Step 1 in managing contracts efficiently dealt with automating contract creation which helps standardize the contracting process and in step 2 we discussed the significance of collaboration while authoring and negotiating contracts.
Moving onto step 3 – CREATE CONTRACT REPOSITORIES
Consider this instance; Company ABC with a transport contract of $100,000 dependent upon the fuel prices. ABC links transport contract with provision of escalator/de-escalator clauses. This clause becomes effective for the $15 fluctuation. The clause states that the change in contract price is equal to 30% of original contract rate * (change in oil price / reference price). The price of oil on the index falls from a reference price of $135 in July 2008 to $56 in May 2009. The change in the contract rate for the given change in oil prices would be equal to 0.30* 100,000* ((135-56)/135) = $17,555
Contracts like this would be existing in different currency formats and with different terms & conditions. These need to be monitored and especially for the ones which are volatile.
Thus measures should be taken to avoid risks arising due to forgotten or misplaced contracts, missing contract expiration or unintended renewals that can cost the business a hefty amount.
Some measures that can be adapted for better contract management are;
- Create dynamic contract repositories that reflect operational requirements
- Include escalation and de-escalation clauses during contract negotiation and link these to market parameters like foreign exchange & commodity indices
- Set a system of alerts and reminders for the specific escalator/de-escalator clauses linked to commodity or forex indices
- Track and measure the compliance and if possible quantify the savings accrued from these contracts
Next we will discuss step 4 to manage contracts efficiently.
