Contract Management – The Ultimate Guide for 2023
Contract management is a very broad topic. So broad that most procurement managers have a hard time not just understanding it, but implementing it as well. And no, it’s definitely more than just managing contracts!
For this article, we are going to dissect what contract management is. We’ll discuss its definition, its importance in the procurement process, the objectives and challenges, and the benefits one can get through contract management.
After reading this article, your procurement team will most likely rely on you for contract management!
The Definition and Importance of Contract Management in the Procurement Process
Contract management is defined as the activities of the buyer during a set contract period. This is to make sure that all parties to the contract are able to fulfill their contractual obligations. So if one is to fully define the meaning of contract management, it is the process of systematically managing the creation, execution, and analysis of a contract.
In negotiations and procurement, the contract is the foundation of a business relationship. The contract should allocate all aspects, such as risk, quality of service needed, value-for-money mechanisms, review procedures, and regular communications and resolutions for disputes.
Since we’re talking about the definition of contract management, we also need to talk about why contract management is important.
For contract management to work, it involves a good working relationship between the customer and provider. This working relationship continues as long as the contract takes effect. The management of the contract is always placed above all others to maintain its proactiveness in anticipating future needs. With this type of working relationship between the client and provider, there is a smoother transaction when it comes to the procurement of goods and/or services.
Apart from the great working relationship, the aim of contract management is also set on the continuous improvement of the contract itself.
The Objectives and Challenges of Contract Management
The objective of contract management is to help establish a good working relationship between the client and provider. We’ve already talked about this above. In order to establish a good working relationship, there are also a number of objectives that are essential for effective contract management:
1. Efficient Preparation
The process of contract management always involves efficient preparation. It should always begin as soon as possible during the contract development stage.
If we’re to base it in the procurement process stage, it’s the part where you, the procurement manager, are taking care of the contract that will be awarded to the supplier. An accurate assessment of needs helps build a clear specification. During the first stages of evaluating prospective suppliers, there should be an emphasis on building clear instructions, managing expectations, minimalizing risks, and ensuring process capability.
A good evaluation will help in picking the right supplier. The challenge here is how to create the right preparation though, just like with all procurement processes. For that, you can check out our Negotiation Course For Procurement Professionals for the ultimate crash course tutorial on contract management.
2. Relationship Management
Another important aspect to consider for successful contract management is relationship management. There should be mutual trust, understanding, and openness between the company and the supplier/provider. To achieve that, excellent communication is a must.
The challenge for this is to learn who to talk to when specific issues arise. The solution here is to ask and evaluate who is the right person for the job.
3. People, Skills, and Continuity
The procurement team must have the right people for the job. Contract management is a responsibility that should often be handled by a team because of its breakdown of tasks. The right people for the job are those who have the right interpersonal and management skills. These skills are necessary to manage peer-to-peer relationships in the organization.
Of course, the biggest hurdle for this would be finding the right people for the job.
Management of contracts requires a lot of flexibility. The procurement manager handling the contracting team must have someone who is able to adapt to the terms of the contract as quickly as possible.
The people involved in managing contracts must understand the objectives and must familiarize contract documentation. Intelligent customer capability, in-depth knowledge of the department and its objects, and an understanding of what the supplier can and cannot do are some of the best traits needed to create a team that will manage the contracts for the procurement team.
Benefits of Contract Management
There are many benefits that a company can get when they practice effective contract management. In fact, we at Procurement Tactics believe that contract management is actually more important than procurement itself.
And if you want to be an expert in contract management, our Negotiation Gamechanger Course can help you with that!
Of course, companies need procurement in order to buy the materials it needs for company growth or company survival. Depending on what your company does, your procurement process will greatly benefit if your procurement team also practices efficient contract management.
Some of the great benefits that include good contract management are the following:
- Supplier Commitment – Suppliers are more likely to be loyal and committed to your company since there is an established working environment between your company and the supplier.
- Higher quality of supplies – Because a supplier trusts that you are able to keep track and enforce the contracts given, they’ll be more inclined to give you the best quality of supplies available.
- High service levels – There is more efficiency coming from all your partners because of your reputation as someone who values their contracts.
- Low chances of cost creep – Because a company is able to keep track of its contracts, there is little to no chance of cost creep appearing in the company spreadsheets. A company having a cost creep is a death sentence, as this is a sign of financial issues within the company.
+ What is contract management?
Contract management is a set of activities done to make sure that all contracts signed are enforced by the supplier and the company.
+ Why is contract management important?
A company that is able to enforce its contracts has a high trust rating from its customers and suppliers. Having a high contract trust rating also attracts more customers.
+ Who is in charge of contract management?
Either the procurement manager takes care of contract management or someone capable of enforcing contracts is given the assignment.
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