Before fully executing a contract, time should always be dedicated to a comprehensive contract review. This allows your business to fully assess every element of the contract, double check the terminology being used and raise any red flags that may cause issues once the agreement is in place.
Contracts being signed will naturally have an expected upside but a clear understanding of any associated risks needs to be achieved as well.
In this article we explore the importance of completing contract reviews, what to prioritise and how contract management software can help enhance your overall review process.
The Importance of a Contract Review
A contract review, whether it happens before you sign for a brand new agreement or renew an existing one, is a fundamental act of due diligence.
Making contract reviews a core part of your processes will allow you to proactively mitigate a number of contract risks, including committing to obligations that can’t be fulfilled or signing agreements that are no longer required.
A review is a success if the contract:
- Doesn’t contain any errors
- Accurately reflects what has been agreed between both parties during verbal conversations and formal negotiations
- Isn’t missing any key legalese or terminology and doesn’t leave any room for ambiguity
- Has terms that are mutually beneficial and adequate to produce the expected outcomes
If you don’t carry out a contract review of the new agreement and it contains errors, discrepancies or terms that are unsatisfactory, you could be exposing your business to reputational, regulatory or financial damage.
Prioritising contract reviews is simply best practice, good governance and your last chance to iron out any unsatisfactory aspects."
Who should complete the contract review?
Contract management is a naturally collaborative process and so multiple people should be involved in the review process. Each relevant party can bring a different perspective and set of expertise to the review, highlighting different elements that may not have been noticed by someone else.
In-house lawyers should naturally focus on the legal aspects of the contract, however, businesses should not rely solely on this team. Input should be organisation-wide to ensure a contract can hit financial, compliance and performance expectations.”
Some businesses will have dedicated Contract Managers who own the review process. Once they have consulted with other internal teams, these individuals should take ownership for communicating with other signing parties if any aspect of the contract needs changing based on the review.
How to review a contract
There are a number of elements that you should prioritise during the contract review to ensure that the agreement reflects your expectations.
You need to take a granular approach to ensure accuracy, but you also need to effectively communicate the key takeaways to other stakeholders that will matter most to the business and its day-to-day operations.
Allow enough time for a thorough and accurate review. Rushing through complex or lengthy agreements can lead to things being missed - putting your high-value contracts at risk.
Regular reviews once the contract has been executed will also help you to monitor and drive performance. Let’s look at where you should dedicate your time during the review process.
1. Assess the accuracy of the contract
A contract is likely to have gone through multiple touch-points before it is ready for sign-off. Changes can be made as a result of negotiations, different people working on the contract from different devices, clauses being copied and pasted from boilerplates - the list goes on.
“A small error may seem negligible especially if you’re in a rush to get started. However, inaccuracies have the potential to cause ambiguity and result in costly disputes. Arm yourself with accuracy and you won’t have to battle for better outcomes later down the line.”
Mistakes from small typos to duplicated clauses can be easy to miss - especially if you have revisited the contract multiple times. Cross-team collaboration means that someone can always review the contract with fresh eyes, identify issues and raise questions.
Inaccuracies can include ambiguous phrases, contradicting statements, grammatical errors, incomplete statements and statements that have poor readability.
If there is any opportunity for language, a clause or a sentence to be misconstrued by your business, it could cause disruption to the fulfillment of obligations - and it could also mean the performance you receive from a third party is less than desirable.
2. Ensure the terms are reasonable
The terms of a contract should work for both parties so that the contract outcomes are mutually beneficial. An in-depth contract review can stop you from rushing ahead to execute a contract and committing to obligations that you simply can’t fulfill.
Without a review, you could find yourself in a position where you are failing to keep up your half of the agreement resulting in legal action, damaged relationships and a compromised reputation.
Businesses need to enter an agreement with full awareness of what they are committing to. All parties should be aware of what is expected once the contract has been fully executed.”
When examining a contract for reasonableness, you should watch out for any circumstances and requests that could be burdensome, impractical or unachievable. It’s also just as important to identify any terms and clauses that are missing, too narrow and those that cause any type of ambiguity as these may cause misunderstandings in expectations.
3. Consider if the contract will deliver expected outcomes
All contracts should deliver benefits to your organisation, so it’s crucial that you only sign agreements that are fit for purpose. At this point of the contract review process, you should step away from the granular assessment of clauses to apply some scenario-based thinking.
Review your contract in the context of potential problems and different what-if scenarios to see if it can still deliver the outcomes you want - if it doesn’t, you will need to raise questions with your third-party and work together to resolve any shortcomings."
The nature of the agreement can lead to multiple possibilities when you apply ‘what-if’ thinking and some scenarios will still take you by surprise - the COVID-19 pandemic being a key example. Rather than losing time to scenario planning, there are a few questions that can guide your assessments such as:
- Does the contract reflect all verbal and written agreements that have been made to date?
- Have all roles and responsibilities been agreed so the contract can be executed successfully?
- Are any potential risks easily identifiable and how will they be resolved before they escalate?
4. Create a top-level summary of the contract’s contents
Contract reviews are time-consuming because entire contracts need to be read line-by-line. Any associated documents must also be reviewed during the process - and the more complex a contract, the more information there is to analyse. Expecting everyone in the business to go through this process is unrealistic and will cause bottlenecks.
It’s best to summarise the most important information - from key clauses to key dates - so all relevant stakeholders can easily access and understand the contents of a contract."
By summarising information such as key dates, termination clauses, confidentiality agreements and auto-renewal language, your business can take the results of a contract review to create a proactive contract management plan, register potential risks and build internal processes around crucial deadlines.
This top-level summary should be created before the contract is signed and it can also prove useful when deciding whether you want to renew it further down the line. Your business can assess performance against the summary, identify if all deadlines were met and if any key terminology needs to change to benefit an ongoing relationship with the third party.
5. Use contract management software to stay ahead of your reviews
Time is a commodity within any business and so the time required to complete a thorough review can often mean the contract review process is skipped over or deprioritised until it doesn’t happen.
This is especially true if your business is managing its contracts manually. Juggling multiple contracts and administrative work will leave your stakeholders asking ‘when will I have time to review these contracts?’.
Building in mandatory time for a contract review will create efficiencies later down the line - your business won’t have to spend time firefighting contract risks it didn’t see coming."
Contract management software can automate your review process for legacy contracts and new agreements by allowing you to:
- Upload PDF and scanned contracts and automatically extract key information, streamlining the work required to review contracts line-by-line
- Search contracts for key clauses and terminology so you can assess overall accuracy and quickly identify if the contract is designed to deliver expected outcomes
- Send automated reminders to contract owners of upcoming reviews - helping your teams to build in time for this process and holding them accountable for completion
To find out how ContractNow can support your contract review process, book your demo today.