Procurement teams negotiate hard to secure benefits and favourable terms put into written contracts. However, all that hard work is for naught if those benefits are not realized. The real work begins once all the concerned parties have signed the negotiated agreements. Of the many daily contract management challenges legal teams face, one that often keeps them awake at night is managing contract performance. During this stage, even the most skilled stakeholders can overlook unintended noncompliance.
To ensure that the agreed-upon terms of a contract are being performed in line, it is crucial to conduct periodic audits. This audit can be performed at a micro-level (i.e., single contract review) or a macro level (i.e., entire portfolio review). Regular contract compliance audits to ensure that your company receives the benefits you bargained for, measure contract effectiveness, identify and improve profitability and verify data reported by vendors you are working with. So, let’s look at a few considerations while performing a contract compliance audit.
6 Key Steps in Contract Compliance Audit:
Set the Right Onset
Conducting a periodic audit of long-term contracts can be downright daunting, however, it is a necessary part of the contracting process to ensure proper and timely performance. A contract compliance audit is highly recommended when a business undergoes merger/acquisition or personnel changes; when a third-party relationship comes into picture or an existing vendor contract is terminated. By determining the scope and parameters for the audit process, you can avoid wasted time and frustration, anticipate the length of the review process, guide and manage the entire exercise and dictate the right timing. Avoid scheduling the audit of your contracts at the same time as any other complex process, such as during tax or budgeting season.
Define Clear Audit Goals
The entire contract review process is pointless if there are no clear compliance audit goals or objectives guiding it. A clear understanding of which contracts will be under audit and what you are hoping to assess with the review is key to an effective contract audit. A company may examine its contracts to evaluate potential redundancies and efficiency or may want to examine whether its contracting partners are holding up their end of the bargain by keeping a track of deadlines or obligations supposed to be met. A formal contract compliance audit program strengthens your organization’s definitive plan to optimize ROI by demonstrating to stakeholders of the enterprise risk management function as well as financial and supply chain performance.
Manage Cost and Risk
Contract compliance audits can help executives in achieving cost-cutting objectives by uncovering unrecorded liabilities, missed savings, overpayments or under-reported revenue thereby, resulting in increased cash flow.
A contract compliance audit can help reduce key risk factors related to transparency between companies and their third parties by promoting communication and yielding trust needed to reduce friction & poor-quality assessment.
Ensure Compliance with New Market Penetration
Companies are increasingly exploring new technology, market growth opportunities, and supply chain partners in emerging markets. But the distance and complexity involved can hinder communication and transparency leading to the risk of contract noncompliance. Organizations can benefit from contract compliance audits when entering new international markets and making new technology investments by monitoring & reducing the risks and costs associated throughout the third-party lifecycle.
Prioritize Contracting Party Collaboration
It is important to have strong working relationships with contracting partners under review to achieve a truly successful contract audit. Stress that the process is done cordially and not meant to be accusatory for the other side. The goal of the audit is to use the information gathered to find areas that could be improved going forward to improve the relationship and outcomes for all parties. An audit can help identify the root causes of the missed KPIs and SLAs by the third party and contribute to resolving such operational challenges. Similarly, noncompliance risk can be identified while engaging in contracts with small, private companies.
Report Insights and Remedies
One of the primary purposes of conducting a contract audit is to understand if each party is meeting its contractual obligation, identify potential issues and opportunities to mitigate them before they become major. In the end, those involved in the process should summarize the findings in a report and use those to discuss the future contract risk management plan and strengthen the recommended controls going forward. Contract compliance audits are a necessary aspect of ensuring your compliance with governmental & industry regulations and serve as a key process for ensuring maximum ROI.
Many organizations do not have the personnel, training, or technology resources to successfully conduct such reviews in-house. Keeping an internal contract compliance team composed of professional auditors would typically not be financially viable. With the right approach, the contract compliance auditing process can be made more insightful, accurate and relatively painless. The most financially responsible approach is to hire a competent contract compliance firm on a contingency fee basis or automate consistent contract compliance audits successfully with a powerful Contract Lifecycle Management tool.
Ultria CLM offers unparalleled insights into your contracts’ content, quickly providing you with relevant information about contract performance and regulatory compliance via a single view customizable dashboard. To learn more about how Ultria can ensure compliance across all your agreements and help you follow the best practices for contract management contact us now.