It is practically impossible to ensure successful contract management without effectively monitoring contract performance. It certainly serves as the backbone of your contract management, ensuring all parties fulfill their roles and meet their needs satisfactorily.
All parties agree to the regulations when signing the contracts, but simply signing does not guarantee smooth operations. Hence, it is crucial to monitor each aspect of a contract execution plan.
While some businesses rely on traditional practices for monitoring, many use automated systems to supercharge productivity and alleviate potential risks. Simply put, automated contract monitoring ensures that your organization is executing a contract seamlessly, eventually saving you from making costly errors.
What is Contract Execution?
The contract execution process refers to an event where all concerned parties sign an applicable contract in one room or on a conference call using a single document or separate counterparts. After signing the document, the contract gains the status of a legal entity, which binds all the signees to its obligations.
A contract manager can record the execution and attach the scanned copy to the contract when it’s signed. Moreover, no amendments can be made to the contract language once the contract execution is completed.
What Does the Contract Execution Process Include?
The contract execution process includes the following best practices:
Assign the Responsibilities
Contract management is ideally managed by multiple stakeholders; it is essential to determine who is responsible for what. For instance, contract managers will focus on monitoring overall progress, while the finance team will be primarily accountable for ensuring that all deadlines are being met and the forecasts are accurate.
Centralize the Data
For effective monitoring, you should be able to access and operate the data with ease. Data across shared drives, Word docs, and Excel sheets could be a hassle. It would be best to use contract automation software to centralize the information.
Ensure Effective Collaboration
Utilizing an automated system, companies can proactively and routinely monitor the entire contract execution phase. A tool makes it easier for all the stakeholders to operate collaboratively and ensure successful risk management, performance management, and, eventually, cost savings.
Why is Contract Execution Monitoring Essential?
Effective contract monitoring ensures that all parties comply with regulations. It enables a business to identify and mitigate potential risks and blockers before they are beyond its control. Modern businesses thrive by preventing breach of contract and maintaining healthy professional terms with partners and other stakeholders.
Simply put, contract management is the smart prevention that saves businesses from the hefty liabilities they may face in the form of missed deadlines, financial or legal hits, and loss of contracts.
The Risks of Poor Contract Execution Monitoring
Poor contract monitoring may expose your business to several risks, affecting your company’s reputation. A few are mentioned below.
- Increased Cost: Failure to perform appropriate monitoring may lead to cost overruns, which may cause unexpected financial or legal losses.
- Overlooked Deadlines: Without adequate periodic monitoring, deadlines may get neglected. It may cause severe harm to project workflow and timelines and affect essential deliveries.
- Breach of Contract: Ineffective contract execution monitoring may lead to breaches, which may not only ruin business relationships, but may add to the expense of damage control.
- Scope Creep: Internal miscommunication or any alteration of the requirements by stakeholders may lead to the project expanding beyond its original objectives, resulting in delays and increased costs.
- Subpar Quality: When a contract is not managed and monitored adequately, the stakeholders may underestimate project standards. As a result, overall quality may get affected, and you may have to spend extra to rectify the quality issues.
What to Monitor During Contract Execution?
To ensure seamless execution of the contract monitoring, you must identify the key areas on which you need to put more weight. For instance, your prime focus could be tracking contract performance, or you may zero in on the deadlines to ensure they are being met on time and per the set standards. Or your emphasis could be on cost management to ensure projects do not exceed a given budget.
Below are the specific metrics you can track throughout the process to ensure effective contract execution.
- Terminated Contract Remaining Value (TRV): Helps prevent revenue loss by assessing the financial impact of contract termination.
- Annualized Contract Value (ACV): Helps determine the worth of ongoing commercial relationships.
- Vendor Fraud: Allows a view into unethical earnings or other fraudulent acts done by suppliers.
- Order Value Variance from Original Contract Value (OVV): Allows the tracking of losses and damages caused by mistakes.
Overall, the data could be highly beneficial to improve contract execution management. Other than the KPIs, organizations can also use past contract management data and analytics to analyze how long it takes to complete a project, what hurdles you often face, and what factors cause the delays. These patterns can help you determine what areas to put more weight on while tracking.
The Benefits of Monitoring Contract Execution
The following are the benefits of monitoring contract execution:
- Improved Compliance: Consistent contract execution monitoring ensures all parties comply with the terms and conditions. It keeps everyone on track, prevents possible breaches, and addresses friction points that may inflate in the future.
- Better Relationship Management: Periodic monitoring and audits ensure each stakeholder is on the same page and each party is informed about recent developments and the project’s status.
- Increased Operational Efficiency: Continuous contract monitoring helps businesses to identify inefficiencies and diagnose factors behind them, allowing your business to streamline the process and increase operational efficiency.
- Enhanced Cost Control: Efficient contract monitoring may help you detect unnecessary and additional expenses. Timely identification may save your organization from cost overruns and serious potential financial damages.
- Risk Mitigation: Strong monitoring can help you mitigate several potential threats, such as financial, legal, reputational, or data security risks, that may arise during a project. On-time risk management helps your business grow consistently, eliminating all the hurdles hindering growth.
Contract execution monitoring should not be a once-in-a-while activity but a constant process to ensure successful contract execution. It is highly suggested that businesses develop powerful monitoring procedures, preferably using an automated system, to streamline tracking, analysis, and reporting simultaneously.
Strong contract monitoring coupled with reporting holds teams accountable and eventually helps boost the overall health of the contract management process. Therefore, modern businesses must prioritize contract monitoring and make it an integral part of daily business operations.
Olga Mack is VP at LexisNexis and CEO of Parley Pro.