Contracting is a necessary facet of running a business, with many companies entering into multiple contracts on a daily basis. Of course, given that contracts are legally binding, enforceable agreements, they can carry some pretty significant consequences. Unfortunately, the management phase of the contracting cycle is often overlooked, as emphasis is placed more heavily on the front end of the contracting cycle, which involves negotiations and drafting. This is clearly an erroneous oversight because poor contract management will no doubt result in negative financial outcomes. Here are some key ways that inadequate contract management can impact a company’s financial success.
Expirations and Renewals
Contracts have various durations, with some agreements simply involving a single, finite transaction and others lasting for years on end. Companies must be aware of every contract’s expiration date and/or renewal requirements because this will undoubtedly impact the influx of goods and services, as well as the outlay of funds. If a contract expires unbeknownst to the team, this could cause a massive disruption in the business’s entire operations. For example, manufacturing contracts often involve the purchase and delivery of various components from around the world. If one of those contracts inadvertently expires, the entire manufacturing process may be shut down until a new deal is negotiated or a different supplier is located.
In addition, contracting partners often include renewal discounts to ensure a long-lasting business relationship. However, to receive these discounts, the contract often has to be renewed within a certain timeframe, such as thirty to sixty days prior to the contract’s expiration. Failing to take advantage of these sorts of incentives can also have a substantial impact on a company’s bottom line, as a new contract may mandate the payment of a higher price. To prevent these costly mistakes, it is imperative to implement a coherent contract management system and utilize practical, purpose-built software.
Contract breaches are the source of countless, costly court battles, and it is likely that close to half of them could have been avoided fairly easily. A party to a contract breaches an agreement in all sorts of ways and for all sorts of reasons. Unfortunately, misaligned goals and miscommunication are often the culprit. Of course, things are far more likely to fall through the cracks when companies fail to keep track of the many details inherent in contractual agreements.
A strong contract management approach is critical to staying on top of things to avoid the financial ramifications associated with a breach of contract, and contract management software is particularly helpful because of its alerting and reporting features. Although contract management software does not completely eliminate the possibility of a breach, it certainly reduces the likelihood that important matters will get lost in the shuffle. And, this clearly helps decrease the chance of having to engage in expensive conflict resolution procedures.
Compliance is a huge and growing aspect of the contracting process, and its complexity is often the reason that companies end up investing in some kind of contract management solution. Companies that are unable to fulfill compliance mandates will inevitably miss out on ample financial opportunities. There may be potential penalties, fines, and damages, but poor contract management that affects compliance issues may also render companies ineligible for contract renewals or bidding on new contracting opportunities with the same entity, especially when that entity is a government agency.
Ultimately, good management is vital to a company’s financial success. This is true across all company departments and sectors, and it is particularly important for contracting given the scope of impact.