How To Perform A Contract Management Audit

Content

• What is a contract management audit?
• Why should you conduct a contract management audit?
• How to conduct a contract management audit
• Establish audit objectives and scope
• Evaluate contract management processes
• Address findings and implement improvements
• Best practices for contract management audits
• Conclusion

Making the most of your business agreements requires a faultless contract management procedure. But what if your contract language isn’t up to par, you missed a deadline, or there’s no record of the changes? Even the tiniest flaws in managing contracts can affect performance, compliance, and opportunities. Poor contracting can ultimately influence the company’s bottom line and business relationships. 

Organizations must, therefore, constantly evaluate and enhance their systems, procedures, and tactics throughout the contract lifecycle. That’s where contract management audits come in! It helps you ensure the contracting process functions smoothly at every level. There are no unwarranted delays, risks, or revenue leakage. 

What is a contract management audit?

A contract management audit is a systematic and comprehensive review of an organization's contract management processes, tools, and documentation. It assists in determining the contract management system's efficacy, efficiency, and compliance. 

Whether you use sophisticated software or traditional methods, it’s hardly wise to expect processes and strategies to be effective indefinitely. Due to shifting circumstances, demands, or involved parties, trouble can crop up in your contract management lifecycle unless you review them regularly. Audits enable businesses to sift through every stage to look for areas of improvement, possible risks, and shortcomings. As a result, they can assure their clients that they have handled their high-volume business agreements with diligence and are adhering to all required regulations.

Why should you conduct a contract management audit?

An ideal system takes time to achieve. Working out the kinks in the process requires a lot of corrective action throughout the contract lifecycle. Considering the time and money businesses invest in contracts, they must ensure the results. They can determine whether they're on the right track for improvement by conducting audits regularly. Following are some of the benefits of contract management audits:

• Establish compliance across all contracts

A contract must adhere to state, federal, industry, and company regulations. There are privacy (HIPAA, or Gramm-Leach-Bliley Act), environmental (EPA), and security (PCI-DSS) standards that every business must follow to stay on the right side of the law. Companies can ensure their procedures and contracts comply with these internal and external standards by conducting contract management audits. 

Moreover, businesses must also carry out all the responsibilities outlined in the contract. Should they fail to do so, it may result in lawsuits, contract breaches, and strained relationships. Regular audits can help establish compliance with contractual terms and conditions.

• Identify areas for improvement

There is always space for improvement in contract management. You can shorten the lifecycle or cut down on language changes, and so on. Businesses must be well-versed in their current processes and shortcomings to make positive changes. A contract management audit allows you to evaluate your existing processes and identify problematic areas. 

Reviewing contract management practices might uncover inefficiencies, bottlenecks, or outdated procedures. For example, you might discover that your contract approval workflow is causing delays or that contract templates don’t reflect current industry standards. By addressing these areas of improvement, businesses can streamline their contract management processes and increase productivity.

• Reduce financial and legal risks

Conducting a contract management audit is essential to reducing legal and financial risks. Reviewing and analyzing contracts enables organizations to identify loopholes or non-compliance issues that could lead to costly legal disputes or financial penalties. This proactive approach allows companies to address contractual discrepancies or errors before they escalate further.

Furthermore, conducting regular audits ensures that all parties manage and adhere to the contract. It reduces the chances of fraudulent activities or breaches. Identifying and rectifying potential risks can safeguard an organization’s legal and financial interests, promoting a more secure and efficient business environment.

How to conduct a contract management audit

Organizations can overcome most contract management inefficiencies and challenges by conducting regular audits. But where do you start? Making sense of it all is difficult when you have massive contract portfolios and dispersed processes. Here’s a tried and tested framework for conducting contract management audits to get you started.

1. Establish audit objectives and scope

Before diving into the audit process, it is crucial to establish clear objectives and scope. It is necessary to consider your motivations for conducting the audit in addition to your methods. Is it a reactive audit concerning recent changes or a proactive one to safeguard your business? Establishing this objective helps to figure out the rest of the process.

Next, organizations must define what they hope to achieve through the audit, whether identifying bottlenecks, improving compliance, or reducing risks. Also, is the audit limited to a specific department or project? They must determine the scope of the audit, including the contract types, the timeframe, and the departments involved.

2. Evaluate contract management processes

The next step is to assess the contract management processes and systems. As it involves many departments, tasks, and procedures, the best approach is to divide and conquer. Businesses can review and analyze each stage of the contract lifecycle. Here’s how:

• Contract generation

The content of a contract vastly affects its performance, compliance, and enforceability. That is why it is essential to include the drafting process in audits. Organizations must review contract templates and clauses to determine accuracy, completeness, compliance with legal requirements, and adherence to organizational policies. They must also look for any errors, omissions, or discrepancies that could impact the validity or enforceability of the contracts.

• Negotiation and approval

Auditing and improving negotiation and approval are necessary to get quicker results. One way to evaluate efficiency is by analyzing the time taken to complete the entire process. A shorter duration indicates a more efficient process, as it reduces delays and allows for faster implementation of contracts. Additionally, tracking the number of revisions made during negotiations can provide insights into the effectiveness of the initial contract drafting. Fewer revisions may indicate better clarity and understanding between the parties involved. 

Lastly, assessing the level of satisfaction among stakeholders involved in the process can offer valuable feedback on its efficiency. Businesses that rely on automated workflows and software to handle the negotiation and approval processes need to assess the effectiveness of these systems. 

• Execution

There are several factors to consider when evaluating the contract signing process. First, the efficiency of the process is crucial; it should be quick and streamlined. Organizations must minimize delays and ensure that contracts are signed promptly. Second, the security of the process is paramount. Businesses must assess the integrity of the contract and ensure that it is not tampered with or forged. Finally, the user-friendliness of the process is crucial. It should be easy for all parties involved to understand and navigate. 

• Post-contract management

One key aspect to consider is the level of compliance with the terms and conditions of the contract. It includes assessing whether all parties are meeting their obligations and if any breaches have occurred. Another factor to consider is whether you’re recording and monitoring essential data and deadlines. It involves renewal dates, expiration dates, and deliverables. Additionally, the financial aspects of the management should be assessed, such as budget adherence and cost control. 

Lastly, accessibility of the contractual agreements is crucial to post-contract management. During auditing, organizations must assess whether all documents are easily searchable and retrievable for all stakeholders. 

3. Address findings and implement improvements

Lastly, organizations can identify areas of weakness or non-compliance in their contract management practices by analyzing the audit findings. It allows them to take corrective action and implement improvements to enhance their contract management procedures. It may involve updating policies and procedures, providing additional training to contract managers, or implementing new technologies to streamline contract management processes. By addressing the findings and implementing improvements, organizations can minimize risks, ensure compliance, and optimize the value derived from their contracts.

Best practices for contract management audits

• Performance criteria for each stage

Establishing performance standards for each stage of the contract management process is critical for conducting effective audits. It involves setting measurable benchmarks and standards to measure contract performance. These criteria should align with the organization's goals and objectives. They can use KPIs such as adherence to timelines, number of contract breaches, number of revisions, and customer satisfaction ratings.

• Assessing contract risks and controls

Contracts involve multiple parties, legal obligations, and potential financial implications. Therefore, it is essential to identify and evaluate the risks associated with contract management. Conducting a comprehensive assessment of contract risks and implementing robust controls can help improve contractual relationships and protect their interests. Assessing contract risks involves identifying potential threats such as non-compliance with contractual obligations, inadequate risk allocation, or poor contract management. Also, evaluate whether organizations have measures to manage and mitigate these risks, such as clear contract terms and conditions, regular monitoring and reporting, and effective dispute resolution mechanisms. 

• Engaging internal and external stakeholders

Engaging internal and external stakeholders is crucial for effective contract management audits. Organizations should involve key individuals, such as project managers and procurement officers. This collaboration allows us to identify potential risks or issues and address them promptly. Additionally, including external stakeholders, such as vendors and contractors, improves contract performance and risk mitigation.

Conclusion

As businesses grow and expand, managing contracts becomes increasingly complex. From vendor agreements to client contracts, organizations have numerous legal obligations to fulfill. However, many companies overlook the importance of regularly auditing their contract management processes. 

Conducting a contract management audit can bring several benefits to your business. It helps them identify areas for improvement, ensure compliance, and reduce risks. As a result, organizations can enhance their overall efficiency and effectiveness. 

Schedule a live demo today to leverage Dock’s features for effortless contract management audits.