What Is Contract Compliance, and How Can You Ensure It?
Running a growing business brings new challenges every day – but one ongoing challenge is that of maintaining contract compliance. Keeping your company aligned with every regulatory standard, internal guideline, and agreement clause can consume a whole lot of time and resources. That’s why it’s crucial to develop a clear company-wide compliance policy, and implement that policy in cost-effective ways.
But what is contract compliance, and why is it so crucial for your organization’s success? How can you streamline the process to make it more manageable and consistent? This article will answer those questions and more – helping demystify the process, analyze its effects, and show you how to create a playbook that’ll safeguard your contractual integrity. Let’s dive in!
What is contract compliance?
Contract compliance means observing the terms and procedures specified in every contract you sign. In practice, of course, this is easier said than done. For example, say you’re a construction firm, hired by a commercial complex to build a new office tower. In this case, contract compliance means managing three interlocking sets of obligations:
- The client’s contractual obligations to you – to pay on time, to provide you with adequate notice of revisions to blueprints, etc.
- Your contractual obligations to the client – to complete the project on-budget, to adhere to the agreed-upon timetable, etc.
- Your obligations under local regulations – to comply with inspections and safety codes, to limit the number of subcontractors you hire, etc.
As you can see from this example, effective contract compliance requires a delicate balance between internal and external obligations. And the more agreements your organization handles, the more valuable it becomes to have a contract lifecycle management (CLM) strategy in place.
Why is contract compliance important?
Contract compliance is mission-critical for a wide variety of reasons. Most obviously, fulfilling your obligations will keep your business out of legal and financial trouble, by preventing lawsuits and lost clients due to breaches of contract. On the flipside, consistently honoring your obligations will build trust with your clientele, fostering long-term business relationships across an ever-expanding network of positive referrals. In short, compliance is crucial for growth.
What’s more, complying with your contractual agreements will help mitigate and distribute risk, by helping protect your bottom line against certain consequences of negative events. For example, if one of your warehouses was destroyed by a storm, your losses might be covered by your contract’s force majeure clause – as long as you’ve remained in compliance with the other terms. In all these ways and more, complying with your contracts prevents many kinds of headaches (and wallet-aches).
Best practices for ensuring contract compliance
Although legal teams at small organizations can sometimes handle contract compliance on their own, you’re going to want to make compliance a company-wide priority as your organization scales. So let’s take a look at some best practices.
Agree on your compliance KPIs
If you’re concerned about compliance, chances are that you already have some success metrics in mind. If not, now’s the time to conduct a contract compliance audit. For example, you might want to track your compliance percentage, your rate of non-compliance incidents, your resolution time, the cost of complying with all a contract’s terms, and the savings achieved by those terms. To get even more fine-grained, you can score your suppliers and subcontractors on compliance, and factor their scores into your metrics as well.
Assign specific contract-facing roles
Different teams deal with different stages of a contract’s lifecycle, from drafting to fulfillment and beyond. That means you’ll want to appoint key team members to ensure compliance at each stage of every project. For starters, a contract administrator can oversee the entire compliance process for every contract, while a compliance officer can make sure all company activities comply with regulatory requirements and internal policies. People in these roles may work with the procurement officer, who deals with suppliers; the operations manager, who handles delivery of goods; and the project managers, who keep every project in line with contractual obligations.
Share examples and templates
Although your contract administrator should check every contract before it’s sent out for signing, a repository of templates will save your legal team a lot of time on drafting agreements. Pre-approved templates will help make sure that all teams approach similar documents consistently, instead of pulling from random examples they find online. If you’re using CLM software like Concord, you can even build “if… then” logic into your templates, automating entire approval and signing workflows with conditional fields and clauses.
Create a contract playbook
One of the most powerful compliance tools in your arsenal is a playbook of company-wide contract policies. Your contract playbook should include example clauses for reference, explain legal concepts in plain language, and lay out your negotiation strategies step-by-step, including fallback positions and escalation points. It’s also smart to outline your approval process, listing job titles and contact info for each reviewer. You may even want to extract some contract intelligence from your existing contract library, to explain when and how contract-related decisions get made.
Leverage a CLM solution
Compliance is just one component of a comprehensive strategy for contract lifecycle management (CLM). By centralizing your contract repository on a secure server, you’ll create a single unified touchpoint for drafting, editing, negotiation and signing. And by keeping all your signed contracts in one place, you’ll be able to search for terms and tags with just a few keystrokes, and generate custom reports on compliance rates, costs, and other variables. The more your business grows, the more time and resources a CLM platform will save you.
