Contract auditing is the process of reviewing a company’s contracts. The purpose is to ensure that the quality, compliance and fulfillment of contracts are correct and to reduce contract risks as much as possible.
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What is contract controlling?
Contract controlling involves evaluating how successfully a company’s contracts have been fulfilled and complied with by the contracting parties. It is used to identify problems or risks related to the quality, compliance or fulfillment of one or more contracts.
Contract auditing is generally used for quality assurance purposes and can vary in scope and detail depending on the objective. Depending on the type of contract controlling, everything from the content of a contract to the processes, policies, and systems used to manage the contract can be reviewed.
Types of contract auditing.
The purpose, type and scope of contract controlling can vary depending on an organization’s strategic priorities and the circumstances of the contract audit. However, there are three common types of contract auditing that are most prevalent in organizations.
Contract performance Contract auditing with respect to contract performance involves examining and verifying how contract objectives and terms are being met by the contracting parties and whether each party has actually fulfilled its obligations. Contract compliance auditing can also be used to verify compliance with certain regulations such as data protection and information security laws.
Clauses In a contract audit regarding clauses, the collection of clauses used in contracts is evaluated to identify incorrect or obsolete clauses. This allows the legal and business teams to identify where contract terms need to be updated in line with the legal and business environment, as well as corporate strategy.
Costs Contract audits with regard to cost review and evaluate the pricing and cost information available in contracts. They are usually performed to ensure that billing is correct and that customers are not being overcharged or undercharged.
Benefits of contract auditing
Contract auditing serves several purposes, and regular auditing of contracts can provide numerous benefits.
- cost control One of the biggest benefits of regular contract auditing is to verify that a company is paying the agreed amounts in contracts and meeting any resulting costs. This can also be useful for forecasting and can help the legal department to assist the finance department and other commercial teams in effectively controlling costs.
Even small errors can lead to inaccurate calculations. Therefore, it is important to identify these errors as early as possible to optimize your financial performance. This assessment also enables you to negotiate better rates in the event of a contract renewal, as contract auditing provides the ability to manage and assess costs on a case-by-case basis.
2 Improving contract quality Contract controlling provides a wealth of actionable data that enables a company to make more informed decisions about contracts, the terms and conditions they contain, and the procedures they use.
Contract controlling can not only provide guidance on how to improve internal processes and the overall quality of contracts, but also help identify individual opportunities to increase revenue or reduce expenses.
You can also use contract auditing as an opportunity to point out clauses that need to be updated, either in terms of the broader scope of regulation or as your business evolves.
- more efficient processes Contract auditing often uncovers points of friction within a contract process and highlights areas that could be made more efficient as a result.
For example, if certain contracts have taken a long time to process, or if certain clauses keep delaying the signing of contracts, contract auditing can help you decide where you should focus your time to improve that process. In most cases, contract controlling will uncover errors and ineffective processes.
- early identification of risks Proactive contract auditing is an effective means of identifying problem areas and risks before they escalate further.
For example, through contract auditing, early identification of inaccuracies in contract preparation can prevent unexpected costs from piling up over time and having a lasting impact on revenue. Similarly, identifying early on that a contract’s objectives have not been met can prevent that non-compliance from leading to potential legal action at a later date. For this reason, companies typically use contract audit software or a contract automation system.
5 Increasing transparency Contract controlling and thus the verification of compliance with contracts also ensures transparency and enables trust to be built up within the company as well as with customers.
If this contract controlling is carried out in cooperation with the customers, you can use it to improve the relationship with them and ensure that your contracts are correct, up-to-date and subject to constant review.
When should you perform a contract audit?
Because contract audits are time-consuming, companies tend to put them off. But when should contract audits be performed, and how often should they take place? There are some specific instances when contract reviews are particularly frequent, including:
- When there is a large capital expenditure.
- When the company wants to expand into new markets
- In the event of a merger or acquisition
- When preparing for a new round of financing
- When a supplier relationship is terminated or begins
- When errors or mistakes in contract performance have been identified
Contract audits can be conducted proactively as a preventive measure, or reactively to respond to pressing problems. It is advisable to conduct smaller contract audits frequently, but it is also important to conduct larger, more comprehensive audits of the entire contract portfolio at regular intervals.
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