Welcome back – it's been a while! As we're heading out of the dog days of summer, we wanted to get right back on the horse and tackle a more challenging topic - not the management of your contracts, but rather the management of the many supporting documents which are either part of the initial contract or subsequently impact your contracts.
As we've established, the contract management function and its importance within an organization has been fundamentally escalated over the past few years. Why? There is a tremendous amount of opportunity in your contracts when managed appropriately – and a tremendous amount of risk when handled otherwise. More specifically, efficient and effective contract management allows sales cycles to be expedited, ensures consistent contract language, captures the appropriate approvals, escalates bottlenecks, and ensures contract obligations are appropriately managed. Inefficient or ineffective contract management practices expose companies to a wide breadth of risks including poor contract language, mismanagement of obligations, potential breach, and overspending and regulatory fines. Given the duration and revenue associated with many contracts, the complexity of these contracts, and the cost – opportunity or otherwise - of mismanagement, many companies have turned to software and automation when addressing these challenges.
With the introduction of software and automation, special consideration should be paid to supporting documents, the information contained within these documents, and the relationship that these documents have with the "master" or governing contract. For purposes of our current discussion, when we refer to supporting documents, we are highlighting three specific document types as follows:
- Appendices and Exhibits
- Change Orders
An Appendix or Exhibit is a supporting document to a contract. While it is often included as part of the overall contract, it is not located within the main body of the agreement. Information which is typically contained within an appendix or exhibit includes defined terms, service or support level agreements, order forms, and various process documents. This information is fundamental to the overall success of the contract, but may not contain specific legal terms or provisions. For example, many software contracts will contain SLA's or Service Level Agreements which address general service or support processes, uptime guarantees, and issue response and resolution times. An additional example of a common appendix or exhibit are travel policy guidelines which a company who enters into a particular contract must adhere to when traveling on behalf of the counterparty. When considering an appendix or exhibit in the context of a contract management system, it is important to understand whether these documents will be addressed as stand-alone documents or whether they should be considered part of the main agreement. It is also necessary to account for the specific terms or processes which are outlined in these documents as well as any obligations which they may introduce which will require management.
Change orders, also considered a supporting document to a contract, differ from an appendix or exhibit in that they do not contain supporting terms or processes. Rather, as the name suggests, they change certain aspects of a contract. In most cases, change orders are applicable to an "order" or project plan – for both goods and services. Change orders frequently impact quantity, price per unit, overall cost or project financials, or timeline. They also serve as a mechanism to add additional goods or services. Given both the complexity and duration of many contracts, change orders are frequently introduced at some point in the contract's lifecycle. As Anumoni Josh, a frequent contributor to IACCM, International Association for Contract and Commercial Management, explains, "Change in any project across industries is inevitable, even if you have a perfect project plan. Managing the change efficiently is key to the success of change order management. Any change to the original project plan is always carried out by a change order request. And, it is imperative to have the change order request approved in writing before acting on the change order." As the change order may impact timeline, obligations and budget, it is critical that these changes are not only accurately reflected within your CLM system, but that they are related back to the master contract.
Our last supporting document type for today's discussion is an amendment. An amendment to a contract changes the terms or conditions of the contract. It may change an existing contract provision, add a provision which didn't previously exist, or remove language which is no longer relevant. While amendments occur for a variety of different reasons, one of the most frequent amendment types addresses a pending termination or expiration date. These items can be addressed by noting a new date, adding an auto renewal provision, or updating the term, entirely.
When considered in the context of the overall management of the contract, these additional supporting documents become critical. Not only do they introduce material terms and conditions, they may impact the budget associated with the contract and the approvals necessary as well as the timeline and commitments made by the parties. CLM systems address these supporting documents in a variety of different ways. The simplest of systems allows these documents to be stored with the main agreement. A change in budget, a contract extension or a change in terms is evaluated on a case by case basis, approved and updated through a manual process. As a CLM system becomes more robust, unique associations can be made to the main agreement, and hierarchical relationships including parent-child relationships can be introduced. The most sophisticated systems will support unique workflows and approval processes for these supporting documents, automatic updating of key terms, and specific hierarchies as well as the creation of obligations.
Given the investment in a system and its strategic importance, supporting documents are not something which can be overlooked. If this is something which is of interest to you, please do give us a call! We'd very much welcome the opportunity to demonstrate how our contract management lifecycle application, CM[.app], addresses these issues within both simple and sophisticated contracting environments.
Tune in again next week when we review the role that automated contract creation plays in the overall contracting environment!
Rob writes on contract management and business applications for Corridor Company.
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