Managing your business entails numerous moving components, encompassing a multitude of connections with subcontractors, service providers, vendors, and stakeholders. Therefore, staying up to date with contractual responsibilities can be a full-time job in itself. According to a KPMG study, companies may forfeit up to 40% of a contract's worth if they fail to maintain strict oversight over governance and compliance.Without implementing a contract management strategy, organizations may feel like they are drowning in a sea of treacherous legal waters. It will be almost impossible to check whether legal requirements are being met, whether either party is breaching its contractual obligations, and if the contract terms are still compliant over time.
We’re here to tell you that you don’t need to try and stay afloat on a sinking ship. Juggling all of your contracts may turn out to be a logistical nightmare without a standardized contract management process, and luckily for you, we will be going through the best tips to help you manage contract compliance better and avoid the consequences that can come with non-compliance.
What Is Contract Compliance?
Contract compliance is the process of checking and assessing whether business contracts are in line with laws and regulations. You can use contract compliance to evaluate contract performance and ensure that both parties are complying with the terms and conditions set out or whether the contract needs to be altered to meet current or future arrangements.
Contract compliance should be part of your wider risk management process and contract lifecycle strategy because there could be potential risks involved if either side is found to be breaching the contract.
The consequences of non-compliance can vary depending on the situation. Failure to comply with regulations or standards may result in exposure to a range of risks, including financial, operational, strategic, reputational, or legal risks. For instance, you can suffer huge financial losses for not complying with indemnity contracts. In the case of Dodika Ltd & Ors v. United Luck Group Holdings Ltd., the wording of the indemnity clause was too vague to be relied upon, so Dodika missed out on receiving damages for their losses.
4 Tips to Improve Your Contract Compliance Standards
The best way to improve contract compliance is to standardize your contract automation and contract administration systems. This way you can keep track of where all your contracts are and get automatically notified of updates and audit reminders, so you can avoid mistakes and missed tasks. Instead, you can maximize efficiency by cutting down on human resources and time spent on contracts. This can help to reduce costs and increase profitability.
Here are some key tips to help you improve contract compliance standards.
1. Assign Clear Roles and Responsibilities
Usually, your procurement or in-house legal teams will be in charge of your contract compliance systems. You may even have a compliance officer to keep an eye on any compliance issues that may come up.
The reality is that most people are too occupied with their daily responsibilities to monitor and regulate your whole contract lifecycle management process, including ensuring compliance at each step .
The way forward is to allocate certain roles and responsibilities to specific people within your teams. If you deal with many contracts at different stages of the contract lifecycle from contract creation through contract renewals, then it may be time to either set up a contract compliance team or add extra duties to staff members’ job descriptions.
Even with an automated contract compliance process, you will still need a human touch to sign off on particular contract stages like the approval process. So it is worth taking the time to give certain employees particular contract compliance roles so that nothing goes awry.
For instance, your head of legal could be responsible for contract review to ensure all terms are legally compliant before being signed off by your finance director. Your compliance officer can be in charge of auditing contracts to check they are up-to-date with current legislation and policies.
When all your team members are clear about what they need to do and what they are responsible for, it leaves little room for important tasks to be missed.
2. Create a Centralized Policy Document
Having workflows and task management systems in place is one thing, but if there is no standard policy document that outlines exactly how your business manages its contracts and remains compliant, then there is a chance of something going wrong.
You can include details in the policy like what your compliance obligations are as a company. Perhaps if you are operating within the financial sector, you need to conduct Know Your Customer (KYC) or anti-money laundering (AML) checks before creating contracts with certain companies. Or maybe you may need to do continuous monitoring checks on third-party businesses to ensure they don’t pose a risk to you before you renew the contract.
You can ask your teams to frequently familiarize themselves with the policy so that everyone is up to date.
3. Create an Automatic Contract Lifecycle Management Process
Automating your contract lifecycle with contract management software will make your life so much easier. An automated process significantly reduces the likelihood of human error and can boost efficiency tenfold.
EY Law reports that 57% of business development leaders say inefficient contract processes delay revenue recognition. In addition, a study conducted by Paradoxes Inc. on behalf of DocuSign found that almost 68% of legal departments are making digitizing their manual processes a high priority.
Using automated software like Certa’s can help you to easily check compliance with your contracts. For example, functionalities like contract milestone approval will automatically monitor each stage of the contract process and prompt key personnel to approve certain stages.
New contracts carry a higher risk of noncompliance since they have not yet been tested. In such cases, it is natural to exercise extra caution , so you may want to set up extra approval milestones or workflows to cover your back.
Or maybe you have an indemnification clause in place that requires thorough review by your legal team so that you don’t fall victim to huge fines for breaching intricate terms. To help with this, you may also want to set up a contract re-review stage later in the business relationship. Or, you could set up a contract audit to confirm that you and the other side are staying compliant with the indemnification arrangements.
4. Conduct Regular Compliance Audits
Regular compliance and contract audits are super important — we can’t emphasize that enough. Over time, things change, whether it is legal requirements, risk levels, risk tolerances, or company priorities. So third-party contractual relationships need to be continuously monitored and audited so that you don’t risk noncompliance or doing business with companies that no longer align with your strategies.
For instance, the Department of Labor (DOL) has recently published details on the Final Rule on ESG fiduciary duties, which regulates how companies should consider environmental, social, and governance factors. Part of your contract with a third party could include a clause that confirms that the other party will update their ESG policies in line with governmental requirements. In this case, when a law is updated, it could be that in your compliance auditing process, you must check the new legal requirements and review whether the third-party company complies with them.
On another note, the Safeguards Rule is also due to be updated this year, which sets standards for handling customer information. If your contract with a supplier includes a clause about parties updating their standard practices according to legal requirements, you should then monitor compliance through contract audits.