An Expert Guide to Recognizing Revenue from a Contract with a Customer
Reporting & Insight
Have you ever wound down a deal with a customer and wondered if you had inadvertently left any money on the table? There’s a good chance you have: research from the International Association for Contract and Commercial Management (IACCM) found that on average, businesses could improve revenues by nearly 10 percent simply by strengthening contract management practices.
According to the IACCM, there are a number of key areas where contracts are most likely to experience value erosion. These include:
Project delays, cost overruns, and other delivery issues, which affect 77 percent of companies
Claim and dispute settlements, which 53 percent of businesses say have led to revenue loss from contracts
Contract cancellations and liquidated damages, which each affect roughly a quarter of contracts
While such issues cannot always be prevented altogether, strengthening contract management processes can help businesses to recognize the greatest possible returns from their agreements and mitigate or reduce losses should a problem occur. To help you get the most out of your customer contracts, follow this expert guide.
Step 1: Know Your Contract History
While it might seem backwards to start with a review of contracts that have already been fulfilled, taking some time to understand what has worked in the past – and what hasn’t – can help you draft better agreements moving forward. While making performance reviews standard process at the conclusion of any contract can help to identify specific problems and causes of value leakage, it is also important to look at macro trends that could be affecting your overall performance. In your analysis, look for contracts where revenues have both underdelivered and exceeded expectations, and see if you can spot commonalities that may have affected performance in either direction. Use those learnings to strengthen the terms in your standard contract clauses and templates.
Step 2: Be Detailed (And Prepare for the Worst)
Though you and your customers are entering into an agreement with common goals that you both believe to be achievable, when drafting contracts, the devil is often in the details. Be precise in your descriptions of the goods and services you will be delivering and as specific as possible about timing, quality considerations, delivery and invoice specifications, payment terms, and any other aspect that could later result in a dispute or delay in payment from your customer. Even something as small as a misplaced comma could change the meaning of your obligations or your customer’s obligations to you, so read over everything closely before signing.
It’s also crucial to spend some time thinking about unexpected or worst-case scenarios that could derail your contract and diminish revenues. For example, if you sell to international customers, you should consider how currency fluctuations over the course of the contract could affect your payment, and include clauses to limit your losses in the event of a dramatic change. In case of a breach in your customer relationship, you should also consider including conflict resolution procedures and a liquidated damages clause to help protect your interests.
Step 3: Have a Contract Implementation Plan (and Ensure Everyone Knows Their Role)
Some of the greatest risks of revenue erosion occur not because of a breakdown or dispute in the contract or customer relationship, but due to a failure to closely abide by the contract specifications. For example, your contract may include specific delivery dates with incentives for being early and penalties for being late. In such a situation, strong project management can make the difference between exceeding your goals for a contract and reduced earnings.
There should be no guesswork in contract implementation – to reduce the risk of losses and realize every opportunity to increase the value of earnings, it’s largely a matter of adhering to all of the requirements set out within your agreement. But in large companies where many individuals and teams may play a role in contract fulfillment, that can be easier said than done without a strong implementation plan.
How can you reduce the risk of not delivering on your contracted obligations with better planning? Start with a thorough review of newly executed contracts, identifying the scope and deliverables, detailed timelines, and potential bottlenecks. Use these details to inform a monitoring plan to ensure that everything is on track. Don’t just focus on the deliverables themselves – all aspects, including things like invoice timing and underlying reliances, such as parts and supplies (which may have their own contracts that require monitoring), will all play a role in your ability to fulfill a contract and get paid on time.
Once you have determined what needs to be done, the next step is figuring out who is responsible for each item in the plan (including status reports), and bringing them fully up to speed on their obligations. You can help to ensure nothing gets missed over the course of a contract by setting up auto-reminders and notifications for key tasks and milestones. Closely monitoring contracts can also help you spot problems that could affect revenues earlier, allowing you to take steps to limit or prevent losses.
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