Contracts play a significant role in regulating relationships between parties, often defining the terms and conditions and consequences of not upholding them. Lawyers, whether in-house or outside counsel, are critical to managing contracts and may often find themselves taking on several roles throughout the contract lifecycle. Responsibilities can include drafting an agreement, negotiating its terms, finalizing it, monitoring its performance, helping with termination, and addressing potential breaches or other issues impeding performance.
The five stages of contract management
A well-defined contract management process can help lawyers meet the expectations of clients, management, and organizational governing bodies to deliver greater value, efficiency, transparency, and cost reduction in legal services throughout the lifecycle of a contract. While the contract lifecycle of your practice or legal department may differ, most cover these five stages:
- Due diligence
- Negotiations
- Execution
- Oversight
- Closure
How you approach these five contract management stages requires careful consideration of your operations, resources, and requirements. These factors should form the steps you’ll take to navigate each stage of your contract management process. The steps and, in turn, your process should enable a continuous approach to contract management.
The checklist below outlines the recommended steps to help you design an effective contract management process.
Due diligence stage
Step 1: Define scope and prepare the business case
- Determine the scope of the engagement.
- Document the business case.
- Prepare the business case. Involve stakeholders, including, if possible, the end users.
- Document what the proposed contract with entail, such as:
- Contract outcome(s)
- Critical success factors
- Risks
- Identification of any contingent or special needs
- Timeline for deliverables, including start/end dates
Step 2: Identify parties and set budgets
- Assign a sponsor as needed, especially for complex transactions.
- Identify stakeholders, including reviewers, approvers, and those responsible for deliverables.
- Set budgets and limits, including proposed payment structures.
- Seek and review all the bids and proposals.
- Track the information submitted to help determine the proposals closest to the criteria.
- Use your criteria to select the final choices.
Step 3: Complete background checks and approvals
- Conduct a thorough investigation of both the business and legal backgrounds of the relevant party or parties.
- Obtain preliminary approvals for the engagement to launch the negotiation stage.
Negotiation stage
Step 4: Identify necessary contract documentation
- Identify the contracts and related documents required to document the relationship and complete any immediate transaction.
- Collect and review examples of the necessary contracts to expedite the drafting process.
Step 5: Finalize contract requirements
- Define the contract requirements:
- Nature, scale, and significance of the need for the organization
- Value of need
- Type of specification: input or output
- Complexity of the need, including the innovation level
- Attractiveness to the market
- Market capacity
- Time scale and phasing
- Identify the steps to be taken to comply with the requirements of any contract review, including required reviews and approvals.
- If warranted by the complexity of the proposed transaction, prepare a project plan to set the time and responsibility schedule for drafting, review, discussion, revision, and completion of all required items and activities.
- Document the post-implementation review to monitor the completion of expected outcomes.
- Launch discussions to start the negotiation of essential contract terms.
- If appropriate and useful, prepare a term sheet or letter of understanding to ensure the parties agree regarding the essential terms before spending any time or effort on contract preparation.
- If direct negotiations aren’t possible, create a list of questions to discuss with counterparts.
- Collect the responses and review them for updates to the preliminary agreement.
- Obtain the requisite approvals and signoffs to finalize the contract.
- Deliver final, executed copies of the contract and related documents to all interested parties.
Execution stage
Step 6: Complete contract execution
- Oversee completion of the closing of the transaction and any required performance and payments/fees obtained or completed full or in part.
- Address any internal control changes warranted; for example, policy documents or delivering training to relevant parties.
- Obtain any required acknowledgements, such as performance signoffs, for example.
Oversight stage
Step 7: Monitor contract performance
- Establish a plan for the ongoing review of the performance of the contract terms, primarily in long-term contracts.
- Set dates identified in the contract that may require follow-up action.
- Conduct any agreed-upon or special review and audits to check performance.
- Address change requests based on performance reviews.
- Make sure to have procedures for contract amendments to facilitate changes.
- Determine if a renewal of the engagement is needed and accounted for in the original contract.
Closure stage
Step 8: Terminate the contract
- Upon completion of the contract deliverables, it’s time to close out the contract.
- Process all final payments and document performance standards.
- Finalize all documentation to prepare for the closing of the transaction.
Step 9: Address breaches
- Define the types of incidents that would result in the contract’s breach or termination; for example, the inability to complete deliverables by a set time, or the inability to complete the deliverables at all.
- Have procedures in place to promptly communicate any new developments to the appropriate individuals within the company.
Step 10: Keep records
- Organize contract files and related documents and retain records per required recordkeeping standards and requirements.
Auditing your contract management process
The above checklist offers recommended steps to help you design an effective contract management framework, but the process you implement should reflect your organization’s individual needs. Plan on reviewing your contract management process periodically to keep it current and responsive to organizational changes. During your review, keep the following in mind:
- Factor the process review into your annual goals each year.
- Solicit feedback from stakeholders about how to make the process more user-friendly.
- Consider adding visuals – such as flowcharts, checklists, and graphs – to help create understanding.
- Add scenarios or techniques that help or reflect what can go wrong.
Move transactions forward with confidence
Bloomberg Law brings trusted analysis, practical guidance, and proprietary market data, including league tables, into one platform. Transactional lawyers can benchmark deal terms, conduct diligence, assess counterparties, and identify potential risks without piecing together information from multiple sources.
BLAW AI, purpose-built agents, and connected workspaces make it easier to find relevant precedents, provisions, and deal intelligence. Request a demo and talk to sales to see how Bloomberg Law can support your transactional practice.