Contract management

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Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees. 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.[1]

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."[2]

Contracts[edit]

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.[3]

Contracts can be of many types, e.g. sales contracts (including leases), purchasing contracts, partnership agreements, trade agreements, and intellectual property agreements.

  • A sales contract is a contract between a company (the seller) and a customer where the company agrees to sell products and/or services and the customer in return is obligated to pay for the product/services bought.
  • A purchasing contract is a contract between a company (the buyer) and a supplier who is promising to sell products and/or services within agreed terms and conditions. The company (buyer) in return is obligated to acknowledge the goods / or service and pay for liability created. When the purchasing contract is between a retailer and manufacturer, the contract also includes conditions for processing returned items. However due to the cost of reverse logistics, retailers often dispose of returns rather than sending them the back to the vendor.
  • A partnership agreement may be a contract which formally establishes the terms of a partnership between two legal entities such that they regard each other as 'partners' in a commercial arrangement. However, such expressions may also be merely a means to reflect the desire of the contracting parties to act 'as if' both are in a partnership with common goals. Therefore, it might not be the common law arrangement of a partnership which by definition creates fiduciary duties and which also has 'joint and several' liabilities.

Areas of contract management[edit]

The business-standard contract management model, as employed by many organizations in the United States, typically exercises purview over the following business disciplines:

  • Authorizing and negotiation
  • Baseline management
  • Commitment management
  • Communication management.
  • Contract visibility and awareness
  • Document management
  • Growth (for Sales-side contracts)
  • Contract compliance/governance

Change management[edit]

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:

  • A mutual agreement of both parties to vary the contract, outside the framework of the existing contract. This would be an independent basis for changing the contract.
  • A unilateral decision to vary the contract, contemplated and allowed for by the existing contract. This would normally have notice periods for fairness and often the right of the other, especially in consumer contracts, to cease the contractual relationship. Be careful that any one-way imposition of change is contractually justified, otherwise it may be interpreted as a repudiation of the original contract, enabling the other party to terminate the contract and seek damages.
  • A bilateral decision to vary the contracting, within the variation or change control process outlined in the existing contract. These are often called change control provisions.

Phases of contract management[edit]

Contract management can be divided into three phases [4] namely

  • pre- contract phase
  • contract execution phase
  • post award phase (often referred to as contract compliance/governance)

Another dimension of the debates on the phases of contract management relates to the interplay between contracts and trust.[5] In particular, management scholars have discussed the nature of the relationship between contract and trust development.[6] On the one hand, some have argued that contracts and trust would substitute each other; that is, the use of one mechanism decreases the advantages of the other.[7][8] On the other hand, others suggest contract and trust complement each other; that is, the use of one increases the benefits of using the other mechanism.[9][10]

Contract compliance/governance[edit]

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%.[11]

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.” [12]

A collaborative governance framework has four components:[13]

  • A relationship management structure (how the parties work together to make both day-to-day operational decisions as well as strategic decisions)
  • A joint performance and transformation management process designed to track the overall performance of the partnership
  • An exit management plan as a controlling mechanism to encourage the organizations to make ethical, proactive changes for the mutual benefit of all the parties.
  • Compliance to special concerns and regulations, which include the more traditional components of contract compliance

Managerial functions[edit]

Scholars in business and management have paid attention to the role of contracts to manage relationships between individuals or between organizations. In particular, contracts work as instruments of control and coordination.[14][15] On the one hand, contracts can moderate the risks of exploitation or misappropriation by an opportunistic partner. On the other hand, contracts can help foster communication and information sharing between parties.

See also[edit]

References[edit]

  1. ^ "Best Practices in Contract Management: Strategies for Optimizing Business Relationships<". Aberdeen Group. Retrieved 2008-07-10.
  2. ^ "Contract Management: Optimizing Revenues and Capturing Savings". Aberdeen Group. May 2007. Retrieved 2008-07-10.
  3. ^ "Contracts<". Cornell University Law School. Retrieved 2015-07-22.
  4. ^ Contract & Commercial Management - The Operational Guide, Van Haren Publishing, October 2011, ISBN 978 90 8753 627 5
  5. ^ Cao, Zhi; Lumineau, Fabrice (2015). "Revisiting the interplay between contractual and relational governance: A qualitative and meta-analytic investigation". Journal of Operations Management. 33–34 (1): 15–42. doi:10.1016/j.jom.2014.09.009. ISSN 1873-1317. S2CID 12536364.
  6. ^ Poppo, Laura; Zenger, Todd (2002). "Do formal contracts and relational governance function as substitutes or complements?". Strategic Management Journal. 23 (8): 707–725. doi:10.1002/smj.249. ISSN 0143-2095.
  7. ^ Ghoshal, Sumantra; Moran, Peter (1996). "Bad for Practice: A Critique of the Transaction Cost Theory". The Academy of Management Review. 21 (1): 13. doi:10.2307/258627. JSTOR 258627.
  8. ^ Lui, Steven S.; Ngo, Hang-Yue (2004). "The Role of Trust and Contractual Safeguards on Cooperation in Non-equity Alliances". Journal of Management. 30 (4): 471–485. doi:10.1016/j.jm.2004.02.002. ISSN 0149-2063. S2CID 144788583.
  9. ^ Ryall, Michael D.; Sampson, Rachelle C. (2009). "Formal Contracts in the Presence of Relational Enforcement Mechanisms: Evidence from Technology Development Projects". Management Science. 55 (6): 906–925. doi:10.1287/mnsc.1090.0995.
  10. ^ Zhou, Kevin Zheng; Xu, Dean (2012). "How foreign firms curtail local supplier opportunism in China: Detailed contracts, centralized control, and relational governance". Journal of International Business Studies. 43 (7): 677–692. doi:10.1057/jibs.2012.7. ISSN 0047-2506. S2CID 167843632.
  11. ^ "California Energy Commission:2008 Energy Efficiency Standards"|http://www.energy.ca.gov/2008publications/CEC-400-2008-016/CEC-400-2008-016-CMF-REV1.PDF%7Caccessdate=2016-08-16}
  12. ^ Williamson, Oliver E.|1979|"Transaction-Cost Economics: The Governance of Contractual Relations,"|Journal of Law and Economics: Vol. 22: No. 2, Article 3|accessible at: http://chicagounbound.uchicago.edu/jle/vol22/iss2/3
  13. ^ Vitasek, Kate; et al. (2011). The Vested Outsourcing Manual (1st ed.). New York: Palgrave Macmillan. ISBN 978-0230112681.
  14. ^ Reuer, Jeffrey J.; Ariño, Africa (2007). "Strategic alliance contracts: dimensions and determinants of contractual complexity". Strategic Management Journal. 28 (3): 313–330. doi:10.1002/smj.581. ISSN 1097-0266.
  15. ^ Schilke, Oliver; Lumineau, Fabrice (2018). "The Double-Edged Effect of Contracts on Alliance Performance". Journal of Management. 44 (7): 2827–2858. doi:10.1177/0149206316655872. ISSN 0149-2063. S2CID 51833472.
  16. ^ "The Best Contract Management Software".
  17. ^ "A methodology on approaching Contract Management".