Contract management: Process, stages, & examples

It would be great if contract management was as simple as adding agreed-upon details, collecting signatures, and calling it a day. But we live in the real world, which means a simple page with signatures isn’t enough to protect your vendor deals, establish production guidelines, enforce compliance, or enforce payment terms.

Add to that list a mountain of things that could go wrong last minute, and you find yourself needing ironclad contract management processes (and know-how) to ensure your vendor relationships go as smoothly as possible.

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In previous posts, we’ve walked through how to negotiate SaaS contracts. However, this guide is designed to lay out the typical process and stages of contract management and tips on how to manage it all — but better.

What is contract management?

Contract management is the process of creating, executing, and managing contracts. Once all parties accept the terms outlined in a contract, the agreed-upon exchange of goods and services can start.

There are all types of contracts, including employment agreements, utility contracts, rental agreements, outsourcing agreements, and nondisclosure agreements. In this guide, we’re focusing specifically on vendor agreements.

A well-managed contract acts as a safeguard against possible mishaps. It can save you from countless headaches, lost time, and expensive mistakes. Because they are such valuable documents, you want to be careful about managing your contracts.

Why is contract management important?

The benefits of sound contract management are clear. Contracts act as a record of vendor deals, protect all parties involved, minimize hazards, and add clarity and accountability to your vendor relationships.

A digital contract management solution makes it possible to keep all your contracts in one accessible place. It makes your contracts editable living documents that you can pull up, amend, or attach an addendum to. But it doesn’t stop there.

Here are some additional reasons why proper contract management is a must:

Contract management helps you avoid costly disputes. If a contract is clear and legally binding, it will be easier to enforce.
An estimated 60 to 80 percent of business activities are governed by contracts and agreements, making them essential to the efficient conduct of most business operations. Contract management ensures that all parties have a point of reference for what has been agreed upon and by whom.
Proper contract management directly affects cost and revenue management, improves productivity, and reduces errors.
Proper contract management is critical in establishing long-term relationships with vendors. Deals go smoother when a solid contract underpins them. A well-managed contract functions as a bridge that helps build trust and fosters cooperation.
Contract management is useful in making strategic data-driven decisions because it gives insight into contracting bottlenecks, recurring issues, and contract shortcomings.
A sound contract management system standardizes processes for contracts that need to be drafted regularly. This gives your vendor management team more time to address other vital issues.

What are the stages of contract lifecycle management (CLM)?

A good contract management process uses data at every stage to reduce legal and financial risk. Contract lifecycle management, or CLM, takes care of all the steps required to create a contract, including:

Drafting
Negotiating
Approving
Signing
Implementing
Tracking
Renewing

Every business has unique needs. In the same way, the stages included in any CLM process can differ from one company to another. However, six common steps are relevant to most contract management cycles. Here’s a walkthrough of each one.

Preparation

The first step of a contract management process is locating the supporting documents required to prepare a contract. Every stakeholder involved needs to get on the same page.

Once all parties are aligned, the legal team can start drafting a contract. But wait. In this step, you also need to outline:

Party goals and key performance indicators (KPIs): What are the goals and KPIs every party needs to fulfill?
Risks: What potential risks should both parties be aware of?
Expectations: What are the needs and requirements of both parties?

For example, suppose a roofing company wants to outsource its shingle-production efforts. Before a contract can be drafted, both the shingle manufacturer and the roofing company need to discuss their expectations, possible risks, supply chain management expectations, appropriate performance indicators, and goals.

Negotiation

Some teams prefer to draft an initial contract both parties can negotiate from. Others may want to take care of negotiations before a contract is ever drafted.

Either way, the negotiation stage is an opportunity to maximize value, lower costs, and arrive at a deal with terms that please all parties. Parties can negotiate a timeline, ask to remove a clause that doesn’t fit well or discuss reimbursement terms.

Next, a draft can be created. If you created a draft before negotiating, you can now edit the draft with the agreed-upon terms.

Drafting

Once expectations and goals are set and you’ve negotiated successfully, it’s time to draft a contract that addresses all the discussed points. It's common to go back and forth over specific terms in the contract, which you can track using document version control.

For example, once a software company and vendor have finalized all the details, the software company can ask a contract expert to prepare the first draft. Both parties can later review the contract to see whether everything is covered.

Approving

After negotiating all the key terms and drafting a contract, you need to get approval from every stakeholder on the final version. That is, signatures are in order.

Digital contract authorization tools or templates help manage the approval process, so it’s less time-consuming. Include the start date in the agreement and get approval from both parties. Once approved, the agreed-upon terms can be executed as per the contract.

Executing

Once the contract is signed and approved, it becomes effective on the agreed-upon date. For example, the signed contract may stipulate the vendor starts the work at the beginning of the following month, as was mentioned in the agreement.

Once the contract is effective, your contract managers ensure everyone follows the outlined terms. Tracking requirements outlined in a contract is worthwhile because sometimes things don’t go as planned.

For example, one of your vendors may encounter difficulties in their supply chains, which means your deliverables may either be delayed or not up to standard. In that case, contract terms can be revised, assuming communication stays open and consistent.

Renewing

When the contract terms end, both parties decide whether they want to renew or terminate the contract. Contract renewal should include a new round of negotiations—take time to refine the contract and use a review process to adjust it for any new terms. Termination officially ends a contract.

Most businesses are simultaneously juggling a good number of contracts. Automations and contract renewal alerts help vendor management teams stay on top of contracts as they expire and plan for each quarter.

Vendor management software can be a key part of managing your contracts so none fall through the cracks.