Tag: contractworks

Commercial contracts are needed for any business to partner with vendors, bring on new customers, or hire new employees. But what goes into a commercial contract? This blog explores some of the most common clauses found in commercial contracts, as well tips for effectively managing these agreements throughout the contracting process.

What is a Commercial Contract?

In the simplest terms, a commercial contract is a legally binding agreement between two or more parties. Most of the time, commercial contracts come in the form of written documents, but they can also be verbal agreements in certain situations. Commercial contracts explain, in detail, what all parties are obligated to do in order for the contract to remain valid, and what the repercussions are should any party fail to comply with the agreed upon terms and conditions.

6 Key Clauses Found in Commercial Contracts

Contracts are used in virtually every industry, and many of the contract clauses that are used are applicable across sectors. In fact, there are certain contract clauses that are likely to make an appearance in just about any contract that is drafted. Commercial contracts, in particular, tend to contain a standard set of terms and conditions. 

Here are six key clauses found in commercial contracts:

Confidentiality

When two or more firms enter into a contract, there will no doubt be a significant exchange of information in order for both sides to perform their contractually stipulated obligations. In light of the need to furnish certain information about each side’s financial and business practices, it is imperative for the contract to contain a strongly worded confidentiality clause. This clause should preclude both sides from divulging any and all information that is shared during the course of the transaction. Of course, this is particularly important when there is valuable intellectual property at stake.

Force Majeure

The phrase force majeure literally translates as a “greater force.” This clause should always be included in commercial contracts, as it can protect parties from circumstances that arise that are beyond anyone’s control. For example, in the event of a natural catastrophe, such as an earthquake or hurricane, a shipment schedule may be unavoidably disrupted. In general, the definition of force majeure is rather broad, with many contracts including wording about things like terrorist attacks and even acts of God. This clause is important to include to ensure that any failure to perform due to such an unforeseeable disruption is not considered a breach of contract.

Termination Triggers

In business, things often do not occur as planned, and thus parties must be able to cut and run as necessary. For contracts, this usually involves the inclusion of a termination clause. This section of the contract must clearly lay out the circumstances under which one or both parties may terminate the contract, irrespective of the time left under the agreement. For example, if one of the parties is acquired by another entity, the other party to the contract may reserve the right to terminate the agreement.

Jurisdiction

These days, cross-border transactions are fairly routine, both in the domestic and international sense. When the parties to a contract are located in more than one state, or perhaps more than one country, it may not be clear which state’s laws govern the arrangement. Therefore, commercial contracts should always specify the state that will have jurisdiction over the agreement, so that it is perfectly clear which laws are applicable.

Dispute Resolution

Even the most well-drafted contracts are susceptible to conflict. As a result, it is of the utmost importance to clarify the parties’ plans for dispute resolution in the event that an issue arises. In many contracts, it is now common practice for firms to include an arbitration clause, requiring the parties to submit to arbitration prior to or in lieu of seeking a remedy via litigation. This is generally a faster, cheaper way to solve contract-related problems, although some contracts still allow for traditional legal recourse.

Damages

In light of the frequency of contract breaches and in an effort to deter them, it is also standard practice for commercial contracts to contain clauses related to damages. In general, liquidated damages clauses will be included, which is usually a predetermined amount that will be owed if one side fails to perform. Of course, a court may award other types of damages beyond that amount depending on the nature and impact of the breach.

Effectively Managing Commercial Contracts

Commercial contracts lay the foundation for how your business operates, so it’s important that you develop a structured plan to manage your agreements throughout the contract lifecycle. There are various stages that make up the contract management process, ranging from planning and contract implementation through contract closeout.

Here’s a brief overview of the seven stages of contract management so you can determine what steps you need to take to succeed in each part of the process:

1. Planning

As the name suggests, this is the time to plan out your process for managing each agreement, determine roles and responsibilities, and assign resources to ensure the contract is monitored closely and obligations are met.  

2. Implementation

The implementation stage is the process of putting your plan into action, and ensuring you have all the right tools in place to manage agreements, including contract lifecycle management software.

3. Pre-contract

During the pre-contract stage, new agreements are carefully drafted, reviewed, and signed. Be sure each contract includes all of the required terms and conditions (including the clauses covered above), so all parties feel confident that the agreement clearly states what is expected of them.

4. Handover

Since the individuals who drafted and negotiated the contract aren’t necessarily the ones who will monitor the active agreement, this is the time to make sure that the contract manager is up to speed and understands all milestones, obligations, and other contract details.

5. Contract

The contract stage is the period of time when the agreement is active and the parties involved are working to deliver services according to the agreed upon terms.

6. Pre-renewal

Before decisions are made about the future of a contract – whether it should be terminated, negotiated, or renewed – the agreement should be evaluated to determine the impact it has on the business. The pre-renewal stage is when this evaluation happens, so stakeholders have the information needed to decide next steps.

7. Post-contract

The post-contract stage, or contract closeout, is the time to wrap up all items related to the agreement and conduct a post-mortem, so you can improve the way future commercial contracts are managed.

Final Thoughts 

Regardless of the size of your business or the industry it operates in, it’s imperative that your commercial contracts are carefully drafted and reviewed thoroughly, both before signing and on a regular basis. For help getting started building out your process for managing commercial agreements, download The Master Checklist for Contract Review & Management.

The terms contract management and contract administration are often confused for one another or used interchangeably, but they actually represent different phases of the overall contracting management workflow. To state it as simply as possible, contract administration is the work done before a contract is signed into effect and contract management covers everything done after signing to ensure that deliverables and deadlines are adhered to as outlined in the agreement.

Below is a more in-depth overview of the differences between contract administration and contract management and helpful tips for excelling in both phases of the contracting process.

What is Contract Administration?

The professionals responsible for a company’s contract administration focus their work on the planning and execution of contracts. The planning process often includes sourcing potential contracting partners, for example via sending out requests for proposal. In addition, contract administrators help with ironing out the details of the contract arrangement, working with prospective partners to negotiate on contract matters such as price, delivery schedules, and performance expectations.

Although the word administration makes it seem as though this facet of the contracting cycle is essentially administrative in nature, it requires a great deal of strategy and business savvy. Entering into legally sound, mutually advantageous contracts is critical to the financial success of many businesses, so it is imperative to find the right partners and put into place fair agreements.

Best Practices for Preparing a Contract Administration Plan

Creating and following a strong contract administration plan puts your team in a good position to successfully manage each new contract throughout the lifecycle of the agreement. This formal document should describe in explicit detail what is expected of both parties during the term of the agreement in order to limit possible breaches of contract or other issues that lead to either side not fulfilling their contractual obligations.

Consider the following five best practices when preparing a contract administration plan.

1. Define the scope and deliverables

The first step to ensuring a successful contracting process is to clearly lay out expectations, including the scope and deliverables. Scope creep is a common issue that can derail any contract, so including in writing exactly what the contract does and does not cover will help keep the contract on track.

2. Include a detailed timeline

It may sound like a given, but contract administration plans should include a detailed timeline accounting for every important milestone throughout the life of the contract, including project start and end dates, deadlines for deliverables, and progress updates.

3. Sort out finances

To avoid contract disputes and maintain positive relationships between both parties, everyone involved in the contract administration process should know the financial terms of the agreement, including the value of the contract, payment intervals, and the process to address the need for any additional expenses (depending on the type of contract).

4. Plan the work

To ensure transparency and accountability, the plan should include details about how the contract deliverables will be executed, including the people who will be working on each part of the agreement (including both internal and third-party personnel, if applicable). Having a plan for measuring success throughout the life of the contract will keep both parties aligned and allow for course correction if needed.

5. Anticipate the risks

Every contract comes with risk, but putting plans in place to account for those risks can prevent the contract from failing. Outline the most likely risks for each agreement and the steps that should be taken in the event those events actually happen. Building in some flexibility for timelines and budgets will allow for minor, unexpected delays or problems to be taken in stride and prevent the contract (and potentially the relationship) from suffering significantly.

What is Contract Management?

Contract management occurs after a contract has been executed and taken effect. Thus, this entails working to ensure that the terms and conditions contained within the contract are adhered to and that all of a party’s contractual obligations are met satisfactorily. 

During the contract management phase, it is always possible that circumstances will change, necessitating modifications to the contract agreement. Of course, the contract management team tends to work closely with the other party to the agreement, so they are in a good position to know whether the relationship is working or if it is necessary to pursue opportunities elsewhere. As a result, it makes sense for the contract administrators and managers to remain in close communication, in the event that they are in fact separate teams within a company.

Stages of Contract Management

Knowing what to expect at each of the seven essential stages of the contract management process will increase your ability to meet contract requirements and deliver optimal results. 

1. Planning stage

During the planning stage, you should outline the specifics of your team’s most pressing contract management pain points, needs, and goals, then determine what kind of approach or system would best enable you to address those areas. You’ll also want to consider the resources you have available to allocate to the contract management process. 

2. Implementation stage

After you know what your contract management process should look like, you can begin to implement the tools and systems needed to support those efforts. If you only have a handful of contracts to manage, you can likely track your deadlines, deliverables, and other obligations with manual solutions like shared drives, calendars, and spreadsheets. If you have more complex contract management needs, consider implementing dedicated contract management software to help you keep track of your agreements and important deadlines.

This is also the time when everyone involved with your contract management process should be onboarded and trained on your contract lifecycle management solution so they’re completely comfortable using the software.

3. Pre-contract stage

During the pre-contract stage, you should work closely with the contract administration to start understanding the important details of the new agreement. This will help you prepare for the contract management process and incorporate any specific guidelines that will help you manage the contract and deliverables effectively.

4. Handover stage

If the individuals who negotiated an agreement are not the same people who will be executing and delivering against the terms of the contract, it’s imperative to have a thorough handover process, often involving dedicated meetings to ensure alignment and common understanding of roles, responsibilities, and key deliverables.

5. Contract stage

The contract stage is when the work defined in the agreement is executed and deliverables are completed, hopefully according to the agreed upon timeline and budget. This is also one of the areas where contract management software can help you stay on track and give you the foundation needed to measure performance along the way. Features like automated alerts and notifications and custom reports will let you know of any upcoming deadlines related to deliverables, termination windows, and any other dates you determine are worth tracking.

6. Pre-renewal stage

Typically, as a contract winds down, you must determine if you want to renew, renegotiate, or terminate it completely. More often than not, there are strict timelines that determine when these actions can occur without penalty, so it’s in your best interest to start thinking about these scenarios well before the contract’s end date. 

7. Post-contract stage

Once a contract has ended and the dust has settled, there are a couple of post-contract tasks to complete. Before archiving your contract, review the contract terms in detail to confirm that all conditions have been met and invoices have been settled. 

Finally, conducting a post-mortem will give you an opportunity to uncover valuable information about the contract and your contract management process – including both successes and shortcomings – that can help you improve your future agreements. 

Contract Management Best Practices

There are many different ways to approach contract management, and a plethora of solutions and methods for accomplishing your contracting goals. Here are seven contract management best practices that apply to just about every situation, regardless of the size and complexity of your contract portfolio.

1. Keep all of your contracts in one place

To manage your contracts effectively, you have to know where they are. By keeping all of your organization’s contracts in one location, you’ll know exactly where to go to find an agreement or track down dates, terms, and other specific contract details.

2. Set and measure contract management KPIs

Setting and measuring contract management KPIs is the best way to determine how your contracts are performing and gives you a way to share that information with internal stakeholders. These KPIs also enable you to identify any ineffective parts of your contract management process and develop strategies to improve by reducing risks, eliminating unnecessary costs, or finding missed opportunities in your agreements.

3. Balance storage security and access

Legal departments and contract managers must find the right balance between contract security and access. Those who use contract management software have a secure online repository to house all of their sensitive contracts, and can easily assign varying levels of access so only specific users and groups can view certain files and folders. This allows legal teams to share some of the contract management responsibilities without losing control of your repository.

4. Track contract approval time

The quicker you can move a contract through the approval process, the less time it takes to start seeing the value from that agreement. But, in order to optimize that process for greater efficiency, you first must have a system in place for monitoring it. Tracking contract approval time will help you understand your contract cycle and determine whether improvements are needed.

5. Automate contract communications

Today’s contract management technology allows legal teams to automate many aspects of the contracting process, especially around communications. For example, cloud-based repositories allow users to schedule and send specific individuals automated contract alerts and notifications, removing the need for manual reminders and unnecessary emails. And with the modern solutions available, many businesses have eliminated the process of physically sending documents back and forth for wet signatures, instead turning to electronic signature options for immediate action.

6. Conduct regular compliance reviews

One benefit of having a structured contract management process is the ability to improve your organization’s compliance with industry regulations. By regularly monitoring federal, state, and other legal regulations and ensuring your contracts adhere to those laws, you can protect your business from avoidable penalties and fines. Make it a point to regularly check for updates to the regulations that pertain to your company, and review active contracts to determine if action is needed to remain compliant.

7. Anticipate evolving business needs

Most businesses and their needs evolve over time, so it’s important to anticipate those changes and adjust your contracts accordingly. If your business is growing quickly and you know your needs will be changing in short order, rather than simply renewing contracts for existing services, consider reviewing them closely to determine if it makes more sense to adjust or renegotiate based on your evolving needs. 

Top 3 Steps to Take Now to Improve Contract Management

If your contract management process is in need of improvement, or if you don’t have a formal process in place at all, these three steps can put you on the fast track to contract management success.

1. Conduct an audit of all things contract related

Before you can start taking steps to solve your biggest contract management problems, you have to understand what those problems are. Conduct a contract management audit that includes all of the stakeholders, resources, and processes across your organization that impact how your contracts are handled from negotiation and creation to execution and management.

2. Develop a formal contract management framework

Using the findings from your audit, you can now put into place a structured approach to managing your contract portfolio. This framework should address every element of the contract management process and clearly define what should be happening at each stage. The plan should also include things like roles and departments responsible for various contract-related tasks and processes, how contract management performance is measured, and any tools and systems that should be used during the contract management process.

3. Use technology to make it easier

Implementing dedicated contract management software can vastly improve your ability to manage your contract portfolio and all of your organization’s contract-related deadlines and deliverables. Once your portfolio reaches a certain size or level of complexity, it becomes next to impossible to effectively track and act on every aspect of your contract management process using only manual tools and systems. With the right contract management software, your organization can regain control of your contract portfolio.

Benefits of Contract Management Software

Every business has a unique set of contract management problems and priorities. Determining what type of software your business should implement ultimately comes down to finding the solution that fits your budget, solves for your biggest contract management pain points, and provides a system you and your team will actually use. 

No matter what type of solution you choose, here are some of the most significant benefits of contract management software:

1. Single source of truth

Contract management software provides one central location to store all of your organization’s contracts, meaning every user knows exactly where to go to find the contract information they need. Using contract management software prevents the issue of having multiple copies or versions of a contract floating around, which can cause confusion and lead to individuals working off of an outdated version of an agreement. 

2. Greater contract visibility and insight

Businesses without contract management software often have to deal with misplaced contracts that are scattered across various desks, shared drives, and filing cabinets. Contract management software gives users the ability to search for any contract, clause, or keyword across your entire contract portfolio, and find exactly what you’re looking for in seconds. 

3. Reduced risk

Contract management software helps you reduce contract risk in a number of ways, including:

• Making it easier to track contract dates and deadlines – By scheduling alerts for key contract dates and deadlines, you can be sure you’ll never get caught off guard when an automatic renewal deadline is approaching or a major contract deliverable is due. 
• Providing stakeholders with critical contract insight – Contract management software enables you to run reports based on any metadata of interest, providing increased contract visibility and insight for department heads, leadership teams, and others. Now, the legal team isn’t the only group keeping an eye on contract adherence and performance.
• Learning from – and not repeating – previous mistakes – Contract reporting also gives your team an easy way to analyze your portfolio to identify trends in past agreements. By isolating underperforming contracts, you can work to understand what those agreements have in common and look for ways to modify how future contracts are structured.

4. Time savings

One of the most important benefits of contract management software is that it saves you time, which then allows you to focus on higher-value activities. Manual contract management is tedious and time-consuming, but the majority of contract management software features are designed specifically with your time in mind.

• An online, searchable repository means you don’t have to spend time digging through cabinets to find a contract or re-reading a 75-page agreement to find a specific clause or term
• Automated alerts eliminate the need to manually track important dates for hundreds or thousands of contracts
• Artificial intelligence features automatically identify and tag key pieces of information in your contracts, potentially saving you and your team from spending hundreds of hours manually entering these details
• Electronic signature features allow you to get contracts signed in minutes. With electronic contract signing you don’t have to look for and wait for a needed signee, which helps reduce the time needed to execute new agreements
• Permission-based user roles give administrators the option of assigning varying levels of access to different groups and users, enabling your colleagues to find answers to their contract-related questions without requiring your time and attention

Implementing dedicated contract management solution streamlines the contracting and helps establishes collaborative contracts management process, enabling key members of the legal department to spend less time on tedious contract management tasks and more time on strategic, high-value initiatives.

Contract administration and contract management represent two different stages of the contracting process, covering the periods before and after a contract is signed and put into effect. To ensure all of your organization’s agreements are created, executed, organized, monitored, and optimized according to company standards, it’s important to have strong contract administration and contract management processes and systems in place.