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What to Do When a Contract Severely Underperforms

Risk & Compliance

Hopefully, dealing with underperforming contracts is not something that your company encounters very often, if ever. In the unfortunate event that it does occur, the contract management team must be well equipped to address the situation swiftly and effectively. Ideally, when there is even a mere indication of performance problems, it must be tackled before it becomes a much larger issue with costly repercussions. Here is what to do about an underperforming contract:

Be Specific About Expectations

Contract performance problems are surprisingly common even when the written agreement is rather lengthy and appears to be incredibly detailed. Most of the time, the eventual performance problems stem from a change to the scope or overarching goal of the contractual arrangement. Of course, in many cases, it is the lack of communication with respect to such changes that actually leads to the breakdown. As things begin to fall apart, if the situation is not addressed early, it can then snowball, and eventually may even become unmanageable. To avoid this, it is important for each party to be clear about its performance expectations from the very beginning and to reiterate those expectations throughout the course of the relationship. There is a constant struggle with ensuring that a contract is both clear and concise, but this precise balance must be struck to ensure that all parties understand that which is expected of them.

Be Clear on the Consequences

In addition to stating without ambiguity what it is that a company expects from the contracting relationship, it is also important to lay out the consequences in the event that those expectations are not met. This should not be terribly hard to include in light of the fact that liability issues tend to be the focus of contract negotiations. And, although these are important terms that must be addressed, they may not be as significant if expectations are abundantly clear from the outset and there is an ongoing dialogue with respect to the contract’s progress. Regardless, the consequences for failing to perform are an essential component of every contract.

Be Firm on Accountability

Of course, stating expectations and spelling out the consequences for failing to fulfill them are meaningless if the breaching party is not held accountable as soon as an issue arises. One of the most important things a company can do to get a contract back on track is to take action the minute things begin to go awry or even appear to be on the brink of doing so. For example, if a supplier begins to deliver parts several days after they are due and your company does not immediately address the issue, the supplier may think that this is acceptable and it could become a regular occurrence. An occasional mishap is one thing, but repeated failures are simply unacceptable, and thus it must be promptly communicated that they will not be tolerated.

Be Proactive

In some instances, underperformance may be unavoidable or too far gone to fix, in which case the best thing a company can do is cut its losses and run. Clearly, the best way to avoid underperforming contracts is to do the appropriate due diligence when identifying potential contracting partners, throughout the negotiations, and during the drafting rounds, which is best done using CLM software. If at any time there are red flags about the other party, it may be wise to pull the plug then and there. Once all of the documents are signed, sealed, and delivered, it becomes much harder to rescind or cancel without some kind of financial ramification, which can be quite hefty in some cases. Ultimately, every facet of contracting requires a diligent and proactive team to ensure that a company receives maximum value from every contract that it enters.

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