How To Ensure Contract Compliance

Contracts, the binding agreements shaping business relationships, can bring immense value when managed properly. They're meticulously drafted, negotiated, and reviewed to ensure a beneficial mutual relationship. However, mishandling contracts can lead to risks, inefficiencies, and delays. Enforcing the contract compliance process is critical to leveraging the full potential of contracts.

Contract compliance refers to adhering to pre-determined standards and policies within contracts and contract procedures. These guidelines aim to avoid associated risks while maximizing the contract's value. This article will guide you through the lifecycle of a contract, highlighting the importance of embedding the сontracts compliance at each stage to add more value to your organization.

Some strategies that you can adopt will help encourage contract compliance before you even start to examine a specific contract. Once you have undertaken this exercise, it should be much easier to apply the most suitable compliance processes for each contract type.

Compliance should start from the point at which a new contract is requested — the “contract initiation” stage.

The organization should have pre-defined templates for contracts that are used repeatedly. Templates will generally reflect a balance between the risk profile the organization is willing to adopt and the position that others in the market are willing to agree to.

When using templates, make sure you consider the following questions:

By having a template — and a robust process for how the template is to be used – your organization can dramatically reduce the variability between contracts. This will make it much easier to identify any non-compliant contracts.

A similar process should apply when you receive a contract from another organization you need to review. A useful tool here is a compliance review checklist. This sets out the company’s policy on:

You can then use this checklist to ensure that any potential new contract complies with your organization’s standard position and flags any unusual or onerous risks for further consideration.

Many organizations have a contract approval policy in place. This usually gives authority to managers at different levels of the organization to sign off on different types or sizes of contracts and usually imposes a monetary limit (above which the contract needs to be escalated).

The approval process might follow a pre-defined workflow. By the time the final version of the contract is ready to sign, this process will clearly indicate that it has been given, for example, budget approval and a full review by the legal team.

The approval policy and workflow are intended to work with the organization’s policy on who is permitted to sign documents. This policy will be partly determined by any applicable legal requirements. There is also a trade-off to be made here. Limiting the number of people authorized to sign contracts makes it easier to control and supervise the process, helping ensure contract compliance. However, this may result in an increased workload for those individuals. Getting a balance is essential.

Compliance becomes challenging to monitor when contracting occurs in different places and business units, maybe with each following its own process. To ensure contract compliance, you need visibility over what is happening across the organization.

A key goal for compliance is to have a system that centralizes the storage and administration of your contracts. At a minimum, you should try to have a contract register — a complete list of all the organizations entered into. Better still, you should have a centralized repository in which copies of all contracts are stored.

Your contract storage can take the form of a physical room or vault where hard copies are kept, but a digital contract compliance management system provides many more benefits, such as:

It’s crucial to ensure contract compliance continues during the performance phase of a contract. Strategies to encourage compliance include:

Contract compliance auditing is a valuable tool to check how effectively contract compliance is implemented across the organization. Audits might be scheduled on a regular schedule (for example, annually) or as a one-off to target a specific problem. They may be carried out by an internal audit team in large organizations or sometimes by the engagement of an external auditor. In particular:

Many organizations invest significant time and effort in developing and implementing compliance processes, only to find later that their employees don’t know what to do or are bypassing the process to get their work done. Any contract compliance program must include an effective training strategy.

Training can focus on, for example:

This training can be provided to new starters and as an annual refresher. Think about creative ways to make the training effective — so that employees don’t rush through to “get it done.” You might also want to consider implementing more in-depth training for targeted groups — maybe those that are in the field and using contracts on a more regular basis.

Similarly, an effective communications strategy is essential. For example, consider whether it might be worthwhile communicating with staff if a compliance investigation or audit has identified issues or if a failure in contract compliance has resulted in the loss of business or litigation.

Ensuring compliance contracts is vital to maximizing value and minimizing risk. Lawyers play a pivotal role in this process, providing essential legal expertise in drafting, reviewing, and ensuring contracts comply with relevant laws. By understanding these elements and the types of contracts usually used, organizations can implement suitable compliance processes for improved relationships and valuable contracts.