Contract disputes, missed deadlines, and lost revenue can all stem from poor contract management—but the right approach can turn contracts into a competitive advantage.
Thankfully, digital contract management solutions streamline the entire contract management life cycle, from initial contract creation to contract execution, enforcement, and extension. Effective contract management saves time, reduces risk, and facilitates smoother client and vendor relationships.
When contract administration slips, you can miss deadlines, become involved in contract disputes, and even lose revenue. Here’s a guide to the stages of managing contracts for your business, paired with some contract management best practices.
What is contract management?
Contract management is the process of creating, organizing, tracking, and maintaining business agreements. For small-business owners, the contract management process often involves tasks like drafting contracts, storing signed documents, tracking renewal dates, and ensuring all parties meet their contractual obligations.
Contract management involves sustained, sometimes painstaking manual effort. As contract volumes grow, it can be hard to keep up. That’s why many businesses and freelancers turn to digital contract management systems for help. Contract management platforms can automate the entire contract life cycle, from initial drafting to compliance and renewals.
What are the stages of contract management?
Contract management plays out in stages, from initiation to either renewal or termination. This discipline is sometimes known as contract lifecycle management (CLM).
Here are the seven stages of the contract lifecycle:
1. Initiation. This stage begins when a contract is needed. You might draft a contract to set the scope for freelance work, to define the terms of a B2B vendor relationship, or when hiring an employee. In the initiation stage, you’ll identify the contract’s purpose, required terms, and who needs to be involved in the contract. If you’re starting from scratch, you may want to think about using a contract template.
2. Negotiation. Next, parties review and revise the contract to reach mutual agreement on terms, scope of work, and fees. If you and/or the other party have a lawyer or legal team, they may drive this step. Contract negotiations can include multiple rounds of edits—including redline edits, where parties may cross out items included in a previous draft, or comments asking for changes. Respectful back-and-forth communication helps smooth the negotiation process.
3. Approval. Before the respective parties sign contracts, all relevant stakeholders should sign off on the terms. This often involves a legal review. If your lawyer wasn’t involved in the negotiation, they should review it during this step. If the other party is a large company, they may need multiple people, including their lawyers, to approve the contract.
4. Execution. The contract is signed by all parties in this step. Signing a contract makes the agreement legally binding and officially active. You can opt for physical signatures or use an e-signature platform. Digital signature might be part of your contract lifecycle management software’s suite of tools.
5. Compliance. After execution, both parties must adhere to the terms and deliverables outlined in the contract. This includes tracking deadlines, payments, performance obligations, and regulatory compliance where applicable (e.g., adhering to labor laws, obeying environmental codes).
6. Renewal. As the contract nears its end date, it may be renewed or extended if both parties wish to continue the relationship. This stage often requires reviewing the original terms and making updates if needed, including applicable dates. When considering upcoming renewals, consider factors like vendor performance, financial performance, and the quality of the relationship.
7. Termination. Not every contract gets renewed. Sometimes a contract concludes either by expiration, by mutual agreement to terminate, or due to a breach. Contract terms usually specify a communication channel for termination; make sure to use this if specified.
Contract management best practices
- Standardize your contracts with pre-approved templates
- Structure and automate approval workflows
- Leverage contract lifecycle management (CLM) software
- Centralize your contract storage
No matter what type of contracts you’re managing, these best practices will help you maximize operational performance.
Standardize your contracts with pre-approved templates
Streamline your process from the start by using pre-approved templates for common agreements. This helps you draw up new contracts as quickly as possible and creates consistency in the terms you agree to. If you issue contracts to your customers, having a template ready to go can shorten the sales cycle. Just bear in mind that not all clients will agree to use your template; they may require you to use theirs.
Structure and automate approval workflows
Establish a structured contract workflow from request through execution to renewal or termination, and train your team on that workflow so that everyone in your organization knows how to request a contract. From there, you can further improve your operational efficiency by setting up automated approval workflows. You can set up your contract workflow so that each relevant person or department approves contracts within their purview. This means that procurement teams approve supplier contracts, finance teams approve investor contracts, and HR approves employee contracts.
A smart approval workflow also enables legal teams to oversee all contracts within a business, since any legally binding agreement inherently falls within their purview.
Leverage contract lifecycle management (CLM) software
Take advantage of a contract management tool or full CLM (contract lifecycle management) software suite to automate your process. Contract software can automate the vast majority of the contract life cycle, especially when companies create pre-approved templates for the software to work from.
There are many CLM software options on the market, including DocuSign CLM, ContractWorks, Ironclad, and Juro, all of which offer full-featured tiers for business users. If you’re a Shopify merchant, check out options in the Shopify App Store, such as BelgePro, which lets you quickly create contracts and send them to your customers as PDFs.
Centralize your contract storage
Keep your entire contract portfolio in a secure, searchable online database. This makes contract retrieval simple and fast. For instance, if your customer service team needs to reference a contract drawn up by your sales team, they can easily retrieve it from a central database. By centralizing your contract data, you’ll facilitate compliance, simplify requests related to audits, and reduce the risk of losing critical documents.
Contract management FAQ
What is meant by contract management?
Contract management is the comprehensive process of overseeing agreements from their initial request and negotiation through execution, compliance, and renewal or termination. Contract managers can also evaluate contract performance, assessing whether a contract is serving the best interests of the organization and whether it should be renewed.
Why is contract management important?
Efficient contract management can mitigate business risk and speed up your sales cycle. You can swiftly turn prospective customers into paying clients if you’re ready to present them with a pre-approved contract, negotiate, and gain approval from relevant stakeholders.
What is an example of contract management?
An example of contract management is a small business tracking its vendor agreements, client service contracts, and employment agreements in a centralized database powered by contract life cycle management (CLM) software. The CLM software can send the team automatic alerts for upcoming renewal dates and monitor compliance with the contract’s payment terms.
