Contract management is a standard practice among most businesses, and attorneys for the parties to the agreement often handle all or at least some aspects of the contracting process. As a result, busy company leaders may not take the time to read the contracts and their accompanying documents very carefully. Ideally, there will be a contract management team in place to oversee the portfolio. Regardless of whether there is a formal team or not, someone will have to take the lead on keeping track of contractual matters. This can be a daunting task, although there are plenty of useful and affordable software solutions available that can make the process much simpler. One of many things to consider is how often certain contracts should be reviewed and/or updated. This will obviously vary depending on the nature and scope of each agreement. However, the following is a general guideline as to when to update certain types of contract:
Every Two Years
There probably aren’t many business operations or records that can only be reviewed every now and then, but there definitely are some. Company documents that are actually contracts, such as operating agreements, and other general records normally fall into this category. Granted, there may be certain circumstances that necessitate a specific review prior to the two year anniversary, such as the departure of a partner or a change in ownership. For the most part, however, these sorts of agreements do not need quite as close scrutiny as compared to other more dynamic contracts.
When in doubt as to when a contract should be reviewed or updated, the safest bet is likely the one year mark. There are tons of agreements that have one year terms, including non-disclosure and confidentiality agreements, leases, and licensing contracts. Even if there is a lease or other property-related document that is intended to last for more than one year, these are often executed on a yearly basis and require subsequent renewals, which may also be true for the licensing agreements. Again, depending on the nature of a contractual relationship, it may be wise to revisit certain agreements on an annual basis.
Even though one year agreements are common, that does not mean that contracts should not be reviewed more frequently. This is particularly true for contracts that involve substantial sums of money. For example, financing instruments and professional service agreements warrant additional oversight, as these can have significant financial consequences. With financial matters, companies that are bound by a contract will want to ensure that they are on track to fulfill all obligations and thus a review midway through the cycle is wise. As for contracting for professional services, these may involve hefty fee arrangements with attorneys or accountants, and thus companies will want to ensure that they are getting the appropriate value, or perhaps should seek services elsewhere.
Although an annual review is probably a safe default, for companies that are able and willing to be really proactive, quarterly is probably the way to go. For one thing, this ensures enough oversight to catch matters before they snowball into much larger issues, and it is also probably the shortest span of time that is actually doable. Of course, for those contracting with vendors or suppliers, quarterly assessments will likely be necessary for budgeting and reporting purposes. And, for companies with a lot of employees that have to handle payroll and tax matters, this is also an ideal timeframe for reviewing and updating.
The idea of engaging in monthly contract reviews and updates may seem like overkill for some companies or just downright unrealistic. Nonetheless, companies are bound to encounter contractual arrangements that require this level of oversight. There may be contracts that are simply of a short duration, contracts of extremely high value, or contracts with somewhat unreliable partners, all of which will necessitate diligent oversight and frequent communication. Fortunately, with the use of the right technology, such as contract lifecycle management software, this previously impossible task is now not so impossible.
Disclaimer: SecureDocs, Inc. and its affiliates do not provide legal advice. This blog was written for informational purposes only. Therefore, it is not intended to provide legal advice, and it should not be construed as such. Please be sure to consult an appropriate professional for advice pertaining to any legal matters.
The Master Checklist for Contract Review & Management
Tips and best practices for a successful contract management process.
Top 5 Books on Compliance Management You Need to Read