30-year-old who enjoys blogging about electronic signatures, electronic documents, and Financial Systems. She is inspiring and generous in blogging. She has a post-graduate degree in Computer science.