Guide to Legal Contract Management

What are the stages of the contract management process?

While different models can define the contract management process, there are five main phases:

1. Due diligence
2. Negotiations
3. Agreement execution
4. Oversight
5. Closure

If done correctly, procedures for these phases must be communicated to stakeholders, including the needed reviews and approvals, the escalation process for noncompliance or breaches, and how to identify and change the permissible contract templates. Stakeholders should review these at the start for feasibility and then schedule periodic checks to monitor their effectiveness.

Due diligence

Beginning with due diligence, counsel must define the scope and prepare the business case, identify involved parties, set budgets, and complete background checks and approvals. This step is important to document the contract’s risk factors. For example, a contract is riskier when it includes an indemnification clause, which stipulates that one party will compensate the other for certain expenses often stemming from third-party claims, or a limitation of liability clause, which limits the amount one party can recover from the other in the case of a contract breach.

Having this information readily available to analyze, lawyers can perform risk assessments or conduct the “what if” scenarios to identify risks so that they can better mitigate them. Some organizations might create “risk scorecards” using Excel or a similar program to predict a contract’s potential risk. This approach can spur a host of issues since the relevant data is decentralized and maintenance is subject to human error that may not be caught – not to mention security issues if not stored properly.

Negotiations

Negotiations involve identifying necessary documents, such as sample contracts, that might expedite drafting. In the contract workflow survey, a majority of respondents (62%) indicate that drafting, editing, and negotiating constitute at least half of their contract work, so this stage in the process is probably the most time intensive. Counsel must pinpoint contract requirements, such as the value of the need the contract meets for the organization or the time scale and phase for the contract. Counsel then determines how to comply with requirements and launches discussions about the contract’s terms with stakeholders. During negotiations, counsel can update the preliminary contract if needed, obtain final signoffs, and deliver executed copies of the contract and related documents to all parties.

Agreement execution

When it’s time to execute the contract to make it legally binding, counsel will oversee the completion of the closing transaction and obtain performance signoffs. Increasingly, contract signings are done virtually, with lawyers relying on e-signatures. An internal signoff process that defines the required approvals and measures to execute contracts must be part of any reliable contract management strategy. Maintaining a record of those with approval authority can increase efficiency by identifying those with the authority to sign off in advance. Relevant parties can receive necessary training pertaining to the terms of the contract or reviewing relevant laws or policy documents to ensure compliance going forward.

Contract oversight and maintenance

In the survey, more than half (55%) indicate having no single platform or using general document systems for contract management. Lacking a centralized source makes oversight, an essential component of contract maintenance, difficult and time consuming. Following execution, counsel must have a plan for reviewing the performance of the contract on an ongoing basis. In this stage, they will ensure there is a procedure for amending the contract and can address requests for changes based on how well the contract performs. If a renewal of the engagement is needed and accounted for in the original contract, counsel will facilitate that change.

Contract closure

If a contract does not renew and parties have completed its deliverables, it may be time to terminate it. Counsel may also have cause to terminate a contract if breaches occur. When one party fails to complete deliverables on time, this breach of contract could result in termination depending on how fully the breach prevented the other party from receiving the promised commercial benefits of the contract.

In many agreements, the parties agree that certain events beyond a party’s reasonable control constitute an excuse to prevent or delay fulfilling deliverables by an agreed-upon time. This is called force majeure and can result in a contract breach or termination. Organizations must also retain contract files per required recordkeeping standards when closing a contract.

What are the standard elements of a contract?

Lawyers must consider the scope, key information, and the ideal format when drafting a contract. Scope refers to the core requirements of the proposed contract, and key information might include any approvals required to execute the contract, the histories of the parties involved, timing and deadlines, termination and breach procedures, and other details. Drafting a contract can be a lengthier process depending on the type of agreement.

While contracts vary in format, certain kinds might share a standard composition. Having a contract template pre-populated with contract information and metadata saves time and improves accuracy. They are especially helpful for quickly preparing the more common templates or forms organizations use such as service level agreements (SLAs).

For this reason, in-house counsel might consider creating a library for contract templates. When records are retained and readily accessible, contracts are easier to draft, update, and amend as needed. Libraries can house preapproved contractual forms or templates that may be used without prior approval. As an alternative approach, companies may keep an inventory of standard contract terms in each contract and a list of any applicable laws and regulations affecting their contracts.

How do you find market standard clauses?

Attorneys who manage contracts can reduce their risk by checking that the clauses in their contracts reflect market standard terms. Clauses are market standard if their language mirrors that of clauses appearing most commonly in other contracts nationwide. For example, a commercial attorney might search for a market standard noncompetition clause when drafting an employment agreement, or they might need a market standard clause that addresses vendor indemnity when drafting a vendor agreement. Attorneys who manage mergers and acquisitions might require market standard clauses for a merger’s closing conditions or for stock purchase or asset purchase description provisions.

Keeping an internal library of useful market standard clauses can make drafting easier. Even still, searching for market standard benchmarks can be laborious for in-house counsel with a high volume of contracts to manage.

What are the challenges of managing legal contracts?

Without the right workflow processes and tools in place, lawyers face some key challenges when managing legal contracts.

Contract management requires in-house counsel to take on several roles – advisor, advocate, and communicator, among others – often for a high volume of contracts at once (per the survey, 71%). For many in-house attorneys, analog methods and inefficient processes can make the role even trickier. For instance, 55% of survey respondents noted that they do not have a single, standardized contract management platform. Most respondents (62%) indicate that drafting, editing, and negotiating constitutes at least half of their contract work.

Drafting challenges can perpetuate when sample agreements are saved on desktops, in shared spreadsheets, or in email archives instead of centralized storage. Storage issues can also prevent lawyers from comparing specific clauses to what they used in previous contracts.

What are the risks of poor contract management?

In addition to challenges noted above, poor contract management practices can waste time and lead to unnecessary errors. A lack of centralized storage for sample contracts may force associates to duplicate their drafting, making it more difficult for in-house counsel to access samples with approved market standard clauses. Without a secure repository for their contracts, organizations face access challenges and potential security and privacy concerns.

Disorganized workflows and poor communication in contract management can also affect organizations’ bottom lines. For example, when the speed of a review takes priority over the quality of review, there is a greater likelihood for contract leakage – the term used when a contract’s expected value is greater than the value it generates. Under rushed negotiations, counsel may not have the time to negotiate proactively for their client, or they may overlook the external risks of the contract and prioritize approvals. Workflow problems can have financial consequences. According to a 2021 EY study, more than half of the responding business development leaders confirmed that inefficiencies in the contracting process have slowed their revenue recognition and resulted in lost business.