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The role of a contract is to set out the roles, rights and obligations of both parties
in a transaction or relationship. A contract implies an intention to “enter into legal
relations”: that is, both parties agree to be legally bound by the specified roles and
responsibilities.
It may take the form of a spoken agreement or understanding (e.g. based on a
regular trading relationship that has developed over time), but more complex contracts
are usually formalized in writing.
Once contracts are signed it is not as simple as saying: “the supplier will now do
that”, as there will be obligations to be followed up on either side. If contingencies arise,
the contract may or may not lay down what happens next.
If the supplier’s performance falls short in any way, there will be a variety of
options for pursuing the dispute, enforcing the terms of the contract or gaining the
remedies (such as compensation). Circumstances and requirements may change, and
contract terms may have to be adjusted accordingly. This is an ongoing process through
the life of the contract – which is where contract management comes in.
In this article, we will briefly survey what is contract management, the key
processes and activities involved in it, and at the end we will explore the benefits of
having effective contract management in your procurement department.
Contract Management Definition:
Many of the cost savings and improvements available from supplier management are
achieved by how buyer and supplier work together after the contract has been awarded.
If contracts are not well managed by the buying organization, the following adverse
outcomes may occur:
The supplier may be obliged to take control of contract performance and
problem-solving, resulting in unbalanced decisions that definitely do not serve
the purchaser’s interests.
Buyers and suppliers may fail to understand – and fulfill – their obligations and
responsibilities.
There may be misunderstandings and disagreements, and too many issues may
be escalated inappropriately, damaging the relationship.
Achieving better value for money, which arising from efficient contract
administration and performance.
In the next article, we will look in more detail at the role of “Contract Manager” on both
buyer’s and suppliers’ side, and will explore the main types of contractual agreements as
typically made between buyers and suppliers.