The Importance of Contract Review

The Importance of Contract Review

Contracts are vital to business. They agree and formalise the flow of money, through sales, procurement, employment, and premises. Everything that enables an organisation to function on a daily basis is governed by contracts. Historically, contracts were considered to be static documents resulting from negotiated and agreed terms between parties and, as such, carried less requirement for contract review than modern contract processes. This is because today, contracts are more often created with flexibility built in.

The modern, globalised world has given rise to Agile Contracts, which are designed to support scalability in business. The most successful contracts in use today incorporate the need for responsiveness as a means to reduce the likelihood of contract disputes. It is this emphasis on effective risk management that requires emphasis on the process of contract review.

What is the contract review process?

As the name suggests the process of contract review involves examining the content of a contract. This sounds very simple, however, this is a process made up of three different phases, each of which serves a different purpose.

  • Phase 1: Contract creation

Any legal team will emphasise the importance of reading a contract before signing, and this is the basic premise of contract review in the contract creation phase. It is vital to perform a comprehensive check of the entire document in order to confirm that all agreed terms and conditions are included, and that no additional clauses have been erroneously added. This is a basic tenet of risk management and ensures that risk management strategies are applied at the earliest possible stage. Checks that should be performed include:

  • Checking for the inclusion of key clauses – When a new contract is created, it is formed on the basis of agreed goals and objectives. In this phase, the most basic contract review should be to confirm the inclusion of key clauses that most specifically relate to those agreed goals and objectives.
  • Checking for clarity – Contracts attract risk when there is a lack of clarity, so checking the newly written document for ambiguity is essential. Language should be clear and leave no room for variations in interpretation. The intent and meaning should always be entirely certain.
  • Checking for renewal and termination clauses – Before entering an agreement, you should be entirely clear on the process required for ending that agreement, so the detail of termination and renewal triggers, options and schedules should be checked and agreed before the point of signing.
  • Checking for ongoing review dates – To ensure that risk management is an ongoing effort, newly written contracts should be checked for the inclusion of agreed review schedules – points at which the performance of the contract is analysed, and at which amendments can be agreed.

 

  • Phase 2: Contract performance

During the course of the contract lifecycle, it is essential to perform ongoing contract reviews, in order to confirm that value for money is being gained from each agreement. This has become increasingly important over the past decade, as the concept of flexibility and agility has been more broadly accepted as a viable and effective risk management strategy. As opposed to generating static terms and conditions that carry significant financial penalty in the event of a breach, contracts are increasingly written with agility, adaptability, and responsiveness in mind. This can be achieved by writing periodic contract review sessions into the body of the document, providing all parties with the opportunity to amend the agreement as necessary, in response to changing circumstances. These ongoing reviews should allow for the assessment of vital contract performance elements, including:

  • Levels of compliance – Are all obligations being met by each party, on time, and in full compliance with the terms and conditions stipulated in the agreement?
  • Bottlenecks – Are there any efficiency issues caused by specific and identifiable workflow delays?
  • Finances – Are financial aspects of the contract working effectively, and in accordance with the agreed timetable?

 

  • Phase 3: Contract renewal

At the end of each contract lifecycle, a contract review should be conducted to determine the viability of any contract renewal. This is another opportunity for renegotiation, and a point at which financial areas can be updated to further reflect changes that have occurred during the contracted period. During renewal reviews, organisations should:

  • Establish consensus – Is renewal the preferred outcome for all parties?
  • Agree on lessons learned – If all parties are agreed on the need for renewal, the preceding contract period should be thoroughly reflected upon, with a frank discussion held about lesson learned. Goals and objectives should then be updated accordingly.
  • Renegotiation – Once the goals and objectives of the contract have been updated and agreed, all other terms and conditions should be reviewed and renegotiated as required.
Contract review for risk management

While each phase of the contract review process serves a different purpose, the overall goal is effective risk management. By engaging in consistent, ongoing contract review, issues and conflict can be addressed in a responsive and proactive fashion, thereby reducing the incidence of contract disputes and contract breaches. These risk management strategies are multi-tasking actions, however, as they also help businesses work toward improvements in efficiency.

By adopting proactive methodologies, issues within business practices can be identified as easily as issues within the contract itself. Regular reviews can highlight areas in which issues consistently arise, indicating a problem or bottleneck within workflows, or specific gaps in personnel training. This makes ongoing contract review an opportunity to make widescale improvements to your business, in addition to improvements to the contracting process.

Contract Management Software and contract review

Contract Management Software, such as Symfact, supports the ongoing contract review process through automation. In addition to the creation of a centralised Contract Repository and standardised template library, the software allows businesses to customise automated reports, notifications, alerts, and workflows. This ensures that the right actions are taken at the right, agreed time, in a fully transparent way that maintains accountability. These processes enable oversight in terms of compliance and allow businesses to keep full control of both contracts and the departments involved. Contact Symfact today to arrange your free demonstration.