Contract management is a term that is commonly used in procurement and purchasing departments. The manager negotiates, accepts, and signs contracts with suppliers of goods and services to the organization as part of the procurement department’s responsibilities. Contract management is the process of ensuring that the supplier adheres to the terms of the contract that have been agreed upon. Although procurement’s role in the negotiation process is critical to cost management, contract management is where actual savings are made or lost.
Lower operating costs, more efficient services, and a stronger bargaining position in the next round of negotiations are all benefits of good contract management practices. Contract management entails ensuring contract compliance, serving as the point of contact for service and dispute resolution issues, and overseeing any payments or clauses negotiated into the contract. Thresholds, rebates, and performance clauses are the three main areas of contract management in general.
Threshold is a term that refers to specific dollar spending, transaction, or unit purchase goals. These thresholds are usually based on the number of orders received within a certain time period and are usually tied to dollar discounts on the purchase price. Thresholds are frequently used in the negotiation process to demand even deeper discounts than the supplier would normally provide. As the supplier’s costs decrease, he or she has the motivation and capacity to lower the price as the volume grows.
Rebates are given to suppliers as a reward or incentive for meeting certain goals. A bakery, for example, might agree to buy a certain amount of flour over a certain period of time. A rebate to the supplier is available for any additional, non-scheduled requests that are completed within a certain time frame. The invoice is for the standard amount, but the rebate is calculated and returned to the supplier as a thank you for meeting a pressing need. This flexibility is frequently found in time-sensitive environments, where the contract stipulates a standard delivery schedule but additional flexibility is required to meet business needs.
Performance clauses are based on measurable items that are essential to the business’s operation. Delivery within a certain time frame, invoicing within a certain date range, meeting benchmark delivery dates, and percentage of completion for construction projects are all common clauses. A performance clause is used to establish an agreed-upon measurement method between the supplier and the customer. Depending on the industry, these clauses are frequently linked to penalties or rewards.
Daily activity tracking, performance management, and follow-up with the supplier are all part of effective contract management. The company can only claim the contract’s benefits if it has an active contract management process in place. Early release clauses, additional payment reductions, and other penalties are examples of these benefits.