Contract management is taking on an ever more important role within companies.
Identifying and understanding the different stages of the contract lifecycle is an essential prerequisite for managing and optimising a company’s contract portfolio effectively.
In this blog post, we will explore the six key stages of the contract lifecycle and explain the value a contract manager adds at each of them, so that you can optimise your contract management.
1. Contract initiation
Many people wrongly consider drafting to be the first stage of the contract lifecycle.
To debunk this popular belief, we often use the example of a newborn: before being born, the baby must have been conceived, and before conception there must have been a meeting, a context, a mutual willingness.
The process is exactly the same for a contract. Before its design or drafting phase, there is a preliminary phase, or pre-contract phase.
This stage is essential, because it is during this phase that the views, opinions, objectives and expectations of each stakeholder are exchanged, along with their potential deal-breakers.
Sometimes an MoU, an LoI or another pre-contract document may be drafted to formalise the intention of the parties expressed during this first phase.
Depending on the organisation, contract managers are unfortunately not always invited to take part in this pre-contract phase. One way to improve is therefore to involve a contract manager in it, which will make them far more relevant, effective and profitable in the later phases.
2. Drafting the contract
Drafting a contract is the second essential stage of the contract lifecycle. This better-known phase is of course essential for several reasons:
– Formalise the expectations, rights and obligations of the parties.
– Define precisely the subject matter of the contract, whether products, services, deliverables, etc.
– Set the financial terms (price, payment, advances, etc.).
– Determine the terms of warranty, liability, insurance, etc.
– Agree the rules for allocating intellectual property rights.
– Describe how pre-litigation matters and disputes will be handled by the parties, should any arise.
– And so on.
While this stage of course involves in-house counsel and sales teams, the contract manager also brings real added value at this point in the contract lifecycle, thanks in particular to their expertise and know-how on the operational aspects of the contract.
For example, the contract manager helps make workable and concrete penalty clauses, payment milestones, dispute resolution mechanisms and, more broadly, anything likely to affect the technical and financial management of the project, risk management and the proper performance of the contract.
3. Negotiating the contract
Logically, after initiation and the drafting of a first version of the contract comes the negotiation phase, the third essential stage of the contract lifecycle. There is no need to dwell on the importance of this phase, which is the subject of abundant literature (we will let you (re)discover our excellent article with reading recommendations).
During this phase, the prospective contracting parties discuss and adjust in order to reach (when all goes well) a final agreement on the terms and conditions of the contract.
Negotiation is a dynamic process (or art) that can often be complex, but it is also rich in opportunities for a contract manager to demonstrate their added value in terms of drafting and communication skills, but also of a holistic understanding of the contract, of its ins and outs and of its impacts throughout the lifecycle.
Indeed, alongside the lawyer, who ensures the legal and regulatory compliance of the contract, and the salesperson, who focuses on securing the order and protecting the margin, the contract manager is the operational expert who makes sure the text matches the reality of a project.
4. Contract approval and signature
Once the contract has been successfully negotiated, it moves into the approval and signature phase.
At this stage, each party must follow internal approval procedures and milestones, whose length and complexity can vary with the size and culture of the companies involved.
At this stage, it is important to make sure that all the necessary documents (finance, legal, compliance, etc.) are in place and duly completed, and that everyone in the approval and signature chain understands simply and quickly what is at stake.
Once again, the contract manager can play a key role in smoothing the contract approval and validation process, whether by producing a summary sheet that lets a decision-maker grasp (in a few seconds) the risks and opportunities attached to the contract, or by presenting the contract to the various approval committees.
Once the contract is signed and approved, you still need to make sure the other contracting parties have signed it too, and sometimes to satisfy conditions precedent for it to come into force (payment of a deposit, provision of insurance certificates, setting up a committee, etc.).
5. Performing the contract
We now enter the stage where calling on a contract manager is the most obvious: performance of the contract.
During this phase, the parties organise themselves to perform their respective contractual obligations, which therefore calls for many actions from the contract manager, who acts (often in tandem with a project manager) as the guarantor of proper performance and of the contract’s margins. Those actions include:
1. Managing performance: by closely monitoring performance of the contract to ensure that all parties meet their contractual obligations. This means keeping a close eye on performance, deadlines, deliveries and any other relevant operational aspect.
2. Managing changes and contract amendments: during performance of the contract, changes can arise from unforeseen circumstances or new needs. The contract manager is responsible for handling these changes in a structured way, ensuring that they are documented, assessed for their impact on the contract, and formally agreed between the parties.
3. Resolving disputes: In the event of disagreement or a dispute between the parties, the contract manager often steps in first (or second, after the project manager) to try to settle the issues fairly. Their aim is to minimise disruption to performance of the contract and to maintain a constructive working relationship between the parties.
4. Reporting and documentation: A fundamental aspect of contract performance is keeping detailed records. The contract manager maintains accurate documentation of all contract-related activities, including communications, changes, issues encountered and the resolutions applied. This documentation can be crucial in the event of a dispute or where proof of compliance is needed.
5. Performance monitoring: The contract manager closely tracks the performance of the contracting parties to make sure they meet the standards and expectations set out in the contract. If gaps are identified, corrective measures can be put in place to bring performance back into line with the terms of the contract.
6. Payment management: Managing payments and invoicing is an essential component of contract performance. The contract manager ensures that payments are made in accordance with the agreed terms and that invoices are accurate and consistent with the contract.
6. Renewal or expiry of the contract
As the contract’s expiry date approaches, the parties must decide whether to renew it or bring it to an end. If the contract has been a success and both parties are satisfied, they may choose to renew it for a further period. Conversely, if the contract has not met expectations or is no longer relevant, it may need to be terminated. It is important to assess the contract’s performance carefully and to consider the best course of action.
This final stage of the contract lifecycle therefore consists, where the contract reaches its term, in formally closing it and making sure that all obligations have been performed. This includes activities such as settling final payments, carrying out post-contract reviews and archiving the relevant documents.
The contract manager is therefore one of the key players in contract offboarding, helping to analyse and document contract performance after the fact, so that organisations can draw lessons for future contracts.
Conclusion
We have identified and described the six main stages of the contract lifecycle in order to help optimise the way it is managed (contract lifecycle management).
In our view, having a contract manager optimises the management of the contract at each of these stages, thanks to their cross-functional skills and expertise (legal, commercial, financial), combined with interpersonal, communication and intercultural skills.
Understanding and optimising the contract lifecycle is a strategic, ROI-driven activity for modern companies, since a direct link can be drawn between profitability and contract management.