Contract management involves negotiating and ensuring compliance with supplier contracts. Effective practices result in lower costs, efficient services, and a stronger bargaining position. It includes limits, discounts, and performance clauses, and requires daily tracking, performance management, and follow-up with vendors to claim benefits.
The term contract management is typically used in purchasing or purchasing departments. As part of the purchasing department’s responsibilities, the manager negotiates, accepts, and signs contracts with suppliers of goods and services to the organization. Contract management is the process of ensuring that the supplier complies with the terms of the negotiated contract. While procurement’s role in the negotiation process is an essential part of a cost management process, contract management is where the real savings are made or lost.
Effective contract management practices result in lower operating costs, efficient services and a stronger bargaining position during the next round of negotiations. Contract management includes ensuring contract compliance, acting as the primary contact for service-related issues and dispute resolution, and managing any payments or terms negotiated in the contract. In general, contract management can be broken down into three main areas: limits, discounts, and performance clauses.
Threshold is a term used to define specific spending targets in dollars, transactions, or units purchased. These limits are usually tied to dollar discounts on the purchase price and are usually based on the number of orders received within a specific time period. As part of the negotiation process, thresholds are often used to demand even deeper discounts than the vendor would normally provide. As volume increases, the supplier has the motivation and ability to lower the price as their costs decrease.
Discounts are used as a reward or incentive for the supplier to achieve specific targets. For example, a bakery might negotiate the purchase of a specific amount of flour for a specified period. Any additional unscheduled requests completed within a specified time period are eligible for a vendor refund. The invoice is the standard amount, but the refund is calculated and paid back to the vendor as a reward for meeting an immediate need. This flexibility is often found in time-sensitive environments where the contract is for a standard delivery schedule, but additional flexibility is needed to meet business requirements.
Performance clauses are based on measurable items that are critical to the operation of the business. Common clauses are based on delivery within a specific time period, invoicing within a defined period, meeting reference delivery dates, and percentage completion of construction projects. The purpose of a performance clause is to establish a measurement method accepted between the supplier and the customer. These clauses are usually linked to fines or rewards, depending on the industry.
Effective contract management involves daily activity tracking, performance management, and follow-up with the vendor. Only through an active contract management process can the company claim any benefits included in the contract. These benefits may include early release clauses, additional pay reductions and other penalties.
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