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The Fundamentals of Contract Management

Bennett Conlin
Bennett Conlin

Learn the basics of contract management.

  • Contract management is when someone takes on the responsibility of managing contracts for employees or vendors or other parties.
  • Contract managers need legal knowledge to accurately lead the contract management process.
  • Not all companies have set contract managers, but major defense firms or companies that frequently work with the government tend to use contract managers.

Managing contracts is an overlooked form of management. Managers interact frequently with employees, and some of those discussions and situations naturally relate to compensation. Some of these conversations will deal with contract management. Other times, businesses need to manage contract agreements with other businesses. It's not talked about much, but contract management is an important business topic. If you're unsure of how the contract management process works, it's important to understand the basics.  

What is contract management, and why is it important?

Contract management is the process of managing contract creation, execution, and analysis to maximize operational and financial performance at an organization, all while reducing financial risk. Organizations encounter an ever-increasing amount of pressure to reduce costs and improve company performance. Contract management proves to be a very time-consuming element of business, which facilitates the need for an effective and automated contract management system.

The fundamentals of contract management

When two companies wish to do business with each other, a contract specifies the activities entered into by both organizations and the terms through which they will each fulfill their parts of the agreement. Contracts affect business profitability in a very large way due to the emphasis on revenue and expenses.

When a contract is phrased poorly, one organization might lose countless thousands of dollars over a simple technicality they lacked the resources to identify. Effective contract management can ultimately create a powerful business relationship and pave the road to greater profitability over the long term, but only when managed correctly. It's a good idea to include a legal department or a lawyer in contract management discussions. The precise wording of contracts is crucial to contract management.

Contract management also applies to managing different contracts with freelancers or employees. These occasionally require management and alterations that help both parties.

Generally, contract management involves a few key stages. There's the early stages or pre-award phase. This is all the work that takes place prior to a contract being given to someone, whether it be a business or an employee. The middle stage is when the process is awarded. This includes all the paperwork to make the agreement final. Third, there's the post-award stage. This is where a lot of contract management and maintenance comes in.

Those three basic stages are a simple way of looking at contract management in three phases, but the process is more complicated than that and can be viewed in more stages depending on how detailed a view you're taking. We'll discuss a deeper view of the process later.

Elements of successful contract management

It isn't enough that an organization has professionals in place to handle contract management. Employees must be augmented with the presence of processes and software companions to satisfy increasing compliance and analytical needs. When a contract management strategy is successfully implemented, organizations can expect to see:

  • The expected business benefits and financial returns are being realized.
  • The supplier is cooperative and responsive to the organization's needs.
  • The organization encounters no contract disputes or surprises.
  • The delivery of services is satisfactory to both parties.

Activities that comprise good contract management

The foundation for contract management relies on the implementation of successful post-award and upstream activities. During the pre-award stage, employees should focus on the reason for establishing the contract and if the supplier can fulfill the terms of the agreement.

Additional consideration is needed to understand how the contract will work once awarded. Avoiding unwanted surprises requires careful research and clarity of purpose in the actual contract.

Contract management requires a level of flexibility for both parties involved and a willingness to adapt contract terms to reflect any changing circumstances. Problems are inevitable, which means organizations must be prepared for the unexpected and be able to adjust contract terms when needed.

What are the stages of the contract management process?

While there are many components of contract management, we can summarize the process by breaking it into five clear stages: creation, collaboration, signing, tracking and renewal.

We can further identify individual steps within the stages. In all, we can break the process down into nine steps, each of which contributes to one of the five overarching stages. This makes it easier to manage the end-of-quarter crunch that tends to happen when it's time for a new round of contracts. Here are the steps of each stage:

Creation

1. Initial requests. The contract management process begins by identifying contracts and pertinent documents to support the contract's purpose.
2. Authoring contracts. Writing a contract by hand is a time-consuming activity, but through the use of automated contract management systems, the process can become quite streamlined.

Collaboration

3. Negotiating the contract. After drafting the contract, employees should be able to compare versions of the contract and note any discrepancies to reduce negotiation time.

Signing

4. Approving the contract. Getting management approval is the step where most bottlenecks occur. Users can preemptively combat this by creating tailored approval workflows, including parallel and serial approvals to keep decisions moving at a rapid pace.
5. Execution of the contract. Executing the contract allows users to control and shorten the signature process through the use of electronic signature and fax support.

Tracking

6. Obligation management. This requires a great deal of project management to ensure deliverables are being met by key stakeholders and the value of the contract isn't deteriorating throughout its early phases of growth.
7. Revisions and amendments. Gathering all documents pertinent to the contract's initial drafting is a difficult task. When overlooked items are found, systems must be in place to amend the original contract.
8. Auditing and reporting. Contract management does not mean drafting a contract and then pushing it into the filing cabinet without another thought. Contract audits are important in determining both organizations' compliance with the terms of the agreement and any possible problems that might arise.

Renewal

9. Renewing. Manual contract management methods can often result in missed renewal opportunities and lost business revenue. Automating the process allows an organization to identify renewal opportunities and create new contracts.

Much of contract management comes down to handling these nine steps. Contract lifecycle management is critical. As different contract types go through their various stages, contract managers need to monitor any potential changes or breaches of contract. If an employee or business is unhappy with their contract, it might be worth making alterations to the contract. It's important to follow contractual obligations while also making sure both sides of the contract are happy.

There are many times during the contract management process when lifecycle management becomes important. Vendor performance and risk management are important considerations during the management of contracts. For example, if a vendor fails to meet their contractual obligations, you may need to rework the contract or enforce some disciplinary measure.

What is contract management software?

While the tradition is to manage contracts manually through folder and file cabinet storage, the practice is riddled with inefficiencies that can only detract from an organization's overall efficiency.

Contract management software is an electronic approach to solving these problems. Contract management software suites can organize all contract paperwork. The software can put signing and renewing on an electronic calendar that is easy to manage, and it can help you track and allocate resources related to the contract management process.

Integration with an automated contract management service can free up countless man-hours and automate countless processes associated with managing a contract, thus creating more value for a company. 

"Contract management software stores key information about contracts relating to providers, leases and licensing agreements," said Robert Powell, CEO and founder of the Rob Powell Biz Blog. "The overall purpose of contract management software is to streamline administrative tasks by creating a centralized and uniform record for each contract's processes."

Using contract management software can make it easier to monitor complex contracts without relying solely on paperwork.  

"The most important aspect of contract management software is that it allows employees in multiple locations to access contracts in one place," Powell said.

Who uses contract management software?

This software will primarily see use in departments that directly deal with creating, tracking and signing contracts. This is often offloaded to the HR department, which manages the vein of employment accounting. The software can also involve managers who need to complete vital processes. Since it can integrate with calendars and communication software, HR can use the heavy-lifting components of the software suite, while the rest helps to loop in managers and personnel who are needed for specific aspects of signing or negotiation.

How to become a contract manager

Not all universities offer a degree in contract management, but some schools do. Getting that education is one option, but there are other business degrees that position you for success in the industry. From there, you want to add contract management experience in some form.

"With a bachelor's degree and a few years of experience in the field, you can apply and test for certification through the NCMA (National Contract Management Association)," said Jared Weitz, CEO and founder of United Capital Source. "Along with education and credentials, a contract manager needs to have solid communication and writing skills and a keen eye for organization and deadline management."

A law degree can also be beneficial to this career path. Legal knowledge is critical in managing contracts. Contract management and negotiation both rely on legal knowledge and expertise.

If you want to become a full-time contract manager, it's a good idea to connect with other contract managers to learn how they entered their current role. There's no one set way to become a contract manager, but business experience is important when becoming a contract manager.  

How much money does a contract manager make?

Understandable, the salary for a contract manager varies by qualifications and location. According to PayScale,  the average annual salary for a contract manager is $80,151. The site lists Northrop Grumman Corporation, Accenture, and the Raytheon Company as a few of the most lucrative companies for contract managers.

Contract managers can also work their way up to a senior contract manager, contract director or a contract administrator. Contract analyst is another common career path within the contract management field.

The bottom line

Contract managers help manage the legal and financial aspects of contracts with businesses or employees. For companies that make frequent contractual agreements, hiring a contract manager can be a good idea.

Ryan Goodrich contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

Image Credit: fizkes / Getty Images
Bennett Conlin
Bennett Conlin
business.com Member
Bennett is a B2B editorial assistant based in New York City. He graduated from James Madison University in 2018 with a degree in business management. During his time in Harrisonburg he worked extensively with The Breeze, JMU’s student-run newspaper. Bennett also worked at the Shenandoah Valley SBDC, where he helped small businesses with a variety of needs ranging from social media marketing to business plan writing.