Contract Management in Procurement Explained

It also represents an important part of the compliance process, keeping businesses inline with procurement law.

But what exactly does contract management involve?

In this guide, DeepStream explains what contract management is and how it enhances the procurement process and offers best practice tips for professional-level contract management. 

What is Contract Management in Procurement? 

Contract management refers to the process of overseeing and administering procurement contracts throughout their lifecycle – making sure contract terms are met and continually referenced from the start of a supplier relationship to the end.

It involves regularly checking the contractual agreements with suppliers to ensure procurement activities align with the terms and conditions of the contracts –including timings, deliverables, compliance requirements and more.

Contract management is crucial in procurement activities as it protects the interests of a business throughout the procurement process, ensuring compliance, mitigating risks and providing a legal reference for delivering on the procurement team's aims. 

What Are the Key Stages of Contract Management in Procurement? 

The key stages of the contract management process in procurement include:

·      Pre-award stage.

·      Contract drafting and negotiation.

·      Contract execution and implementation.

·      Contract monitoring, performance management and post-award stage.

·      Contract renewal, amendments or termination.

·      Contract closeout and evaluation.

The two most crucial stages often come before and after the contract is awarded:

Pre-Award Stage

‍The pre-award stage refers to the initial phase of the procurement process. It involves the activities in the source-to-contract process, such as market research, vendor selection, bid evaluation and contract negotiation, leading up to the awarding of the contract.

Post-Award Stage

‍The post-award stage in procurement occurs after the contract has been awarded. It involves activities such as contract implementation, performance monitoring, change management, issue resolution and relationship management with the supplier throughout the contract duration.

Pre-award Stage Considerations 

Before beginning the pre-award stage, several critical questions should be addressed to ensure a successful outcome:

·       What are the specific goods or services required, and are they clearly defined?

·       What are the desired quality standards and performance expectations?

·       What is the timeline for delivery or completion?

·       What is the budget and are there any cost constraints?

·       What are the legal and compliance requirements?

·       What are the potential risks involved and how will they be managed?

·       What are the terms and conditions, including payment terms and penalties?

·       How will disputes be resolved?

·       How will the contract be monitored and evaluated?

·       What is the process for contract renewal, amendment, or termination?

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Alongside these essential considerations, it’s also important to assess supplier capability and readiness.

This can be done by evaluating factors such as financial stability, past performance, references, certifications, production capacity, quality control processes and the vendor’s ability to meet contractual requirements and timelines.

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Vendor credentials are often accessed through a Request For Information (RFI) document – find out more in our helpful guide!

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To ensure negotiations are effective in procurement contracts during the pre-award stage, consider the following strategies:

·       Prepare thoroughly by researching market conditions, supplier capabilities and alternative options.

·       Clearly define your objectives and desired outcomes.

·       Establish a collaborative and open communication approach.

·       Identify areas of flexibility and trade-offs to create mutually beneficial terms.

·       Focus on supplier value rather than solely on price.

·       Seek win-win solutions by exploring creative options.

·       Use objective criteria and benchmarks to evaluate proposals.

·       Consider long-term relationships and incentives for supplier performance.

·       Document all negotiated terms in writing for clarity and reference.

·      Continuously review and analyse contract terms for improvement opportunities. 

Post-award Stage Management

Contract administration involves the day-to-day management and oversight of procurement contracts once they have been awarded.

After a contract has been created and signed, it is not always plain sailing. That’s why contract management is key in making sure all terms and deliverables are met. To ensure successful relationships which reflect mutually agreed contract terms, it is best practice to:

·       Establish clear performance metrics and Key Performance Indicators (KPIs).

·       Regularly monitor and evaluate supplier performance.

·       Maintain open communication and address any issues promptly.

·       Conduct periodic audits or inspections.

·       Use performance-based incentives or penalties as appropriate.

·       Maintain a collaborative relationship to foster continuous improvement.

·       Ensure compliance with contract terms.

·       Monitor supplier performance.

·       Process invoices and payments.

·       Manage changes or amendments.

·       Resolve party disputes.

·       Maintain accurate contract records.

The goal is to ensure both parties fulfil their contractual obligations to deliver compliant and successful procurement projects.

Challenges and Risks in Procurement Contract Management 

Managing procurement contracts can present various challenges – however, it is possible to mitigate and avoid disruption with the right preparations:

Poor Contract Visibility and Tracking

‍Use contract management software to centralise contract information and enable easy access and tracking.

Inadequate Contract Documentation and Record-Keeping‍

Maintain comprehensive and up-to-date contract documents, including amendments and correspondence, to ensure clarity and avoid disputes.

Non-Compliance With Contract Terms and Conditions

‍Establish clear processes for monitoring and enforcing contract compliance, including regular audits and performance assessments.

Supplier Performance Issues or Delays‍

Develop KPIs and service level agreements (SLAs) to measure and manage supplier performance. Address issues promptly through open communication and collaboration.

Disputes and Conflicts Arising From Contract Interpretation

‍Clearly define contract terms and engage in proactive communication with suppliers to ensure mutual understanding. Consider dispute resolution mechanisms like mediation or arbitration.

Inefficient Communication and Coordination With Suppliers

‍Maintain regular and effective communication channels, establish clear points of contact and conduct periodic meetings to enhance collaboration and address concerns promptly.

Changes In Business Requirements or Scope Creep

‍Implement change management processes to handle modifications in contract scope, including assessing impacts, obtaining approvals and revising contract terms accordingly.

Limited Resources for Contract Management

‍Allocate dedicated resources and establish defined roles and responsibilities for contract management. Consider outsourcing contract administration tasks if necessary.

Contract Renewal or Termination Complexities

‍Initiate renewal or termination discussions well in advance, assess performance, negotiate terms and document any changes or agreements.

Balancing Cost Control with Maintaining Supplier Relationships

‍Maintain a balanced approach by considering both cost optimisation and supplier relationship management. Foster open dialogue and explore win-win solutions when cost reductions are necessary. 

Forming a Contract Management Strategy in Procurement

A procurement contract management strategy should contain clear objectives including elements such as:

·      Contract lifecycle management

·      Defined roles and responsibilities

·      Contract standardisation

·      Risk management

·      Performance monitoring

·      Communication and collaboration

·      Compliance and governance

·      Contract documentation and record-keeping

·      Continuous improvement

To ensure cooperative and responsive relationships with suppliers, prioritise clear communication, collaboration, goal alignment, timely feedback, problem-solving, recognition and trust and transparency. This may include the following techniques:

·      Establishing clear and comprehensive contracts with well-defined terms and obligations.

·      Maintaining open and transparent communication channels with suppliers.

·      Actively managing contracts through regular monitoring and milestone tracking.

·      Implementing a change management process to handle contract modifications.

·      Including dispute resolution mechanisms, such as mediation or arbitration clauses.

·      Maintaining thorough documentation and records of contract-related communications and changes.

·      Defining performance metrics and KPIs to evaluate supplier performance objectively.

·      Fostering a collaborative and positive relationship with suppliers through regular feedback and communication.

Contract Management Best Practices in Procurement

Below are some best practice principles and techniques for successful procurement contract management:

·      Establish clear contract objectives.

·      Conduct thorough supplier evaluations and selection.

·      Maintain open and transparent communication.

·      Regularly monitor supplier performance against KPIs and SLAs.

·      Ensure contract compliance by both parties.

·      Foster positive and collaborative supplier relationships.

·      Continuously improve contract management processes.

·      Proactively identify and mitigate risks.

·      Evaluate supplier performance for contract renewal or termination.

·      Conduct periodic supplier performance evaluations.

Contract management software can significantly enhance the processes by centralising your contract history, providing a comprehensive audit trail and even saving time with AI integrations. Some of the key benefits include:

·      Centralised document storage and automated workflows.

·      Implement electronic signature tools for more efficient contract execution.

·      Employ document management systems for secure storage and easy access to contract-related documents.

·      Set up automated alerts and reminders for critical contract milestones and renewals.

·      Use performance tracking tools and dashboards to monitor supplier performance against KPIs andSLAs.

·      Utilise collaboration platforms or project management tools for seamless communication and collaboration among stakeholders.

·      Leverage data analytics tools for insights and reporting on contract performance, compliance and risks.

·      Explore AI andML-enabled tools for contract review, risk identification and data extraction.

·      Integrate contract management systems with ERP systems for streamlined procurement processes.

·      Utilise mobile applications for on-the-go access to contract information and approvals.

DeepStream Contract Management Software saves procurement professionals time and complexity while ensuring compliance throughout the whole S2C process.

Measuring Success and Performance in Procurement Contract Management

The contract management process is an ongoing one – which should be regularly reviewed and refined to boost outcomes.

To assess the effectiveness of contract management in procurement, the following metrics or KPIs can be used:

Contract Compliance Rate

‍Measure the percentage of contracts that are fully compliant with terms, conditions and deliverables.

Contract Cycle Time

‍Track the average time it takes to complete the entire contract lifecycle, from drafting to execution and closure.

Supplier Performance

‍Evaluate supplier performance against agreed-upon KPIs, SLAs and quality standards, to ensure contractual obligations are met.

Cost Savings/Value Achieved

‍Measure the cost savings or value generated through effective contract management, such as negotiated discounts, optimised pricing or improved supplier performance.

Contract Renewal Rate

‍Monitor the percentage of contracts that are renewed upon expiration – a key indicator of successful supplier relationships and contract outcomes.

Dispute Resolution Time

‍Track the average time taken to resolve disputes or conflicts arising from contract management, indicating the efficiency of the resolution process.

Contract Risk Mitigation

‍Assess the effectiveness of risk management efforts by measuring the number of identified risks, risk mitigation actions implemented and the impact of those actions.

Stakeholder Satisfaction

‍Gather feedback from internal stakeholders, such as procurement teams and end-users, to gauge their satisfaction with the contract management process and outcomes.

Cost of Contract Management

‍Analyse the cost associated with managing contracts, including administrative overhead, technology, and personnel, to ensure cost-effectiveness.

Contract Renewal/Expiration Monitoring

‍Track the percentage of contracts that are monitored for renewal or expiration, ensuring proactive management and avoiding missed opportunities or risks.

DeepStream Contract Management Software boosts compliance, speed and transparency across the S2C process.

Frequently Asked Questions (FAQs)

Q: What is the role of a contract manager in procurement? 

A: The role of a contract manager in procurement is to oversee and manage the contractual agreements between the organisation and its suppliers. They ensure compliance, mitigate risks and monitor the performance and fulfilment of contractual obligations.

Q: What are the four components of contract management? 

A: The four components of contract management are contract creation and negotiation, contract implementation and execution, contract monitoring and control and contract analysis and improvement. These components encompass the entire lifecycle of a contract, from creation to evaluation and improvement.

Q: What skills does a contract manager need? 

A: A contract manager needs skills such as strong negotiation and communication abilities, attention to detail, legal and contractual knowledge, analytical thinking, problem-solving skills and the ability to manage relationships and navigate complex situations effectively.

Q: What are contract management responsibilities? 

A: Contract management responsibilities include drafting and reviewing contracts, ensuring compliance with terms and conditions, managing contract performance, addressing disputes or issues that arise, maintaining contract records and fostering positive relationships with stakeholders involved in the contract.