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Contracts are essential in the sales process for a variety of companies. Companies of all sizes, from small businesses to large multinational corporations, use contracts to establish agreements between vendors, business partners, or customers. But to create a valid contract, both parties must go through a series of steps called the contracting process.
What is the Contracting Process?
A business contract is a legally binding agreement between two or more parties (i.e., business entities). A contract typically includes the names of the contracting parties, a description of services to be provided, payment terms, and other relevant information. It is important that all parties involved understand the scope of the agreement to properly protect their rights and interests.
The contracting process is a series of steps that organizations follow to develop, negotiate, and execute a contract. It begins with both parties identifying key stakeholders and their roles throughout.
Next, both parties negotiate the terms and conditions of the agreement, including payment terms, the timeline for completion, service/product specifications, standard agreements, and any other relevant information. Once both parties have agreed on the terms, they must prepare and sign a binding contract document that contains all of the agreed-upon details.
- Contract Generation Process – The total process of creating a contract from beginning to end.
- Contract Management Process – The processes involved in managing contracts once they have been created, including tracking obligations and performance, monitoring compliance, and enforcing the terms of the contract.
- Contract Preparation Process – Preparing the contract documents before they are signed. This includes gathering information, creating a draft agreement, and reviewing it with the other parties involved to make sure that all details are accurate.
Functions of the Contracting Processes
From award of contract to termination, the contract process is designed to ensure that the rights and interests of all parties are protected. This process helps both parties better understand their roles, obligations, and liabilities.
It also allows for efficient resolution of any disputes that may arise during the duration of the agreement.
After a business receives a request for proposal (RFP) or request for quote (RFQ), they—along with other potential contractors—will generate a proposal. If they are awarded the contract, they must then go through the contracting process.
Contract procurement is the process of winning a contract and requires several steps. First, potential contractors must review the RFP or RFQ and determine if they have the necessary resources to fulfill the request. If so, they must create a proposal that outlines their proposed services/products, cost, and the completion timeline and submit it to the requesting party.
Once proposals are received and reviewed, the requesting party will select a contractor (or multiple contractors) for an award. The awardees must then complete the contracting process in order to finalize the agreement.
Once a contract is awarded, the business can begin preparing the contract. This involves gathering information from both parties, creating a draft agreement, and discussing it with the other party to ensure all details are accurate.
The contract authoring process consists of several steps:
- Researching applicable laws and regulations: Depending on the industry a company operates in, there may be applicable laws that must be taken into consideration.
- Talking with key stakeholders: It is important to make sure that all team members and stakeholders are aware of the contract terms.
- Drafting the document: Businesses can write a contract from scratch, use a template, or utilize a contract management platform to get the job done efficiently.
- Risk assessment: The contract should also include risk management strategies and potential areas of dispute.
- Finalizing the document: Before sending the contract to the other party, the creators and internal business stakeholders should review the document to ensure all details are accurate.
When preparing the contract, it is best to have a template or framework in place that can be customized depending on the situation. Especially in complex sales processes, this speeds up the deal cycle and reduces the risk of errors and omissions in the contract creation process.
Сontract Risk Management
Risk management is the process of identifying, assessing, and controlling potential risks that may arise from any kind of business activity. It helps organizations anticipate and mitigate any risks that could negatively impact their operations and performance. The goal of risk management is to minimize or eliminate any potential losses due to these risks.
Risk management involves numerous steps, including assessing the potential risks and determining appropriate controls for mitigating them.
In the contract process, this includes reviewing the agreement for any potential ambiguities or loopholes that either party could exploit. It also requires creating mechanisms that allow for parties to resolve disputes efficiently.
Once the contract is drafted, the contracting parties undergo a negotiation process. This allows them to clarify any misunderstandings and come to an agreement on terms, conditions, and responsibilities.
After sending the contract for review, negotiations can involve numerous conversations that focus on several aspects of the agreement:
- Refining the scope of services and/or products
- Establishing deadlines and delivery dates
- Determining pricing
- Agreeing on any specific clauses that must be included in the agreement
- Addressing any potential risks or liabilities
In many cases, the terms are agreed upon in the RFQ stage, and the company that wins the contract did so by offering most of this information up front. The negotiation process serves the purpose of ironing out any discrepancies between the two parties and making sure everyone is on the same page.
Negotiating can also involve both parties making concessions. This includes giving up certain aspects of the agreement or modifying language to better suit both parties’ needs.
Contract redlining is the process by which changes are made to an existing contract. This is used when either party has new requirements or if the original agreement needs to be updated due to new laws, regulations, or policies.
The contract change process involves both parties reviewing the changes and negotiating until a satisfactory agreement is reached.
After the negotiation process is complete, the contract must receive final approval from both parties.
The amount of time required for approval can vary significantly depending on how many stakeholders are involved. It is important to have a streamlined process in place for getting the necessary sign-offs and avoiding any delays.
Contract Finalization and Signature
Once everyone involved passes the contract, it is ready for finalization and signature.
At this point, the official document can be shared with both parties. This is usually done through an e-signing platform allowing quick and secure signature exchange.
Once all signatures are obtained, the contract is considered legally binding and contract signing is complete.
At the end of the contract term, the process can be repeated to renew the agreement.
This involves reviewing the original contract and assessing its performance over the course of its life cycle. It is also the time for the contractor and sales team to evaluate any changes in business needs or goals that may require modifying existing terms.
If there need to be revisions to the contract requirements, a new negotiation process between the contracting parties will begin.
Sometimes, either party may choose to cancel the contract altogether.
There are a few reasons contract termination may happen:
- The contract no longer meets the business needs of either or both parties.
- The financial terms have become too expensive for one party.
- The company has decided to pursue another option.
In any case, an agreement should be reached on how to handle the cancellation process and what it means for any existing obligations. This should be clearly spelled out in the cancellation clause of the contract so both parties understand their rights and responsibilities.
How to Optimize the Contracting Process
The contracting process can be complex and time-consuming, particularly when companies have complex pricing models. The good news is that there are several ways to streamline it.
1. Use a Contract Management System
Contract management software accelerates negotiations and allows teams to collaborate more efficiently. This ensures that all parties have access to the most up-to-date information, reducing the chance of miscommunication or errors.
2. Leverage Automation
Automating certain parts of the contracting process can help simplify and expedite negotiations. From automating document generation and signature processes to automatically routing contracts for approval, sales automation can save time and resources.
3. Ensure Compliance
Compliance is essential in any contract process. Companies should make sure that their contracts adhere to all relevant laws and regulations. This means having a robust compliance review process in place so that all contracts are reviewed for accuracy before they’re signed.
4. Set Up Defined Processes
Defining processes and procedures helps ensure that the contracting process runs smoothly. A contract management strategy includes:
- Creating templates
- Assigning roles and responsibilities within the organization
- Setting up rules for notifications
- Building timelines for review and sign-off
These steps will help streamline the process, reduce mistakes, and create a more efficient contract management system.
5. Train Employees on Contract Management Processes
Train employees on the contracting process and provide them with resources to help ensure that they have a thorough understanding of how the process works.
Salespeople should also be familiar with the legal nuances of contracts, so they can ask informed questions and negotiate the best deals for their organizations.
Benefits of Automating the Contracting Process
Automating the contracting process at different stages gives businesses and sales teams many advantages.
1. Increased Efficiency
The main advantage of contract management software is that it can increase efficiency throughout the whole contracting process.
- Procurement: When salespeople are empowered to quickly draft, review and approve contracts, they can close deals faster.
- Preparation: Automated document generation, routing for approvals and signature processes reduce the time it takes to get a contract ready.
- Validation: Automation can also help ensure accuracy by flagging potential compliance issues before contracts are executed.
According to PwC, automating contract management results in:
- A 50% faster negotiation cycle
- 75-90% fewer inaccurate payments
- 10-30% lower operating and processing costs of contract management
This makes it easier for companies to focus on high-value activities such as customer relationship management and sales strategy.
2. Improved Visibility
Automation improves visibility into contracts in progress, allowing managers to track progress and take action as necessary.
For instance, when a contract is taking longer than expected to be approved, managers can intervene and resolve any issues that may be holding up the process.
3. Reduced Risk
Compliance is a key component of any successful contract process. Remaining compliant requires constant up-to-date knowledge of regulations and policies.
Automating the contract process can help reduce compliance risk by flagging potential violations before they occur, allowing teams to quickly resolve issues before signing contracts. This eliminates the chance of legal disputes arising later due to non-compliance.
4. Improved Decision-Making
Contract automation improves the quality of data used to make decisions, which reduces risk helps sales teams negotiate better deals improving the overall selling experience .
Sales teams can leverage analytics and insights from contract data to inform decisions, allowing them to make more informed negotiations and close more profitable deals.
5. Better Buying Experience
To maximize sales output, it’s important to ensure that the buying experience is as seamless and efficient as possible. Sales cycle time is a key metric to measure the buying experience, and 18% of the selling cycle is taken up by contract processes.
Automating contract administration makes it easy to generate, review and sign contracts quickly. This significantly reduces the sales cycle time and creates a better buying experience for customers.
Technology to Streamline the Contracting Process
Numerous tools can be used to streamline the contracting process.
Manage Customer Relationships with CRM
CRM software provides sales teams with a central hub to store, track and manage all customer data and documents. This helps them stay organized and keep the contracting process running smoothly.
Practically every company uses a CRM tool of some sort, and CRM integration with contract management software offers a seamless contracting experience.
Manage the Contract Lifecycle with CLM
Contract lifecycle management (CLM) software is designed to automate the entire contract process. It can be used to draft, negotiate, track and approve contracts quickly and accurately while keeping contract files in the same place.
Manage Contracted Pricing with CPQ
Managing contracted pricing is one of the essential functions of a Configure, Price, Quote (CPQ) solution. CPQ software enables sales teams to quickly and accurately configure, price, and quote products and services. This capability can save time, increase accuracy, and provide customers with accurate pricing for their orders.
The CPQ system integrates with ERP, CRM, and CLM so that it can access all pertinent information regarding each customer’s contract. This includes product and service categories, item descriptions, unit cost, quantity discounts, special discount structures, delivery costs, taxes, shipping information, payment methods accepted, warranty periods, return policies, discounts for ordering large quantities, expiration dates on contracts or quotes, promotional codes that offer additional discounts or special offers.
By configuring this information into the CPQ system, sales teams can quickly generate accurate quotes for customers. Once the price has been approved in the contract, it becomes the customer’s contracted pricing. The system also allows sales reps to adjust prices for new orders based on existing contracts or past orders from the same customer.
With a properly configured CPQ system, it’s easier than ever to manage contracted pricing accurately and efficiently. This provides customers with clear visibility into their contract terms and assurance that they are receiving the most competitive pricing available for their purchases. In addition, it helps organizations maximize their profits by ensuring they receive the contracted price for their goods and services as specified under their contractual agreements.
People Also Ask
What are the 5 stages of a contract?
The five stages of contract management are as follows:
1. Contract Creation
2. Contract Preparation
3. Contract Validation
4. Contract Execution
5. Contract Monitoring and Renewal
What is the contract procurement process?
Contract procurement is the process that a business follows when purchasing goods or services from an external supplier. It involves researching vendors, evaluating bids, negotiating terms and conditions and awarding the contract to the preferred vendor.
What is a contracting process flowchart?
A contracting process flowchart is a visual representation of a company’s contract management process. It shows the steps involved in creating, negotiating and executing contracts, as well as any other related activities.