4 Key Contract Performance Metrics
It is often difficult to discern the success of a contract when the subject matter of the agreement is more complex than the delivery of a single item in exchange for a payment. A lot of business contracts can last for several years and may involve a series of actions, deliveries, and/or payments from one or both sides. Nonetheless, contract performance is critical to managing a company’s contract portfolio, and it obviously has significant influence on the bottom line. As a result, the contract management team must have clear metrics by which to measure performance. Here are four key metrics that can be used to evaluate contract performance:
Costs, both Economic and Otherwise
As with most business operations, success really boils down to money that is spent as well as money that is saved and thus the ensuing profit margin. A contract that performs well does not allow trivial issues to derail progress or lead to unforeseen expenditures to get things back on track. Of course, in addition to the general economic impact that a bad contract can cause, relationships and reputations can be damaged. Thus, to determine whether contract performance is occurring as stipulated, it is important to look at the progress of the contract, as well as the overall impact that the contract has had on the company budget and its standing within the industry.
For many contracts, there is a clause indicating that time is of the essence, and therefore adequately fulfilling contractual obligations requires doing so in a punctual manner. If either side is consistently or even occasionally tardy in performing its contractually mandated duties, this can wreak havoc on the other side and the agreement as a whole. This is particularly true for certain sectors such as manufacturing that rely on strict production and delivery schedules. In light of this, assessing the timeliness of each phase of the transaction will prove critical to evaluating performance, as well as the future of the contracting relationship.
Reliability and Responsiveness
It often takes time to find the right vendors or other contracting partners, as companies usually have a list of specific needs and criteria that must be met. Ideally, once the right fit is identified, both sides will strive to create a good working relationship to ensure consistent workflow and business. Unfortunately, some companies are a bit shortsighted when it comes to managing relationships, and they place more emphasis on the overall financial gain at the expense of the transaction as a whole. Successful contract performance requires a level of reliability and responsiveness from both parties to the agreement. Contracting partners must be willing and able to make periodic modifications or adaptation for the sake of the relationship.
Quality and Consistency
Performing in a timely fashion is obviously of critical importance, but punctual deliverables must also be of consistent quality and value. Sometimes a party to a contract is so focused on maintaining a high volume of transactions or output that it begins to neglect quality. Being able to deliver a consistently high quality good or service clearly requires diligent oversight and organization. This is one of several reasons that contract performance is reliant on the implementation of a coherent contract management strategy. It is important for companies to utilize a purpose-built contract management solution to facilitate contract management and thus contract performance.