When it comes to business dealings, contracts are necessary to help establish the terms of an agreement and prevent misunderstandings down the road. But what happens when things go wrong? This is where contract performance monitoring comes in. It helps the managers of both contracting parties measure progress, make adjustments to work with contracts, and achieve goals against contracts. This blog post will explain what you need to know about contract performance monitoring and how to do it.
What is contract performance? Why is it essential to monitor contract performance?
Contract performance is simply how well a company fulfills the terms of its contract. This can include anything from meeting deadlines to providing quality products or services. Monitoring contract performance is vital for several reasons. They include:
Makes it easy to identify potential problems early on
Monitoring contract performance allows you to identify potential problems early on. This is important because it gives you the chance to address these issues before they become more significant problems and lead to costly legal battles.
Ensures that the contract is fulfilled as promised
When a company agrees to fulfill the terms of a contract, it must do just that. By monitoring contract performance, both parties can be assured that the contract will be fulfilled as promised.
Keeps contractors honest
Contractors may sometimes try to take advantage of their clients by not meeting deadlines or providing low-quality work. However, if they know that their actions are being monitored, they are less likely to do this.
Helps managers meet goals
Contract performance monitoring can also help managers meet their goals. By tracking the progress of a contract, they can make sure that it is on track to be completed on time and within budget.
Ways to monitor contract performance
When it comes to monitoring the performance of a contract, there are many factors to take into account.
In general, though, here are some steps to follow when monitoring a contract’s performance:
First, you need to understand what the contract is supposed to achieve. This can be done by creating specific goals and setting contract performance measures for the contract and then measuring how well those goals are met.
Second, you need to track critical milestones throughout the contract. This will help you ensure that everything is proceeding on schedule and that any issues or problems can be addressed quickly.
Third, you should regularly review the positive and negative indicators associated with the contract. This will help you identify any areas that may need improvement and make the necessary changes.
Fourth, you should always be prepared to take corrective action if needed. This may include renegotiating the contract, terminating it early, or taking other steps to ensure that the contract’s objectives are met.
By following these steps, you can provide an effective contract performance review and make sure that it meets your organization’s needs.
Additionally, some measures and metrics can be used to track contract performance.
Some of these include:
Annualized Contract Value (ACV)
This is the total value of contracts that will be realized in a year. It’s crucial to monitor contract performance to help you understand how much revenue your company can expect to bring in during the year. ACV can measure progress against contracts, making it essential for contract managers.
Terminated Contract Remaining Value (TRV)
Another metric that can be used to measure the performance of a contract is Terminated Contract Remaining Value (TRV). The TRV metric considers the total value of the contract, including both the initial contract value and all subsequent modifications, and subtracts any payments made to date. This metric can be used to identify under or over-budget contracts.
When calculating TRV, it’s essential to consider whether the termination was due or not. If the contractor voluntarily terminates the contract, there may be some value remaining in the contract that should still be paid. Conversely, no further payments should be made if the contractor is terminated for cause.
TRV can help you answer essential questions such as:
- How much money is left to be paid on this contract?
- What was the original value of the contract?
- How much has been paid to date?
- What is the estimated final value of the contract?
Order Value Variance from Original Contract Value (OVV)
Another measure of contract performance is order value variance from the original contract value. This metric looks at how much the actual order values differ from the original contract values.
The formula for this calculation is:
(Actual Order Value – Original Contract Value) / Original Contract Value
This calculation gives you a percentage that shows how close or far off the actual orders are from the original contract values. You can use this information to determine if there are any areas for improvement, and it can also help you renegotiate contracts if necessary.
When it comes to contract performance monitoring, vendor fraud can be used as a metric to measure. The potential for fraud can increase when there is less oversight of the contractor’s performance, so it’s crucial to have protocols to mitigate this risk. In some cases, a third-party verification company may be engaged to assess the work being done by the contractor and ensure that no fraudulent activity is taking place.
If you’re concerned about potential vendor fraud, there are a few things you can do:
- Require regular reports from the contractor that detail their progress and performance against the contract terms
- Periodically review the work being done by the contractor to ensure it matches what was agreed upon in the contract
- Have a system in place for reporting any concerns or suspected fraud to your contracting officer or other appropriate authorities
By taking these steps, you can help protect yourself from potential vendor fraud and ensure that your contract is being performed following the terms and conditions.
Another metric to consider when monitoring contract performance is contract compliance. Contract compliance looks at whether the contractor meets all the requirements specified in the contract. Meeting all contractual requirements is necessary for a positive relationship with the customer, but it is also required to avoid any penalties that could be assessed for noncompliance.
There are several ways to measure contract compliance, but some standard contract performance metrics include:
- Percentage of deliverables completed on time
- Compliance with specifications and standards
- Number of change orders issued
- Number of claims filed
- Quality audits performed/results thereof
By tracking these and other compliance metrics, you can get a good idea of how well your contractor is performing overall relative to the contract. This information can help you decide whether to continue working with the contractor, adjust the contract terms, or pursue other remedies.
Last but not least on this list of contract performance monitoring measures is quality and complaints resolutions. This is where you track how many issues have been raised, the root cause, and how they were resolved. This will help you identify any patterns or problems with your contract performance early on.
If a high number of complaints are being received, it could indicate that the contract is not clear or specific enough. Or perhaps the product or service does not meet the customer’s expectations. It would be beneficial to investigate these issues and make the necessary changes to the contract before it causes more damage.
On the other hand, if a low number of complaints are being received, this could indicate that the contract is well written and that both parties are meeting or exceeding expectations. In this case, you may want to consider increasing the standards or goals of the contract to challenge the team and continue to deliver high-quality results.
No matter what the situation is, it’s essential to have a system to record and resolve complaints. This will help you stay on top of any potential problems and take corrective action as needed.
Contract performance management is vital for any organization, but it can be challenging to get it right. However, you can streamline and automate your contract performance management process with a CLM tool. It makes it easier to track and manage your contracts. So, if you’re looking for a way to improve your contract performance management, consider using a CLM tool. It can make your life a lot easier!
Olga Mack is VP at LexisNexis and CEO of CounselLink® CLM.