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How to Perform a Contract Compliance Audit

Risk & Compliance

Contracts are critical legal instruments for companies of all sizes in virtually every sector. Although sourcing, negotiating, and drafting contracts can be quite a tedious process, contracting does not end once the agreement is put to paper. In fact, the real work begins once all parties have signed the final documents. To ensure that the terms and conditions of a contract are being performed as stipulated, it is crucial to conduct periodic audits, which is easier done using CLM software. This may be done at a micro level (i.e., by contract) or at a macro level (i.e., a review of the entire portfolio). Here are some of the key points to consider to perform a contract compliance audit:

Determine the Appropriate Timing, Scope, and Parameters

The idea of auditing any facet of a business is no doubt stress inducing, and conducting an audit of contracts can be downright daunting given the legal ramifications of non-compliance. However, it is a necessary part of the contracting process to ensure proper and timely performance. To complete a contract audit effectively, it is important to first determine the appropriate timing, scope, and parameters for the process.

Of course, the scope and parameters will likely dictate the timing, as a wider audit is going to require more time and thus probably should not occur at the same time as any other complex process, such as during tax season or another kind of audit. It may make sense to start small by conducting audits in batches, for example based on contract type, and then use the lessons learned to begin reviewing other batches of contracts. Most importantly, it must be clear which contracts will be under review, the anticipated length of time that the review will take place, and the types of things that the review is seeking to assess.

Establish Clear Objectives

An audit is essentially pointless if there are no clear goals or objectives guiding it. A company must determine what it is that it hopes to accomplish by examining its contracts. This can be done by establishing clear objectives from the outset. For example, many companies are concerned about cost overruns and leakages, so they may want to examine contracts for efficiency and potential redundancies. In other cases, companies may be worried that its contracting partners are not holding up their end of the bargain and thus want to evaluate whether deadlines and obligations are being met in a timely fashion. There can be a wide range of reasons that companies decide to initiate an audit, and as long as the ultimate goal and end result are clear, this will help guide the process.

Emphasize Cordial Collaboration

To achieve a truly successful contract audit, it will be helpful to engage the other party or parties to the particular contracts under review. After all, it would be pretty hard to decipher how well things are going if half of the equation is not being evaluated. In light of this, it is important to have strong working relationships with contracting partners and to include them in the audit process. This should be done in a cordial fashion to avoid having the other side become defensive or even hostile. The goal of an audit should not be to apportion blame or fault for mistakes or problems but to use the information gathered to improve things moving forward.

Debrief and Plan Accordingly

As just mentioned, one of the primary purposes of conducting a contract audit is to identify potential issues and to rectify them before they devolve into much larger issues. Thus, a contract audit is a good chance for companies with a contracting relationship to figure out what sort of things are working and what things need work. Even the audit process itself can be used as a learning tool, as subsequent audits will no doubt be necessary. In the end, those involved in the process should debrief regarding the contracting matters in need of attention, as well as the audit process, and use those lessons to plan accordingly for the future.

The Buyer's Guide to Contract Management Software

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