The Essentials of Commercial Contract Management: Strategies and Best Practices

What is a Commercial Contract?

A commercial contract is a legally binding agreement between the parties that allows them to enter into and have legally enforceable commercial transactions with one another. They are also often referred to as business contracts and if made in the course of a business, the UK equivalent of a commercial contract is a contract "made in the course of a business" is governed by the Supply of Goods and Services Act 1982 . Commercial contracts cover a range of legal areas such as construction, licensing, purchases, leasing, franchising and distribution.
The basic elements of any contract are an offer, an acceptance and consideration provided in exchange for performance under the contract. Other fundamental aspects of commercial contracts include that they are signed by persons who have the power to bind the parties to them, have a reasonable certainty of purpose and subject matter and are voluntarily entered into by all parties.

The Contract Management Process

In the commercial context, the lifecycle of contract management encompasses the planning stages that exist before the formation of a commercial contract and the post-formation processes that promote effective decision-making throughout the term of the contract.
Drafting
Once a plan becomes necessary, the first step is to draft the contract’s terms in anticipation of the contract becoming final – this is called negotiating. The drafting process develops as the parties exchange their respective terms. When negotiation is complete, and the final agreement is signed, it is "finalized."
Contract management really begins the moment the parties proceed to the drafting stage. Negotiation is the most important stage of the contract management process. Drawing on each other’s skills and knowledge, the parties will be able to draft the agreement in a way that will encourage compliance during its execution.
The strategy behind drafting a contract’s terms is to align equal interests among the parties. From the start, they need to have a clear understanding of their rights and responsibilities. As a result, the parties should exchange information about various aspects of the contract, including pricing, quality of goods, delivery timelines, schedules, and schedule milestones.
Often, one or both party drafts a contract using an online template or sample contract as a reference guide. Using pre-determined categories of terms and conditions, a party will insert the terms and conditions relevant to the particular agreement. When a sample contract is used as a jumping-off point, the contracting parties are more likely to start with a contract that has been structured for their mutual benefit. This benefits the parties by giving them a baseline from which to individually customize the terms.
Execution
Once the contract is finalized, the next phase is the execution of the contract itself. Depending on the accuracy of each party’s contract formation efforts during the drafting stage, the executing process may be relatively simple or it may involve more complex actions, like the creation and issuance of bills of lading or insurance certificates, that confer additional rights and responsibilities.
Among other things, executing a contract also includes the basic acts of recording the actual file copy of the contract and contacting compliance, accounting, and intellectual property departments with a copy of the contract to distribute the pertinent information to all of the relevant departments of the company.
As a result, an organization that fails to organize its contracts properly will have difficulties managing the information in such contracts. Neglecting to catalog each contract’s terms makes it very hard to find specific information quickly in the future. For example, say a supplier delivers the product after the date in the contract. An organized record keeping system helps a business know right away if late deliveries are actually a breach of the contract. Or if a customer sends a payment late, knowing the terms of the contract will help the organization determine whether to levy a late fee, and if so, how much to charge in late fees.
Termination
There are several reasons why a contract might terminate. Sometimes a contract will terminate consciously at the end of its term. Other times, a termination could be the result of the events leading up to closing a contract’s lifecycle.
Termination occurs when a party’s allowed time period, duration, or existence of contract has ended. Often, contracts will indicate the conditions under which they become voidable or void. A contract may become voidable if one party shows a are preventing the other party from fulfilling their obligations under the contract. As a result, the aggrieved party may void the contract. In contrast, a contract becomes void when it has no legal effect. Which may occur is a contract requires the accomplishment of an illegal purpose.
In short, the four steps of contract management are negotiation, execution, termination and renewal. Each phase builds on the last – completion of one step allows the contracting parties to move to the next phase. For organizations that develop effective contracts for use in their commercial dealings, their contracts will be a valuable asset.

Contract Management Tools

A vital piece to managing commercial contracts efficiently and successfully are the right tools; however, the universe of potential solutions can be overwhelming. Available tools fall into two broad categories: plug-ins or add-ons and end-to-end management platforms. Within the first group, there are additional modules or features that can be added to existing contract lifecycle (CLM) or supplier lifecycle management (SLM) solutions, but that also can be implemented independently of those solutions. These will most often be deployed to focus on one step in the contract lifecycle process with specific features and capabilities throughout the key contract lifecycle phases of initiation, execution, and termination. These include tools for digital signatures, renewal alerts, playbooks specific to contract types or business groups, approved language libraries and checklists, and reporting and analytics. The second group includes end-to-end contract lifecycle management solutions that are comprehensive and designed to be implemented in order to replace a company’s existing processes and overall approaches with respect to contracting. As with the more focused tools, the contract management platform goes beyond the capabilities of merely managing contract information. These tools include clauses, templates, playbooks, and checklists as well as workflow, review, and approval tracking, audit trail, storage, and oversight. They are focused on improving compliance with company policies and applicable laws, training, and template use. These tools are typically designed, from the ground up, to ensure that everyone in the organization is following the same process for contract creation and negotiation. They may be hosted on-premises or in the cloud. There are many such solutions on the market today, with new providers, features, and functionalities entering the market regularly. Overall, there are a variety of options available, which can vary dramatically in terms of functionality, focus, and price. It is essential to understand the problems at hand in order to make an informed choice.

Managing Commercial Contract Risk

There are many types of risks associated with commercial contracts, ranging from financial and legal to operational and reputational. Additionally, risks can be posed to suppliers, customers, service providers, partners, and subcontractors. One way to mitigate these risks is through risk assessment. Your own contract management process should include a risk assessment of each contract an organization signs. It should also have a uniform approach to risk assessment for every contract, i.e., all of its suppliers, customers, contractors, and vendors.
Because of their complexity and the number of parties involved, it is difficult to predict all of the potential risks when contractors. Vendors and suppliers face the risks of non-payment. Customers may see their business interrupted for a period of time due to a problem with a supplier or contractor. The more complex and multi-layered a given contract, the more likely it is that potential risks will arise. All contracts should go through a uniform risk assessment process as a key step in any contract management process. Often, the risk assessment will identify a need for a specific contract type to mitigate a given risk, e.g., a data handling agreement to protect client data. A uniform risk assessment process allows a company to gain insight into the agreements it is entering into with vendors and suppliers, track the volume of similar agreements, and reduce overall exposure. A risk assessment considers some or all of the following factors: Typical contract process. Some organizations connect the risk management process to a contract management process. A contract will pass through three stages: pre-execution, execution, and post-execution. Considerations such as carefully evaluating the service level agreement (SLA), detail orientation, and collaboration eliminate misunderstandings among stakeholders and between departments. The longer it takes to execute a contract, the more time and effort a company spends to manage the contract. One strategy that pays dividends is investing in a robust contract management solution that incorporates a risk management process into pre-execution, execution, and post-execution phases. A good solution helps contract managers make more informed decisions on supplier relationship management, spend management, and contract compliance.

Contract Management Best Practices

The importance of what is written down and what is agreed to in a contract is very high. Contracts can be construed to have significant meaning, so our recommendation is to capture all the details in a transaction.
One of the best ways to maintain documentation is to have an engagement letter or contract – something that memorializes your agreement. When dealing with a vendor or supplier, an engagement letter can make clear the services you will be provided, the pricing for these services, when and how they will be provided and the basis on which they will be invoiced. If a supplier fails to provide services as agreed, then you have recourse to refuse payment or seek the return of money. Or worse yet, you might have paid for services that you never received.
For a client or a customer, an engagement letter or contract will make clear and legally binding issues concerning pricing, billing and payment terms, scope of services provided, and many other details of a transaction. The failure of a customer to pay or to seek a refund can be remedied by having a contract in place.
An engagement letter or contract can also be helpful in working with your legal team. Confidentiality and non-disclosure clauses as well as other restrictions should generally be in writing so that all parties are on the same page about what is expected. If a legal engagement is terminated , then having a legally binding document will be helpful to document the time period of the relationship, the fees that were paid or that were due, the work that was performed, and what remains to be done. Sometimes attorneys and clients will have a different understanding of prior engagements and payments. Some clients fund a retainer and others pay as you go. If there is a disagreement about what is owed or not owed, a written agreement can help identify any shortfalls and help collect payment.
Contractual relationships must be monitored for compliance. For example, are the contracts being managed? Are the parties producing what they said they would? Are the performance dates met? Are the payment terms met? Failure to meet the performance dates or to make payment can require warnings and then the imposition of remedies, such as terminating the contract. Developing a checklist to monitor performance can be a useful tool for evaluating contracts.

Contract Management and the Role of Technology

As technology advances at breakneck speed, contract management is transforming into an increasingly data-driven enterprise function. New tools for each stage of the contract lifecycle are emerging almost daily. This section explores the key innovations driving contract management toward a smarter — and less error-prone — approach.
Contract Lifecycle and Centralized Storage
One of technology’s most telling impacts on contract management is the lifecycle and centralization of documents. Artificial Intelligence (AI) and blockchain play a particularly large role in enhancing security, adding transparency and increasing the speed with which new data can be transferred between contracting parties. While some companies continue to rely on traditional contract lifecycle management (CLM) systems, they are more often met with difficulty integrating those CLM tools with a myriad of other systems. By contrast, modern solutions have an outsized capacity for integration. Solutions leveraging one or more of the aforementioned technologies can quickly adapt to existing third-party software stacks commonly deployed within your organization.
Artificial Intelligence
AI is already imbuing contract management tools with new levels of efficiency and accessibility. Marketers, for example, may use it to parse data across customer contracts and extract insights related to service, intent and demand, enabling more granular customer segmentation. Client relations can be enriched with AI that digs deep into contract data and structuring out details needed for regulatory compliance. Executives can rely on AI to continuously mine contract data — whether buried within enormous legacy documents or newly created and expanded with each revision — to surface insights about contract renewals, or before a contract expires, for new upsell opportunities. Many new contract management tools harness these capabilities through a well-designed API — often, only requiring the addition of a new application to the existing software mix.
Blockchain
On the other hand, blockchain is arguably the technology with the largest potential to upend the status quo of contract management. Without a central administrator overseeing transactions, contracts managed on a blockchain carry an intrinsic degree of trust. With this level of transparency and flexibility, the cost of managing contracts — especially across multiple jurisdictions — will undoubtedly drop, while speed will increase. Trigger-based smart contracts that automatically execute certain actions upon specified conditions are a natural fit for blockchain, making it ideal for automating procurement, supply chain, service delivery and other processes. Within each of these areas, blockchain-based contract management software can track, manage and verify all transactional elements, enabling a much higher degree of precision in billing and reconciliation, and ensuring appropriate delivery, all while avoiding the need for numerous intermediaries.
Accurate, Efficient and Adaptable Contract Management
As these technologies continue to develop — and as they combine to modernize old processes — the challenge of contract management evolves once again. Where early adopters took careful consideration regarding the eventual integration into an existing IT stack, or their capital investment in a new CLM software, the next consideration for those using outdated systems is their own survival. As centralization, blockchain and AI transform the way contracts are managed, companies using disparate systems and unrefined processes will be increasingly vulnerable to contract and data breaches — or worse, legal disputes and penalties.

The Future of Contract Management

As contract management evolves, so too have industry standards and expectations. Regulators around the world are increasingly tightening rules on contract amendments, and corporations are tasked with maintaining consistent commercial contract standards across multiple locales. In an age of uncertainty, businesses are also looking for flexibility and transparency from their service providers. With these standards and expectations in flux, it is important to understand developing trends in commercial contract management, as well as what your business can do to meet these changes head on. Providing a consistent, enforceable framework for contract management is one way to not only meet but exceed the evolving expectations of regulators and customers alike. One way to examine future trends in commercial contract management is to take a look at emerging trends in best practices across various industries. For instance, best practices for supplier audits are becoming increasingly common, with a growing number of companies implementing regular supplier audit cycles. In fact, conducting a supplier audit in the future may become the norm, rather than an exception, in international business. Similarly, your business should consider a move towards more robust contract preservation standards . The requirements of ISO 9001:2015, a quality management standard, are spreading to many commercial contract management companies, and provide a good starting point for what content to include in your contract repository. The trend toward greater visibility into contract compliance, particularly with regard to customer KPIs, is also expected to become a requirement by regulators and customers alike. As new international regulations continue to come into effect, companies should continue to refine their contract waterfall process to ensure ongoing compliance and consistency. In addition to examining trends and evolving standards in the regulatory environment, businesses should also continuously monitor their use of contract management software. The best commercial contract management software can help organizations keep pace with evolving standards as set by those organizations’ customers. Next-generation contract management software can adjust accordingly as customers implement enhanced standards or amend existing contracts. Consequently, smart businesses will invest in contract management software with the flexibility and adaptability to provide solutions that meet the evolving expectations of regulators and customers alike.