Are you ready to take your company’s contract administration to the next level? Contract management will either make or break the company. Here are five pro-level tips on how to tackle high-level contract issues and avoid costly mistakes.
1. Recognize The Gaps Between Main Contracts And Sub-Contracts
Have you ensured that related contracts that are not back-to-back have sufficient risk budgets, insurances or other means of covering the gaps between clauses with the main contract? If not, this can cause unpleasant surprises when contractual issues pop up.
Imagine the following situation. You as a main contractor are responsible for liabilities up to 5 million euros but your subcontractor, who is responsible for the actual performance, has an equal clause with maximum liability (and insurance value) being only 3 million euros.
Also if the plan is that your subcontractor shall solely insure the project, this situation basically results in your company having 2 million additional risk not covered by that insurance. Thus, you should either reserve sufficient risk budget to cover for the gap or to have additional insurance in place. Alternatively, you can try changing the required insurance sum with your subcontractor, which they might not be willing to do without additional payment.
2. Identify The Critical Risks Of Back-To-Back Contracts
Flowing down main contract clauses to your subcontracts certainly makes your job easier as a contract manager, if your suppliers are willing to accept this. However, if your suppliers have more bargaining power than you, this is not a very successful strategy. You end up having to take the terms you are given.
Moreover, if the clauses in your main contract are tough (expensive) you end up paying the risk budget that your suppliers price in due to those clauses.
Prefer rolling down only the riskiest clauses and use judgement with the other ones. Don’t pay for the risk budget to your suppliers just because it’s a part of the main contract, unless that risk is really valid for the project.
3. Make Sure Your Contracts Are Assignable To A 3rd Party In An M&A Deal
Do your contracts require consent from your client if they are assigned to a third party? If your company is sold and you have +100 contracts that all require pre-approval, this might be a rather daunting task to pull off. The unnecessary delays might banish your potential buyer candidates.
Also, if the due diligence process reveals that some of your most appealing contracts might not be transferred with the M&A (Merger & Acquisition) deal due to reluctance of the customer’s side to accept the acquisition, that can remove the basis for the whole deal in the first place. If possible, make sure to use assignment clauses in your customer/supplier contracts that exclude consent requirements in case your company is sold (or merged).
Tip: Choose a contract management software that allows you to tag contracts so you can easily keep track on which ones require pre-approval, for example. The tagging system can be used in other ways, as well.
4. Always be consistent with your Intellectual Property Rights (IPR)
It is not uncommon for companies to have different Intellectual Property Rights clauses in their contracts with different customers. Furthermore, the situation with IPRs might have changed substantially from the original state. When a start-up company is negotiating with potential customers the bargaining power is probably quite different compared to when the same company has become a well-established player in the software field.
IPR clauses concerning user rights that contain terms like unrestricted and irrevocable can be harmful in the future if your customer ends up competing with you, using your own software.
Thus, always make sure to include an IPR strategy to your business strategy before it’s too late.
5. Pay Attention To The Annexes
Underestimating the importance of annexes can be one of the costliest mistakes out there. Usually most of the contractual disputes are related to annexes, e.g. technical descriptions, statement of work or compliance matrices and not to “standard” contract clauses. This is quite self-explanatory since the devil is always in the details, the annexes.
Thus, involve your project team in the preparation and ensure that all the parties, including the customer, understand their responsibilities. Favor jointly drafted notes section in the annex documents to clarify what is actually meant by a certain requirement.
Be careful though: Too detailed description can also exclude items, so remember to be imprecise enough when needed!
First Things First
Before giving a single thought to these tips make sure to have all the basics together. Govern crucial materials under the same roof and give access to the right personnel.
Often biggest mistakes are made when information is not passed on, it is outdated or simply lost. By using a proper contract management software one can ensure that the contract manager has a real- time view on all contracts and can proactively start implementing the right measures to reduce perceived risks.
Technology won’t solve all the legal problems within your company but it can definitely make things easier – even for a seasoned professional.