What Is Contract Management? (With Benefits and Strategies)
By Indeed Editorial Team
Updated June 16, 2022
Published January 3, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Legal contracts are official records, obligations, and conditions of any agreement between individuals, businesses, vendors, contractors, and employees. Contract management is an integral part of several professions related to law and human resources. You can ensure a contract is in your best interest by learning more about how to create, manage, review, and draft contracts. In this article, we answer, “What is contract management?”, share a list of careers that handle this responsibility, explain its benefits, and discuss the different stages of this process.
What is contract management?
Those who want to learn more about creating or reviewing a legally binding document may wonder, "What is contract management?" Contracts define and identify the responsibilities and obligations of all individuals or entities involved. They also identify the rights of those parties. Contract management refers to the process of drafting agreements, ensuring all parties sign the documents, and implementing procedures outlined in these contracts. It involves assessing the terms and conditions of the agreement and considering important details that may affect any of the parties involved, like employment agreements or non-disclosure agreements.
Related: What Is an Employment Contract?
Careers that involve regular contract management
Here are some professions to consider if you're interested in managing contracts as part of your role:
National average salary: $90,459 per year
Primary duties: Lawyers help ensure the protection of their clients' rights and advise them on important legal decisions which include property agreements, equipment leases, business loans, labour law for unions, and partnership agreements. When negotiating and managing contracts, these professionals ensure they have fair terms and use excellent communication skills to help their clients understand the terms fully before signing a contract. When necessary, these professionals also defend their clients in court.
National average salary: $89,473 per year
Primary duties: Finance managers provide their clients and employers with financial advice, reports, and information. These professionals also develop statements for cash flows and money allocation. They may also help with profit projections and the management of client credit. Finance managers may review and verify contracts between two companies when negotiating an important business decision, like a merger or acquisition. They also help financial institutions draft contracts for insurance, investment, credit and other purposes.
National average salary: $84,084 per year
Primary duties: Contract managers oversee projects that require partnerships between multiple organizations or business entities. These professionals also help with finalizing contract conditions, signing contracts, and reviewing contract terms. When necessary, they approve budgets related to contracts, along with project deadlines. They typically work for larger corporations that require extensive contract preparation and management.
What are the benefits of contract management?
Here are some benefits of managing contracts:
Encourages efficiency: Successful contract management enables companies to review all their legal obligations and agreements more easily. This knowledge can help create efficient processes and improve workflows that meet the conditions of the contract.
Improves compliance: Effective contracts ensure all parties involved understand the requirements and can remain in compliance with the terms. In the event of non-compliance, the contract provides support when addressing the issue.
Reduces risk: Using contract management significantly reduces the risks of liability. By mitigating risks, contracts can also help companies manage their budget and security more accurately.
Accelerates the review process: Managing contracts well makes it easier for all parties to review these documents regularly and make updates or amendments as needed. Keeping organized records can also contribute to this process.
What are the stages of contract management?
Here are the eight stages of contract management that can help you create and organize contracts:
Preparing contracts involves considering the goals of all parties involved. This helps you identify which specific components and sections to include. You also consider expectations and understand what those expectations are for each individual involved. To do this, facilitating clear communication between all parties is essential. You can also conduct risk assessments to understand what may happen if someone violates the contract terms.
Following the declaration of expectations, goals, and requirements of all parties involved in a contract, you develop a draft. This draft reflects all elements previously discussed with the involved parties. For example, apartment leasing companies may want to create a contract with a cleaning service. Contract managers in this situation develop an initial agreement that both parties can review to help allocate the role, responsibilities, and costs associated with this service.
Following the initial contract draft, all parties who want to update the terms negotiate specific sections and clauses of the contract. When either company requires adjustments, this occurs in the future and final drafts of the agreement. For example, if a company providing services to an IT company asks to increase the rate of their services, either party may request negotiations. These negotiations continue until both the company receiving and providing services agree on the terms of those services.
Contract management requires the approval of all parties involved in the contract and the signature of the final version of the agreement. Following this approval, the parties also agree on the date on which the contract begins, which is also in the contract. Companies sometimes use online contract authorization tools that simplify signing and approval. For example, suppose the apartment leasing company and the cleaning services vendor are both happy with the agreed-upon rates in exchange for services. In that case, they can sign the contract and agree to begin their partnership at the beginning of the following month.
After all involved parties approve a contract, it comes into effect. The contract may go into effect on an agreed-upon date or immediately, depending on the type of contract. With the example of the contract between the leasing company and the cleaning company, the cleaners begin their services to the apartment leasing company at the beginning of the following month.
6. Obligation management
When executing a contract, a contract manager can begin supervising and overseeing the adherence to obligations by different parties. This step can help everyone involved ensure that the contract keeps its value. For example, after a few months, the apartment leasing company may have issues organizing the cleanings as they adhere to a strict schedule, sometimes on short notice, to prepare apartments for new tenants. In this case, it may be necessary to revise the contract as per new conditions agreed by all parties.
Once a contract is in effect, the parties involved can agree to revisions as circumstances change. In the previous example, the cleaning vendor and leasing company can agree to more specific terms involving the timing of cleaning services. The vendor might agree that its cleaning employees won't be more than 15 minutes late, barring unforeseen circumstances. The contract manager can revise the contract to reflect these changes.
8. Renewal or termination
When a contract's term ends, the parties involved can renew or terminate the agreement. Renewal may involve a new round of negotiations or can also happen as per the existing terms and conditions. Termination formally ends the contract. For example, the contract between the cleaning vendor and apartment leasing company was successful after the revisions. The parties can agree to enter negotiations to renew the contract for another year.
Contract management strategies
Here are some best practices that can help you manage contracts more effectively:
Research contract parties
Conducting research on the parties of a contract, including background checks, can help you ensure that an individual or business can legally enter a contract and that they're likely to meet the terms. You may find that the party has existing obligations that affect any contract you enter with them. When researching these parties, identify potential risks that result from these contracts.
Establish consequences for breaches or delays
Another strategy for better contract management involves establishing and communicating consequences for contract breaches or delays. This can help you ensure that the contract fulfills its value for the parties involved. It can also encourage adherence to the contract. For example, suppose an editor for a publishing company continually misses deadlines. In that case, the hiring company can include consequences for these delays into the contract, like a hold on payment until they've reached the milestone.
Identify the life cycle for contracts
You can specify the life cycle of a contract to fit your requirements. For example, if a company operates on a seasonal basis, it can specify that new contracts expire after six months and require regular renewal. You can also identify information from other parties that may lead to automatic contract renewal or termination.
Discuss contact sections
Communicating authority is another strategy that can help you manage contracts with more transparency. It's vital that all the parties involved are aware of the decision-makers in the process. Sometimes the board of directors at a company elects a representative who can make decisions in contract negotiations. For example, if a salesperson requires final approval for lower rates from their manager before a client signs a contract, the salesperson can communicate this clearly to the client.
Salary figures reflect data listed on Indeed Salaries at time of writing. Salaries may vary depending on the hiring organization and a candidate's experience, academic background, and location.
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