Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees. Contract management includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution. It can be summarized as the process of systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk.[1]
Common commercial contracts include purchase orders, sales invoices, utility contracts, letters of engagement for the appointment of consultants and professionals, and construction contracts. Complex contracts are often necessary for construction projects, goods or services that are highly regulated, goods or services with detailed technical specifications, intellectual property (IP) agreements, outsourcing and international trade. Most larger contracts require the effective use of contract management software to aid administration among multiple parties.
A study published in 2007 found that for "42% of enterprises ... the top driver for improvements in the management of contracts [was] the pressure to better assess and mitigate risks" and additionally, "nearly 65% of enterprises report that contract lifecycle management (CLM) has improved exposure to financial and legal risk".[2]
A contract is a written or oral legally-binding agreement between the parties identified in the agreement to fulfill the terms and conditions outlined in the agreement. A prerequisite requirement for the enforcement of a contract, amongst other things, is the condition that the parties to the contract accept the terms of the claimed contract. Historically, this was most commonly achieved through signature or performance, but in many jurisdictions - especially with the advance of electronic commerce - the forms of acceptance have expanded to include various forms of electronic signature.[3]
Contracts can be of many types, e.g. sales contracts (including leases), purchasing contracts, partnership agreements, trade agreements, and intellectual property agreements.
The business-standard contract management model, as employed by many organizations in the United States, typically exercises purview over the following business disciplines:
Contract management can be divided into three phases:[5]
In the post-award or "downstream" phase,[6] some organisations have a contract management team, others may require operational managers to include the management of contracts within their role.[7] The Chartered Institute of Procurement & Supply (CIPS) suggests that the requirement for dedicated contract management depends on contract value, contract length, complexity of services and level of risk, although in the initial stages of a contract, the assessment of risk and the implementation of core contract management processes may be appropriate tasks for a dedicated contract manager. CIPS also notes that in some cases the procurement team may have an extended role in maintaining contract management. Contracting for services may be more complex than supply-only contracts and therefore require closer management.
There may be occasions during the post-award phase when what is agreed in a contract needs to be changed later on. A number of bases may be used to support a subsequent change, so that the whole contract remains enforceable under the new arrangement.
A change may be based on:
See also: Relational contract. During the post-award phase, it is important to ensure that contract conditions and terms are met, but it is also critical to take a closer look for items such as unrecorded liabilities, under-reported revenue or overpayments. If these items are overlooked, the margin may be negatively impacted. A contract compliance audit will often commence with an opportunity review to identify the highest risk areas. Having a dedicated contract compliance (and/or governance) program in place has been shown to result in a typical recovery of 2-4% and sometimes as high as 20%.[8]
Current thinking about contract management in complex relationships is shifting from a compliance “management” to a “governance” perspective, with the focus on creating a governance structure in which the parties have a vested interest in managing what are often highly complex contractual arrangements in a more collaborative, aligned, flexible, and credible way. In 1979, Nobel laureate Oliver Williamson wrote that the governance structure is the “framework within which the integrity of a transaction is decided”. He further added that “because contracts are varied and complex, governance structures vary with the nature of the transaction”.[9]
A collaborative governance framework has four components:[10]
Another dimension of contract management relates to the interplay between contracts and trust. In particular, management scholars have discussed the nature of the relationship between contract and trust development.[11] On the one hand, some have argued that contracts and trust would substitute each other; that is, the use of one mechanism decreases the advantages of the other.[12] [13] On the other hand, others suggest contract and trust complement each other; that is, the use of one increases the benefits of using the other mechanism.[14] [15]
In 2008, the International Association for Contract and Commercial Management (IACCM, now World Commerce & Contracting) began a project intended to clarify the role of a contract manager, which has since been updated on several occasions. This work identified that among contract managers themselves, there is a "widespread belief that the title (and its variants, such as Commercial Manager) masks massive variations in job role, status and responsibilities". However, the IACCM's research found indications that "the core responsibilities of Contract Managers (and by deduction, Contract Management Departments) are very similar" and applied across a range of tasks from bid preparation and contract negotiation to a "middleman" role between an organization's employees and its customers, and compliance and ensuring contract close-out, extension or renewal at its end point.[16]
Scholars in business and management have paid attention to the role of contracts in managing relationships between individuals or between organizations. In particular, contracts work as instruments of control and coordination.[17] On the one hand, contracts can moderate the risks of exploitation or misappropriation by an opportunistic partner. On the other hand, contracts can help foster communication and information sharing between parties.
In the UK public sector, concerns were raised by the House of Commons Public Accounts Committee in 2009 regarding resourcing and training in relation to contract management. The committee reported that
No commercial director/head of procurement rated the level of resources allocated to the management of their major contracts as 'good', and 22% of contract managers considered they did not have time to perform their responsibilities well. Most contract managers had undertaken relevant training, although 60% of organisations did not provide a structured training programme for their staff.[18]
Contract management standards were published in 2014 by the Crown Commercial Service, and have been updated periodically.[19] These standards were developed as a result of a 2013 "Cross Government Review of Major Contracts",[20] commissioned by the Cabinet Office to assess the management of major contracts held by the companies G4S and Serco,[21] and led by Bill Crothers, the government's Chief Procurement Officer. Having highlighted previous failings, by September 2014 the UK's National Audit Office (NAO) felt that the government was "starting to improve how it manages its contracts", but important improvement work remained to be done.[22] In December 2016 the NAO re-published a good practice contract management framework which had been first published in 2008 with the help of the Office of Government Commerce, then part of HM Treasury. The NAO "believed", based on practitioner feedback, that this framework was "one of the best references for the basic tasks necessary for good contract management".[23]
the UK government has in place a "Contract Management Capability Programme" aiming to develop the skills of government staff involved in contract management roles.[24]
In the United States, the National Contract Management Association and the National Association of Government Contractors offer certification in the skills required for government contract management.[25]