What is Contract Performance?

Contracts are the foundation of business relationships, outlining the terms, responsibilities, and expectations of involved parties. However, a contract is only as valuable as its execution. This is where the concept of "contract performance" comes in. Understanding the importance of contract performance is essential for ensuring that the expected value of a business relationship is fully realized, risk is minimized and compliance is assured.

What is contract performance?

Contract performance is the fulfillment of the obligations specified in a contract by the parties involved. It is the execution of the agreed-upon terms, whether delivering goods, providing services, or making payments. To put it another way, contract performance is the post-signature phase in the contract lifecycle, where the obligation aspects of an agreement are put into practice. For best results, all parties should agree on the quality, timing, and other performance measurements written in the contract.

There are two primary types of contract performance:

1. Complete Performance:

This occurs when all parties involved fulfill their contractual obligations exactly as stipulated in the contract. Once complete performance is achieved, the contract is considered fulfilled, and the obligations of all parties are discharged.

2. Substantial Performance:

Sometimes, a party may only meet some of the terms of the contract to the letter but has performed enough of the contract that the remaining obligations are minor or negligible. This is known as substantial performance. While it may still lead to minor breaches, substantial performance is generally accepted as fulfilling the contract's essential terms. However, it might warrant some compensation to the other party for any deviations.

The Importance of Contract Performance

Contract performance is crucial to the smooth functioning of business operations and legal obligations. Regularly conducting a contract performance audit helps businesses identify risks such as non-compliance with contract terms, inadequate performance, or unexpected results. If risk factors are identified early on, companies can address them before they become major problems, preventing potential financial loss, reputation damage, and legal issues.

Tools such as contract management software can make contract performance audits easier and automate risk discovery. The article will discuss this further shortly.

Risk Management:

Strong contract performance helps to prevent disputes, litigation, and financial losses. By adhering to contract terms, businesses can protect their interests and maintain positive relationships.

Financial Stability:

Contract performance directly impacts revenue generation and cost management. When contracts are fulfilled as agreed, businesses can optimize their financial performance and avoid penalties or damages.

Reputation Management:

Consistent contract performance is essential for building trust and credibility with clients, partners, and stakeholders. Positive performance enhances a company's reputation and attracts new business opportunities.

Operational Efficiency:

Effective contract management and performance contribute to streamlined operations. By tracking and analyzing contract performance, businesses can identify areas for improvement and optimize their processes.

Compliance:

Adhering to contract terms is often a legal requirement. Non-compliance can lead to severe consequences, including financial penalties and reputational damage.

How is Contract Performance Measured?

Contract performance is measured through key performance indicators (KPIs) and qualitative assessments. These metrics provide insights into how well contract obligations are being fulfilled and the overall impact of the contract on the business. As with all business functions, contract managers don't just want to create value for their organizations; they want to be able to measure and demonstrate it.

Key performance indicators (KPIs) that measure contract performance tend to fall into the following categories: financial, time-based, quality, efficiency, or vendor performance. Below are some examples of each.

Financial Metrics:

In a contract management context, a financial metric is a quantitative measurement used to assess a contract's financial performance.

• Contract value realization
• Cost savings
• Return on investment (ROI)
• Spend under management

Time-Based Metrics:

In a contract management context, a time-based metric is a quantitative measurement used to assess the efficiency or speed of a process, task, or project.

• On-time delivery
• Time to contract
• Time to contract closure

Quality Metrics:

Quality metrics are a quantitative measurement used to assess the level of excellence or conformance to standards of a product or service.

• Contract compliance rate
• Defect rate
• Customer satisfaction

Efficiency Metrics:

Efficiency metrics are quantitative measurements used to assess the effectiveness of resource utilization in achieving a desired outcome. In a contract management context, contract cycle time is often used as a KPI to measure efficiency. Contract cycle time is the average time it takes to complete a contract, from start to finish, including revisions, approvals, and signatures.

• Average contract cycle time
• Average contract value
• Contract volume

Vendor Performance Metrics:

A vendor performance metric is a quantitative measurement used to assess the performance of a supplier or vendor in fulfilling their contractual obligations.

• Vendor on-time delivery
• Vendor quality
• Vendor responsiveness

Qualitative assessments of contract performance are often broader than a score. It is a subjective evaluation based on non-numerical data, such as observations, opinions of customers or stakeholders, and professional expertise. Below are some common examples:

Compliance with Contract Terms:

It is a qualitative measure that evaluates the extent to which both parties adhere to the contract's terms and conditions. Contract management software often makes this task easier and more quantifiable, evaluating risks and compliance through machine learning and presenting important metrics and insights on a dashboard.

Performance Against Service Level Agreements (SLAs):

One common place to find performance metrics is in the terms included within Service Level Agreements. It typically measures the supplier's performance against agreed-upon service levels.

Customer Satisfaction:

Customer satisfaction is a qualitative metric that assesses the customer's perception of the contract performance.

Risk Management:

Evaluate the effectiveness of risk mitigation strategies. This qualitative review is often made easier with contract management software. It offers a systematic review of risks present in a contract and its associated contracts. It can pinpoint risky or deviated clauses and take users directly to the affected areas. It presents important metrics and insights on a dashboard that allows users an overall view of a contract portfolio’s risk level.

Dispute Resolution:

Dispute resolution is typically evaluated by tracking the number and resolution of contract disputes. Many contract management software applications are equipped with this tracking feature. Advanced platforms go a step further and use machine learning to understand this data and evaluate contract outcomes. The platform then serves users only the contractual terms that have led to the most optimal business outcomes for future drafting and negotiation.

The specific metrics you choose will depend on your industry, contract types, and organizational goals. Establishing clear definitions and targets for each metric is essential to ensuring accurate measurement and analysis.

What Does It Mean to Have a Non-Performant Contract?

A non-performant contract means that one or both parties involved in the agreement are failing to fulfill their obligations as outlined in the contract. This can occur due to various reasons. Below are a few common examples of non-performance:

Breach of contract:

One party is violating the terms of the agreement.

Non-compliance:

One party is unintentionally failing to meet the contract's requirements.

Missed Deadlines:

Deliverables are not provided within the agreed-upon timeframe, causing delays in project timelines or disrupting business operations.

Substandard Quality:

The goods or services provided do not meet the quality standards specified in the contract, leading to dissatisfaction and potential financial losses.

Incomplete Deliverables:

The obligations outlined in the contract are only partially fulfilled, leaving critical aspects of the agreement unaddressed or improperly executed.

Financial Discrepancies:

Costs exceed the budget outlined in the contract, or payments are not made on time, leading to financial strain on one or both parties.

Lack of Communication:

Poor or insufficient communication between the parties leads to misunderstandings, misaligned expectations, and errors in execution.

Force Majeure:

Force majeure is an unforeseen event (e.g., natural disaster, war) that prevents a party from fulfilling their obligations. However, unlike previous examples of non-performance, this scenario is often covered by a force majeure clause in a company’s standard boilerplate language.

When a contract is non-performant, it can lead to significant consequences, including financial losses, reputational damage, and legal disputes. It's important to address non-performance promptly and effectively to minimize negative outcomes.

Best Practices for Ensuring Contract Performance

Contract performance, in essence, is about ensuring contract execution and compliance with all contract terms. To mitigate contract performance challenges mentioned above and ensure effective contract performance, consider incorporating the following best practices:

1. Clear and Precise Contract Drafting:

Ensure that all contract terms are clear, precise, and unambiguous. This reduces the likelihood of misunderstandings and disputes over what constitutes proper performance.

2. Regular Monitoring and Review:

Continuously monitor the performance of all parties involved in the contract. Regular reviews help identify potential issues early, allowing for corrective action before a breach occurs.

3. Risk Management:

Identify potential risks and develop strategies to mitigate their impact on contract performance.

4. Performance-Based Incentives:

Consider incorporating performance-based incentives or penalties into contracts to motivate parties to meet their obligations.

5. Collaboration with Counterparties:

Maintain open and effective communication with all parties involved in the contract. This encourages collaboration and ensures that any issues affecting performance are promptly addressed.

6. Contingency Planning:

Anticipate potential challenges that could impact contract performance and develop contingency plans. This includes force majeure clauses that address unforeseen events like natural disasters.

7. Dispute Resolution Mechanisms:

The contract should include clear dispute resolution mechanisms, such as arbitration or mediation, to handle any disagreements that may arise during performance.

By following these best practices, you can significantly improve contract performance, reduce risks, and enhance your business's overall success.

Contract performance is the linchpin of successful business and legal transactions. It ensures that the terms of an agreement are fulfilled, legal compliance is maintained, financial interests are protected, and positive business relationships are cultivated. By understanding the importance of contract performance and adopting best practices, businesses can minimize risks, avoid disputes, and ensure that their contractual obligations are met efficiently and effectively.

How contract management software can help

Contract management software can significantly enhance an organization’s contract performance by automating contracting processes, providing data-driven insights, and improving collaboration. It streamlines contract creation, negotiation, execution, and management, reducing errors and ensuring compliance. Additionally, the software can track key performance indicators, identify potential risks, and facilitate effective stakeholder communication, ultimately leading to better contract outcomes.

• Automated workflows: Streamlining processes such as contract creation, review, approval, and execution reduces manual errors and accelerates contract lifecycle.
• Risk management: Identifying potential risks within contracts and providing tools to mitigate them helps prevent disputes and financial losses.
• Compliance tracking: Ensuring adherence to legal and regulatory requirements through automated notifications and reminders.
• Performance analytics: Tracking key performance indicators (KPIs) and generating reports to measure contract performance and identify areas for improvement.
• Centralized repository: Storing all contract-related documents in a single location improves visibility, accessibility, and collaboration.
• Version control: Managing multiple versions of contracts and tracking changes to ensure accuracy and accountability.
• Digital signatures: Streamlining the approval process by allowing electronic signatures, reducing paperwork, and accelerating time-to-contract.
• Integration with other systems: Integrating with enterprise resource planning (ERP) or customer relationship management (CRM) systems to provide a comprehensive view of contract-related data.

By leveraging these capabilities, contract management software can help businesses significantly improve contract performance, reduce costs, and mitigate risks for organizations of all sizes.

Consider Icertis

Looking for a contract management platform that does all the above and more? Today, more than a third of the Fortune 100 trust the Icertis Contract Intelligence platform to transform the contract lifecycle management at their organizations. From automated contract analysis to risk assessment, Icertis uses AI to empower you to extract valuable insights from your contracts, reduce risks, and ensure compliance.

Start your journey to better contract outcomes with Icertis Contract Intelligence. Request a demo to learn more.