What is Contract Compliance and Why is it Important?

Contract compliance is a measure of how well the parties to a contract are currently doing or have done what they agreed to do, as specified in the contract.

That measure is derived from an assessment of compliance performance outcomes related to completeness, correctness, quality and timeliness, and in accordance with any applicable guidelines, policies, regulations, specifications and standards.

It applies at the individual contract level and at an aggregated level across a business’s fleet of contracts that are specifically and actively managed.

While it’s reasonable to expect that each contracted party will honour its total compliance commitment to the best of its ability, there’s no guarantee that it will do so. 

This article discusses:

• What is contract compliance?
• The importance of contract compliance
• Who is responsible for compliance
• How to ensure compliance business-wide
• Contract compliance best practices 
• How Vendor and Contract Lifecycle Management software helps

What is contract compliance?

Contract compliance has a variety of aspects, including:

1. Adherence to Terms and Conditions: Contracts typically contain terms and conditions that govern the relationship between the parties. Compliance involves following those terms, whether they relate to pricing, delivery schedules, quality standards, or other aspects of the agreement.
2. Conformance with Official Standards: Various standards related to finance and accounting, health and safety, and specific industries might need to be complied with when applicable.
3. Contract Operation: Most contracts, or perhaps just a select few as the case may be, should have a relevant contract management plan. It should be updated as required, describing scheduled activities related to ensuring their smooth operation. Close compliance with the plan during a contract’s operational life is expected, as is the need for its occasional updating for ongoing relevance.
4. Dispute Resolution: Contracts commonly include mechanisms for resolving disputes between the parties, such as through negotiation, mediation, or arbitration. Compliance may involve participating in these dispute-resolution processes when necessary.
5. Fulfillment of Obligations: Each party involved in the contract must fulfill their specific duties and responsibilities as specified in the agreement. This may include delivering goods or services, not doing certain things unless allowed, and meeting payment or reporting deadlines.
6. Quality Expectations: Contracts can specify requirements for the quality of goods or services provided. Compliance may involve meeting those requirements.
7. Reporting and Documentation: Some contracts can require the parties to provide regular reports or documentation as evidence of their compliance with the terms and conditions.
8. Risk Management: Contracts might need to have a regularly updated risk register and risk management plan to comply with the business’s internal contract governance policies or any applicable legislated requirements.
9. Risk Tolerance: Contracts should not operate with a level of active risk exceeding the business’s internally published thresholds.
10. Timely Performance: Meeting deadlines and timelines specified in the contract is essential for compliance. Failing to deliver goods or services on time can be a breach of contract.

Why is Contract Compliance Important? 

When it comes to contracts, anything representing a risk with the potential for severe consequences following its occurrence needs some serious focus and attention.

Contract compliance is an essential element of managing risks, maintaining the integrity of contractual relationships, and ensuring that all parties receive the benefits they expect from their agreements. It provides a framework for conducting business responsibly and ethically while upholding all manner of obligations.

Contract compliance is also critical for maintaining trust and ensuring the smooth functioning of business relationships.

When one party fails to comply with the terms of a contract, it can lead to legal action, financial penalties, and damage to the parties' reputations. Careful attention and diligent efforts to meet contract obligations are essential for all parties involved.

Some key reasons why compliance is important include:

• Accountability: Contract compliance requires the assignment of stakeholder accountabilities within and between the parties. This encourages diligence and professionalism and identifies where the buck stops.
• Avoidance of Unforeseen Consequences: Inconsistent or unreliable compliance measures may lead to unexpected consequences, such as inadequate risk management, operational disruptions, or legal issues that could have been avoided with accurate and relevant compliance data.
• Business Relationship Quality: Contract compliance fosters the positive relationships between parties essential for long-term partnerships and collaborations.
• Competitive Advantage: Businesses that have robust and reliable compliance measures may gain a competitive edge in their industry, resulting from a reputation for quality, integrity, and reliability.
• Financial Stability: Contract compliance helps to ensure that the parties receive the benefits they are entitled to and that payments are made as agreed, contributing to financial stability for all parties.
• Legal Obligation: Since contracts are legally binding agreements, failure to comply with a contract can result in legal consequences, including breaches of contract and potential lawsuits, and operational difficulties.
• Operational Efficiency: Effective compliance measures help streamline operational processes and reduce inefficiencies. Reliable measures ensure that operations are conducted in accordance with established standards, promoting efficiency and cost savings.
• Predictability and Planning: Contract compliance allows the parties to plan their operations and allocate resources with confidence, in the expectation that contractual commitments will be met.
• Quality Assurance: In contracts that involve the delivery of goods or services, achieving and maintaining contract compliance ensures that the promised quality standards are met, enhancing customer satisfaction and reinforcing vendor reputation.
• Regulatory Compliance: Adhering to industry-specific regulations and legal requirements is not only important for contractual compliance but also for avoiding legal penalties and reputational damage.
• Reputation Management: Failure to comply with contracts in any sustained or damaging way can harm a business's reputation and credibility as a buyer or seller in the marketplace. Conversely, demonstrating a commitment to contract compliance can enhance its reputation as a reliable and trustworthy partner.
• Risk Mitigation: Ensuring compliance with contract terms minimizes the likelihood of disputes and unexpected liabilities.
• Strategic Decision-Making: Reliable compliance data and measures provide a foundation for informed strategic decision-making. Businesses can use compliance information to identify areas of improvement and align strategies with regulatory requirements.
• Third-Party Trust: Third-parties are increasingly more inclined to deal with businesses that maintain the integrity of their operations via a demonstrable commitment to compliance with legal and ethical standards.

Regular training and education about contract compliance for employees involved in contract management can help mitigate these challenges.

Additionally, legal counsel or contract management professionals may be consulted to navigate complex contractual issues and ensure compliance with legal and regulatory requirements.

Who is Responsible for Contract Compliance?

The extent and nature of involvement may vary based on the size and complexity of the business, the nature and number of the contracts, and specific compliance requirements. In general, the stakeholders who should be involved, how, and to what extent in monitoring contract compliance measures can include:

• Contract Managers: primarily responsible for overseeing and ensuring compliance with the terms and conditions of the contract, they play a central role in establishing monitoring processes, setting compliance expectations, and conducting regular assessments.
• Finance and Accounting teams: responsible for monitoring financial aspects of contracts, including payments, invoicing, and financial reporting, they play a critical role in ensuring financial compliance with the contract terms.
• IT and Data Management teams: may be responsible for collecting, storing, and managing data relevant to contract compliance measures but will ensure the integrity and security of data used for monitoring.
• Legal and Compliance teams: providing guidance on legal and regulatory requirements that contracts must adhere to, they ensure that the monitoring process correctly identifies any non-compliance with applicable laws and regulations.
• Operational teams: involved in contract execution, such as procurement, production, or service delivery, they play a key role in monitoring compliance with operational aspects of the contract, ensuring that products or services are delivered as specified.
• Quality assurance and control team: responsible for monitoring and ensuring compliance with quality standards and specifications outlined in the contract, they assess the quality of deliverables and products.
• Risk Management team: providing help to identify, assess, and mitigate risks associated with non-compliance, they play a role in reducing risk exposure.
• Third-party experts: auditors or consultants may conduct independent assessments of compliance measures.

The extent of stakeholder involvement can vary widely. Contract managers and those directly responsible for contract execution are typically deeply involved in day-to-day monitoring.

Other departments and teams are involved as needed based on the specific compliance requirements of the contract.

Regular communication and collaboration between these stakeholders are crucial to ensure effective monitoring and to address any compliance issues that may arise.

How to Ensure Contract Compliance Business-Wide

Ensuring contract compliance business-wide realistically requires a comprehensive  approach that involves people, processes, and technology. Watch this video below for actionable steps on improving vendor contract compliance.

The areas to be covered to achieve contract compliance can include:

• Communication and Transparency: Foster open communication and transparency within the business regarding contract compliance. Ensure that all relevant stakeholders are aware of their roles and responsibilities.
• Continuous Improvement: Continuously review and improve processes based on feedback and lessons learned from previous contracts.
• Contract Governance: Develop a governance framework that defines roles, responsibilities, and escalation procedures for contract compliance issues.
• Contract Management Team: Designate a team or individual responsible for overseeing compliance. This team should have a clear understanding of contract terms, legal requirements, and industry-specific regulations.
• Contract Repository: Implement a centralised electronic contract document repository. This allows for easy storage, retrieval, and tracking of contract documents, obligations, key dates, and other useful information.
• Contract Review and Approval Process: Establish a formal contract review and approval process. This process should involve all relevant stakeholders to ensure that contracts are reviewed for compliance and aligned with the business’s goals.
• Contract Tracking and Reporting: Implement a system for tracking and reporting on contract compliance. It should allow for real-time visibility into the status of contracts and their level of compliance.
• Dispute Resolution Procedures: Establish clear procedures for resolving disputes related to contract non-compliance or other matters. Ensure that these procedures are communicated to all relevant parties.
• Document Management: Implement document management processes to organise and maintain records related to contract compliance, including amendments, correspondence, and performance reports.
• Executive Support: Secure executive support and buy-in for contract compliance initiatives. Ensure that senior leadership understands the strategic importance of contract compliance.
• Legal and Regulatory Updates: Stay informed about changes in laws and regulations that may impact contracts. Update contracts, clause template libraries, obligation registers, and compliance practices accordingly.
• Performance Metrics: Define key performance indicators (KPIs) related to contract compliance and regularly measure and report on these metrics to identify areas that may require improvement.
• Regular Audits and Monitoring: Conduct regular audits and compliance checks to ensure that contracts are being adhered to. This can include financial audits, quality control assessments, and legal compliance reviews.
• Standardised Contract Templates: Develop standardised contract templates that clearly outline terms, conditions, and obligations. This helps minimise ambiguity and allows a measure of consistency across contracts.
• Training and Education: Provide training and education to employees involved in contract management and execution. Ensure that they understand the importance of compliance and know how to interpret and enforce contract terms.

Implementing these steps within your business can significantly improve its ability to ensure contract compliance business-wide. It's an ongoing process that requires dedication, regular monitoring, and a commitment to best practices.

Contract Compliance Best Practices

Effective contract compliance is essential for ensuring that parties to a contract meet their obligations and that the contract's goals are achieved. Here are some key best practices:

• Identify all sources of obligations: apart from an agreed contract itself, determine what internal policies and practices apply. If not stated anywhere, discover which external regulations, guidelines and standards might be relevant to the operation of a contract, maybe using external advisors or internal legal or governance staff. Maintain a constant watch for emerging regulations that could be relevant, particularly if they have a retrospective element or relate to the business’s use of critical third-parties.
• Set up contract clause templates: create a library of clause types with preferred, alternative and fallback settings. Identify which types contain either mandatory or conditional obligations and which parties they apply to. Outline how compliance can be determined for an obligation clause and potential responses to non-compliance.
• Establish obligations visibility: create a register to document all obligations identified in, or pertinent to, each contract type or individual contract. Assign obligation ownership. Add details to the register initially as part of contract implementation activities and update as obligations change during a contract’s operational life. Provide a mechanism for revealing all contracts having the same obligation(s).
• Provide compliance guidance: develop a guideline for all contract stakeholders, potentially including third-parties, about what compliance is and why it’s important. Outline any role they might have in determining where compliance is needed and why, how to check it, how to deal with any non-compliance, and who to escalate to for action about unresolved non-compliance.
• Establish compliance metrics: design KPIs to be used in assessing how well contract compliance has been achieved, providing guidance for areas that need attention to improve outcomes. Measure what matters most, not what’s easiest to do.
• Conduct regular compliance audits: check contract compliance levels at shorter or longer intervals depending on deemed contract importance or criticality. Record results in the obligations register, noting the nature and causes of any non-compliance sustained and the party(s) responsible. Detail any consequences of the non-compliance and how it was addressed.
• Enable contract compliance visibility: develop and maintain a compliance dashboard that reveals current compliance KPIs and various statistics across a selectable range of dimensions with drill-down capabilities and various reporting options.
• Manage contract obligations change: establish a formal change control process that covers change requests, change development, stakeholder review and approval, implementation and documentation. Update the obligations register and provide notifications to change requesters and other affected stakeholders when applicable changes go into effect.
• Manage regulatory obligations change: monitor updates to applicable regulations, standards and guidelines to identify changes required to relevant obligations or the addition of new obligations and the timing of applicability. Conduct an impact assessment to determine the nature of any changes required to existing clause templates and contracts. Update all affected clause templates. Identify all affected contracts, notify all stakeholders and prepare a contract modification plan and submit it to the formal contract change control process for implementation.

Remember that contract compliance is not a one-time activity but an ongoing process that requires attention and diligence throughout the life of the contract.

Implementing these best practices can help your business to minimise risks, improve operational efficiency and maintain positive business relationships with its contracted third-parties.

How Vendor and Contract Lifecycle Management (VCLM) Software Helps

Vendor and Contract Lifecycle Management involves overseeing the entire journey of contracts and relationships between a business and its vendors of products and services.

It’s a comprehensive set of practices covering everything from identifying the need for a vendor, selecting the right one, negotiating and executing contracts, ensuring compliance with obligations, and managing ongoing relationships.

VCLM is about efficiently handling the entire contract and vendor ecosystem to minimise risks, optimise performance, enhance the value derived from business-vendor partnerships - all whilst maintaining compliance.

VCLM practices can be significantly enhanced and automated through the use of purpose-built software. Gatekeeper's VCLM platform supports contract compliance with:

• Analytics: your business can analyse contract data to identify compliance issues or trends. This data-driven approach helps in proactively addressing potential compliance risks.
• Audit trails: detailed audit trails record all activities related to a contract, providing a clear history of changes, approvals and interactions. This helps in demonstrating compliance efforts and resolving disputes.
• Automated alerts and reminders: many VCLM activities and regulatory obligations are date-driven. Once recorded in the VCLM software, the approach and occurrence of such dates can trigger alerts to the relevant people to remind them about critical contract events, such as renewal dates, performance milestones and payment deadlines. This helps prevent overlooking key dates and the consequences that might follow.
• Electronic signatures: replacing wet signatures with electronic versions makes it easier to obtain signatures and approvals remotely and at any time for the signatory while maintaining a secure and auditable trail.
• Integration with other systems: the ability to integrate with other business systems, such as Netsuite, can help ensure that contract-related data is synchronised and accessible across the business.
• Risk management: using VCLM software to record details about risks associated with contracts allows businesses to make informed decisions and take appropriate actions to mitigate those risks.
• Search and reporting: advanced search and reporting capabilities allow the rapid retrieval of specific contract details if they exist, and generation of compliance reports for internal or external use.
• Security and access controls: user permissions and access controls available in VCLM software can safeguard sensitive contract information by restricting access to only properly authorised personnel.
• Workflow management: your business can create and assign tasks related to contract compliance to specific individuals or teams. This helps ensure that responsibilities are clear, critical compliance steps are not overlooked, deadlines are visible, progress is transparent and task durations are tracked for compliance with delivery expectations.

By implementing VCLM software, businesses can enhance their ability to track, manage and enforce contract compliance effectively. This not only reduces the risk of contract disputes and penalties but also improves overall contract performance and strengthens business relationships with partners, vendors and customers.

Wrap-up

Achieving and then sustaining contract compliance is really important. It’s not just a legal necessity, it’s a strategic imperative. It’s critical for minimising risk, maintaining trust and ensuring the smooth functioning of business relationships.

It’s the ultimate safeguard, the last man standing, that ensures promises are kept, terms are honoured, and relationships remain intact.

Contract compliance is complex, never-ending and tedious work. Like Gary Allan once sang, “sometimes it’s just plain hard”.

It has to be considered through a payback lens though, weighing the costs of compliance against the benefits, the risks against the reward. The trouble with risk is that a little bit can go a long way if you let it.

Ensuring contract compliance is widely and thoroughly achieved throughout a business’s inventory of active contracts is akin to having a safety net below a high-wire act. A soft landing with a bounce back up is always the best way to survive a fall.

Expect stumbles with contract compliance, commonly in inverse proportion to the business’s level of contract management maturity and resourcing. Don’t give up.

To learn more about how Gatekeeper can help manage contract compliance, via its Three Pillar Success Framework which allows you to restore visibility, take control and safeguard compliance, don't hesitate to get in touch with us.