What is Contract Compliance?

Who is responsible for contract compliance?

Contract compliance can be important for businesses large and small, as violations can lead to expensive lawsuits or other penalties. Stakeholders across a company, such as compliance officers, are responsible for ensuring that contracts are being followed and often work with legal teams to address any potential issues. By taking steps to ensure compliance, businesses can protect themselves from these risks. Below is a detailed breakdown of the teams and personnel typically responsible within an organization:

1. Contract Owner/Business Unit: 

The department or business unit that initiates the contract is usually responsible for ensuring compliance with the terms and conditions of the contract. This can include departments such as procurement, sales, or legal, depending on the nature of the contract. The contract owner monitors performance, ensures obligations are met, and raises any issues related to non-compliance. 

2. Legal Department: 

The legal team is often responsible for ensuring that contracts comply with laws, regulations, and internal policies. They review contracts during the negotiation phase to identify potential risks and ensure that the terms protect the organization. After execution, legal teams may also assist in managing disputes or handling breaches of contract. 

3. Compliance Department: 

In larger organizations, a dedicated compliance team may oversee contract compliance. This team ensures that contracts adhere to internal policies, industry standards, and regulatory requirements, particularly in heavily regulated sectors like healthcare, finance, and government. They may also perform audits or reviews of contract performance and compliance. 

4. Contract Manager/Administrator: 

Contract managers or administrators are typically responsible for overseeing the lifecycle of the contract, ensuring that all parties adhere to the agreed terms, tracking key milestones, and managing renewals or amendments. They often use Contract Lifecycle Management (CLM) software to track deadlines, deliverables, and compliance metrics. 

5. Finance and Procurement Teams: 

These teams play a role in ensuring financial compliance with contract terms, such as payment schedules, pricing structures, and cost management. Procurement teams also ensure that vendors or suppliers fulfill their obligations and that contract terms align with the organization’s procurement policies. They may track expenses, payments, and financial obligations to ensure they align with the agreed contract terms. 

6. Operations/Project Managers: 

For contracts related to services or projects, the operations or project management teams are responsible for ensuring the work is performed according to contract specifications. This includes tracking performance, quality, timelines, and deliverables. 

7. Internal Audit Team: 

Internal auditors may periodically review contracts to ensure compliance with internal controls and regulations. They can help identify gaps in compliance and recommend improvements. 

8. Executive Leadership: 

Senior executives are ultimately accountable for their organization's overall contract compliance and performance. They may serve as a point of escalation in cases of major compliance concerns.

While each department contributes to contract compliance, effective collaboration between legal, finance, operations, and regulatory teams is crucial for ensuring full and comprehensive compliance across all aspects of a contract. Open communication and the use of contract management tools can help streamline processes, maintain alignment, and guarantee ongoing adherence to legal and regulatory obligations.

Why is contract compliance important for businesses?

1. Multiple departments across an organization work with contracts

As a business owner, you're likely to come across a variety of contracts. Whether you're hiring new employees, partnering with other businesses, or dealing with clients, contracts are an essential part of ensuring that everyone understands the terms of the agreement.

2. Fully understanding your contract terms

While some business owners may be tempted to simply sign whatever contract is put in front of them, it's important to take the time to understand the contract and ensure that it meets your needs. This is where contract compliance comes in.

3. Regular monitoring and reviews

Contract compliance is the process of making sure that all parties involved in a contract adhere to its terms. This includes reviewing the contract before signing it, as well as monitoring compliance throughout the duration of the agreement.

4. Contract compliance is key to managing risks

Having a clear contract in place can give you the peace of mind that your needs are being met, and if something goes awry, you have grounds to initiate legal action against the provider. Having a well-drafted contract gives you the opportunity to manage your risk as a business.

There are many reasons why contract compliance is so important for businesses. Most important of all -- it helps to protect your interests! When you're outsourcing a service or product, it's important to understand how your business will be protected by the contract. 

How compliance is made easier with a contract management system

The goal of contract compliance is to guarantee that your company fulfills its contractual obligations. This means delivering on promises, hitting deadlines, and adhering to all agreement terms. Compliance officers, often working alongside legal teams, are responsible for overseeing adherence to contracts and addressing potential issues. Whether a large corporation or a small startup, ensuring compliance is crucial. Violations can result in costly lawsuits or penalties. By prioritizing compliance measures, businesses effectively shield themselves from such risks.

Companies can realize the maximum value of their contracts with compliance tracking and integration across enterprise systems. Identify and manage risk throughout the lifecycle with proactive insights on risk and compliance.

1. Cross-agreement relationships management

Create rule-based relationships between contracts (e.g., MSA-SOWs) to better enable compliance-related activities, such as the enforcement of terms and roll-ups of SLAs and financials. Companies often make this daunting task easier by using contract management software. For example, smart links may provide contextual access to related documents, helping users quickly understand the context around every project and agreement. This holistic view helps to:

• Reveal complex dependencies between contracts to anticipate and address potential bottlenecks
• Track potential liabilities by showing how the performance of one contract will impact other areas of the value chain
• Link buy and sell contracts to better address back-to-back contracting challenges
• Increase visibility across the value chain and drive alignment of terms

2. Capturing the full value of your contracts

Achieve the full potential of negotiated contracts through better enforcement of commercial terms. The Icertis platform captures the terms of products and services, prices, discounts, rebates, and incentives in a structured form. Integrate that data with enterprise systems and help enforce terms for better contract performance.

For sourcing, automatically check purchase orders against agreed-upon contract language to detect incorrect billing issues. On the sell-side, automatically flow negotiated rebate and incentive information into financial systems for better visibility. Workflows ensure a review process to assess compliance before posting to financial systems for settlement.

3. Obligation and commitment management

Achieve better compliance for contract commitments by identifying, capturing, assigning, and tracking the completion of tasks assigned to business owners—even with commitments involving third-party paper and complex commitments. Contract workflows that require input and/or approval from users across regions or business units can instantaneously be executed.

Using seamless Microsoft integrations, you can create obligations from Word in addition to using the web interface. Leverage ICI’s intelligence to model even the most complex business rules, which automatically assign obligations to owners based on the characteristics of the commitment.

What are the benefits of contract compliance?

When companies engage in business, they do so with the understanding that there are certain risks involved. One way to mitigate these risks is to have a contract in place that outlines the expectations of both parties. A contract compliance review helps to ensure that both parties are adhering to the terms of the agreement.

There are several benefits to conducting a contract compliance review. First, it can help identify areas where the company may be at risk. Second, it can help ensure that both parties follow through on their commitments. Finally, it can help avoid potential disputes down the road.

Overall, a contract compliance review is an important tool for companies to use in order to protect themselves and their interests. By taking the time to review contracts on a regular basis, companies can avoid many potential problems and ensure that they are getting what they bargained for.

How can you ensure contract compliance?

When it comes to ensuring contract compliance, the process starts with understanding the contract lifecycle and knowing what to look for at each stage. By following a few simple steps, you can help ensure that your organization is in compliance with its contracts.

A Clear Understanding of the Contract Lifecycle

The first step is to develop a clear understanding of the contract lifecycle and what happens at each stage. This includes understanding the negotiation process, reviewing the contract terms, and monitoring performance.

Identify Potential Areas of Non-compliance

Once you have a clear understanding of contract lifecycle management, you can start to identify potential risks and areas of non-compliance. By doing this, you can develop processes and procedures for contract risk management.

Monitor Compliance on an Ongoing Basis

Finally, it is important to monitor the contract compliance process on an ongoing basis. This includes conducting audits and reviews, as well as maintaining communication with all parties involved in the contract.

The risks of non-compliance

Contract noncompliance poses significant risks to organizations, ranging from financial penalties to reputational damage. The severity of these risks depends on the nature of the contract, the industry, and the legal environment. 

As a contract manager, it is your job to ensure that your company complies with all contract agreements. However, there are risks associated with non-compliance. If your company does not meet its contractual obligations, you could be liable for damages. In some cases, non-compliance can even lead to the termination of the contract. Below are some common risks associated with contract noncompliance:

1. Financial Penalties and Losses: 

Fines and penalties: Noncompliance with contract terms can result in financial penalties, particularly in contracts involving government entities or highly regulated industries.

Loss of revenue: Failure to meet performance obligations may lead to a loss of revenue, missed opportunities, or forfeiture of payments under the contract.

Legal fees: If a contract dispute escalates into litigation or arbitration, the costs of legal representation can be substantial.

2. Litigation and Legal Action:

Noncompliance may result in breach-of-contract lawsuits, where the noncompliant party could face litigation. This can lead to court rulings that may enforce penalties, order specific performance, or even result in damages awarded to the other party. Disputes over contract noncompliance can be time-consuming and disruptive, drawing resources away from core business operations.

3. Reputational Damage:

Noncompliance can severely harm an organization’s reputation, particularly if the breach becomes public or affects a high-profile client. Damaged relationships with customers, suppliers, or partners can lead to a loss of trust and credibility. Reputational damage can also affect an organization’s ability to secure future contracts or attract new clients.

4. Loss of Business Opportunities:

Noncompliance can result in termination of the contract, leading to lost business opportunities. In competitive industries, this can also hurt an organization's market position. Future opportunities with the same client or vendor may be jeopardized, as a history of noncompliance can deter others from entering into contracts with the organization.

5. Regulatory Penalties: 

In regulated industries such as healthcare, finance, and government, contract noncompliance may lead to regulatory scrutiny, sanctions, or audits. Regulatory bodies may impose fines or restrict the organization’s ability to conduct business. Failure to comply with regulatory requirements within contracts (such as data privacy regulations) can result in significant sanctions.

Safeguard your business with strong contract compliance

Contract noncompliance exposes organizations to a variety of risks, including financial losses, legal disputes, reputational harm, and operational inefficiencies. Managing these risks through effective contract lifecycle management, regular compliance checks, and using tools like automated contract management systems is essential to avoid potential negative outcomes. 

By fully understanding and complying with the contracts terms, and ensuring that your company has the resources to meet its obligations, you can help protect your company from potential damages.

To learn more about how a contract management system can help your organization track compliance and mitigate risks, please contact us to schedule a free demo. 

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