Contract lifecycle

What is contract lifecycle?

The term “contract lifecycle” is commonly used in contract management to describe the stages of a contract from conception to completion. This concept has gained greater attention in recent years as companies have realized that proper contract lifecycle management can increase revenue, reduce costs, and provide other benefits to the business.

Phases of the contract lifecycle

There is no universal agreement on the exact phases of the contract lifecycle, as the contracting process can vary from industry to industry. Notwithstanding these differences, the following list provides a good generalization:

1. Negotiation preparation: Generally, in this phase of the contract lifecycle, one or both parties propose a potential business relationship. Both parties should first define their needs, goals, and strategies.

2. Preparation of the draft contract: In this process step, one of the parties prepares a draft contract that the parties will work on.

3. Contract negotiation: The parties negotiate the terms of the contract in this phase, with the intention of reaching a final agreement. If a final agreement is reached, both parties must obtain the appropriate approvals.

4. Contract execution: The responsible persons formally sign the final version of the contract. This is an important step in the overall contract lifecycle.

5. Contract tracking and performance management: The contract should be stored in a central repository. This allows the company to ensure that the terms of the contract are met and all obligations are fulfilled. The enterprise can also track special provisions such as automatic renewal clauses, benchmarking provisions, and audits.

6. Close/renew/analyze: When the contract is closed by time, performance, or both, it should be marked as closed. The organization may consider renewal or renegotiation and the process begins again. Some contracts automatically renew if appropriate action is not taken. This is also an appropriate time for a final analysis of whether the company’s goals have been met. This is usually the end point of the contract lifecycle.

Teams involved

The contract lifecycle is central to any area that relies on contracts. In any organization, numerous departments may be involved:

• Sales and Procurement departments: They are responsible for the need for external contracts and are involved in negotiation, approval and performance measurement. It is with these teams that the contract lifecycle process often starts.

• Legal departments: They are often responsible for industry contract compliance, making them an essential part of the contract lifecycle. This department is involved in negotiation, approval, compliance, and periodic audits. Legal departments also often work with due diligence teams to verify that all contracts are acceptable to the management team before they go into effect.

• Human Resources Departments: These employees typically use contract management internally to map the contract lifecycle. They may also be involved in internal negotiations and use performance metrics and special clauses in contracts to understand the state of the business in relation to its people.

• Management Teams: These typically oversee all relevant teams in the contract lifecycle to ensure they are all working towards the same goals and following internal policies.

Summary

Contract lifecycle has meaning for all businesses. By improving it, companies are better organized and can gain visibility into their company’s contract performance. In addition, it improves corporate governance and helps the company avoid missteps that could impact its future.