What you need to know about contract management

“Begin with the end in mind”  –  Stephen Covey

(Habit 2 of the 7 Habits of Highly Effective People)

Contract management starts right at the beginning. When you decide you need to buy something, you should already be asking yourself what the contract with the supplier you choose should look like, and how you should manage it. If buying something big and complex like a space station – high value and high risk – you need a solid contract and you need to manage it well. With something small and closer to home, like paper for the printer – low value and low risk – you may only need a purchase order with a few words on it, and, given that the paper arrives in one piece at the right time and you pay for it in a timely manner, you really do not need to think about it again.

Contracts follow a lifecycle as shown in the diagram:

Contract Management Lifecycle_V2

Sign contract

After specifying what you need to buy and choosing a supplier, you sign a contract, which is a promise to supply goods, carry out services or perform works in return for payment. A good contract is simple, clear and complete. It is as simple as it needs to be to describe the commercial relationship with the supplier, but not simpler. This is the concept of proportionality – the “size” of the contract should reflect the size of what is bought – measured by both value and risk.

The contract should clearly set out what is being bought, when this is to be supplied, and how much it will cost. It should set out the quality expected of the goods or services supplied. And most importantly, it should set out when the contract comes to an end, how you can renew it and how you can get out of it.

It must be signed by all parties concerned and stored in a safe place for easy access. There’s nothing worse than being told, “it’s in the contract”, when you can’t find the contract, and then, when you do, there’s only one signature on it.

Phase in

Even the simplest of contracts needs to be phased in – the paper needs putting in the right place, and if the new paper is different from the old, then you will need to phase out the old paper. In a services contract there will often be an incumbent supplier and there will need to be a handover. If new goods are supplied they will sometimes need to be tested first.

This can all take time and needs to be allowed for in plans – it needs to be managed too. What needs to be done and how it will be managed should be set out in the contract itself.

Manage contract

Not all contracts are equal – you should not waste time carefully managing small low-risk contracts. On the other hand, if you do not manage your high-value, high-risk contracts well then not only will your suppliers manage them for you (often to their benefit), but you will miss out on opportunities to work closely with your suppliers to save money, reduce risk and seek out innovation.

Some of the activities that have to be managed are:

  • Administration and support – the contract needs to be signed, stored, updated, renewed etc., and an electronic system can help enormously here.
  • Compliance to contract – the suppler must do what they have agreed to do in the contract.
  • Performance – the supplier must carry out the services to the service levels agreed in the contract.
  • You must pay the supplier as agreed in the contract.
  • Change – things change over time, and sometimes the contract needs to be changed to reflect new circumstances or new wishes.
  • Risk – there is always risk in a contract: the supplier could go bankrupt, or be flooded out, or fail to give you the attention you need…
  • Capability development – can you work together with the supplier to improve their ability to supply?
  • Innovation – can you work together with the supplier to develop innovative processes or products, or to bring new products to the market more quickly?
  • Dispute resolution – how can you work together to resolve disputes, or if you can’t, then how should you handle them?

And then of course, the relationship with the supplier itself needs to be managed – supplier relationship management, or SRM.

End contract

A good contract will define its natural end – the goods have been supplied and tested to satisfaction, or the services have been provided for the agreed period of time. You should make sure that you plan ahead in good time for this end. If you need services to continue, then your new supplier needs to be in place ready for the end date.

The contract should also clearly set out what happens if you want to terminate the contract early.

  • Can you end the contract just because you want to – termination for convenience?
    And if so, how much notice must you give?
  • Or, are there only certain conditions under which you can terminate – termination for cause?
    And what are these conditions – bankruptcy, breach of contract…?

And, what about renewing the contract?

  • Will the contract automatically renew, unless you terminate it on agreed notice? This is common with certain types of services agreement, but dangerous.
  • Do you have the right to renew, and if so, for how long and on what terms?

Again, begin with the end in mind.

Phase out

Phasing out needs to be covered in the contract, and can be costly as it can involve extra work for the supplier beyond the official end of the contract. It can also involve the transfer of personnel or the using up of stock.

There are certain actions that may need to be performed as the contract is phased out:

  • Confidential data, including files or documents, need to be returned or destroyed.
  • Equipment or tools need to be returned.
  • Access to IT systems needs to be removed.
  • Access passes need to be returned.

And finally, it’s a good idea to hold a post-contract review with all involved and with the supplier – what went well and what could have been done better? This should be done sooner rather than later while the contract is fresh in peoples’ minds and they are still available to come together to talk about it.