How To Establish Contract Compliance & Obligations Management

Ensuring the legality of a contractual agreement is a job straight up the legal department's alley. However, for growing organizations immersed in all kinds of contracts, establishing obligations and compliance becomes an organization-wide task involving all parties.  

At first, having a large team for compliance management may seem beneficial. But in the long run, too many regulators can lead to non-compliance and obligations slipping through the cracks. That is why businesses require well-thought-out compliance and obligation management strategies. When you have a contract management plan, it is easy to check all the appropriate compliance boxes for mitigating risks and scouting opportunities. But these complex legal documents are pretty challenging to break down, so here is the ultimate checklist for effective contract compliance and obligation management.  

What is contract compliance? 

Contract compliance is a contract management practice to ensure all the parties involved observe all the terms and stipulations stated in the legal agreement. For a business, compliance management mainly involves following internal and external regulations. These include governmental laws, contractual terms, and organization standards.  

Compliance checks, a crucial component of post-contract management, all the invested parties receive the terms they agreed to. Thus, the contractual arrangement remains valid and fair to everybody, regardless of the power structure. 

What does contract compliance entail? 

Compliance can be a one-time event or an ongoing activity, depending on the nature of the contractual arrangement. Once the contract is signed, compliance must be the legal division's first focus to prevent contract violations. Compliance management for an organization involves conforming with the following:  

• Governmental laws: No organization is above state and federal legislation. They need to adhere to the mandatory regulations to avoid litigations and fines.  
• Company’s policies: They must adhere to corporate laws and practices to preserve the integrity of the enterprise and its connections. 
• Service standards: These aid in ensuring that the company and its connections provide consistent performance and service.  
• Contractual obligations: Executing all the terms and stipulations outlined in the legal agreement. 

Achieving all these goals is the cornerstone of contract compliance. But depending on the complexity of the business relationship and the contracts, the compliance objectives can change. Before we get into that, let us discuss contractual obligations in detail. 

What are contractual obligations? 

Contractual obligations are the legal responsibilities and requirements specified for all the parties involved in a contract. Some conditions must be satisfied in each business relationship to achieve the intended outcomes. Failure to fulfill the contractual obligations can count as a breach of contract. It means litigation and recurring losses for the company. That is why adhering to obligations is just as crucial as contract compliance. Some regular contractual obligations examples include: 

Document requirements: It entails all the necessary documents the stakeholders must submit as part of the contractual agreement and relationship, for instance, business licenses and insurance certificates. 

Invoice & payments: Contractual agreements mainly involve paying a party for goods or services. Obligations include fees, refunds, and credits stated in the legal document.  

Delivery: Likewise, the service or goods promised in the legal agreement also fall under contractual obligations.  

What are the benefits of contract compliance & obligation management? 

Compliance and obligation management is the process of monitoring and implementing all the stipulations laid down in a contract. Contract management software makes the job easier for businesses. The following are the perks organizations can enjoy with efficient contract compliance & obligation management: 

• Reduce contract risks  

Risks are an unavoidable part of the contract management process. But adopting contract compliance and obligation management strategies can help organizations to mitigate financial, operational, and legal risks. For instance, effective contract compliance and obligation management mean organizations do not have to worry about contract breaches or litigations.  

• Realize contract value 

Favorable contracts are only beneficial to businesses if they carry them out. Just imagine negotiating for advantageous terms and not enforcing them. But with contract obligation and compliance management, the legal division can ensure that the organization gains the most out of the contractual agreement. They will ultimately receive everything that they anticipated.  

• Avoid revenue leakage 

As contractual agreements lay down the guidelines for a business relationship, there are many opportunities to incur losses. Moreover, non-compliance can lead to hefty fines and penalties. Compliance and obligation management perpetuates timely goods & services, payments, quality products, and compliance. Consequently, there is no need to worry about avoidable losses.  

• Improve chances of contract renewal  

It’s a no-brainer that parties are much more likely to renew contracts with trustworthy enterprises. Sticking to the terms and conditions stated in the legal document can improve business relationships and lead to contract renewal or expansion.  

What are the consequences of ineffective contract compliance & obligation management? 

The terms and conditions specified in a contractual agreement are countless. All parties involved must maintain constant vigilance to enforce contract compliance and stipulations. It's easy for the legal department to lose track of all the details of individual contracts over time. Non-compliance and ineffective obligation management expose businesses to: 

• Reputational damage 

The reliability of a firm is only as solid as its word. Organizations risk losing any credibility and market status they already have in the event of non-compliance or contract violations. It can irrevocably affect business prospects.  

• Soured business relationships 

If a business doesn't uphold the terms and obligations mentioned in the contract, consumers or suppliers won't be too happy with them. In the long run, this means unnecessary friction between an enterprise and its business partners.  

• Harms business continuity 

Ineffective compliance and obligation management can lead to a lack of trust between an organization and its business connections. Thus, the vendors or clients are much less likely to form a partnership with the enterprise in the future.  

How to ensure contract compliance & obligations management 

Managing contract compliance and obligations can be challenging and tedious for the legal division. Identifying and monitoring terms and conditions when handling contractual agreements at a scale is nearly impossible. Fortunately, contract management software comes with the means to optimize contract compliance and obligation management. It empowers the legal team to automate processes to detect, monitor, and establish contractual obligations and compliance. Here’s how: 

• Obligation tracking 

Organizations must keep track of requirements, payments, milestones, and other details while managing compliance and obligations. Manually staying on top of numerous contractual agreements is out of the question. Contract management software offers intelligent obligation-tracking functions. Users can identify significant terms and clauses and set up tracking to ensure completion.  

Thus, if either party doesn’t adhere to a stipulation or condition, the contract managers receive notifications and can take timely action. Automated obligation tracking substantially reduces the chances of non-compliance. Users can also utilize the invoice tracking function to ensure timely payments.  

• Accountability 

One of the main issues with managing contract compliance is the lack of clear ownership for obligation execution. As a result, there is a high chance that crucial terms and conditions may go unnoticed. Clearly defining responsibilities and authority regarding contract compliance and obligation management can go a long way.  

Contract management software offers obligation tracking and user permission functions to instill accountability in the contract compliance process. Thus, relevant parties can take ownership of compliance and obligation duties. As a result, in case of non-compliance, there are timely notifications. It enables the organization to identify flaws in the system and take necessary action.  

• Measurable objectives 

Specific conditions and compliance awareness are necessary across the organization for efficient obligation management. Contract managers require clear goals and objectives regarding what they’re trying to achieve through compliance and obligation management.  

Organizations can define what contract compliance and obligation fulfillment imply for the business by identifying and monitoring relevant contract metrics and performance indicators. They can utilize regular contract audits and KPIs (Key Performance Indicators) to measure the success of their compliance and obligation management strategies. It also helps to identify underperforming areas of the contract management system. Thus, there is always scope for improvement and increased returns. 

• Flexible process 

Contract compliance and obligation management are ongoing practices for most organizations. The rules and regulations of the governing bodies, enterprises, and the market keep changing. Businesses cannot establish compliance if they do not adapt to the evolving times.  

Hence, organizations require a holistic and flexible methodology to tackle contract compliance and obligations. Contract management software provides users with an overview of the contracting process. Thus, businesses are able to track document status, milestones, and workflows from a single platform. This complete control over the system enables users to adapt their compliance and obligation management strategy to changing industry standards. 

• Organized contract management  

It is easier for an organization to ensure compliance if they have a structured system for contract management. Centralized repositories, clause libraries, pre-approved templates, and automated workflows offered by contract management software ascertain that businesses produce only legally compliant contracts. 

Automated review and approval workflows guarantee that only efficient contracts get to the final stage. When you have an accurate and competent legal agreement, the compliance and obligation management processes progress smoothly. Moreover, the users can bring consistency to their contracting process and eliminate errors and non-compliance. They are perfect for improving competency in organizations handling self-serve contracts. 

Bottom line 

Organizations invest endless time, resources, and workforce to draft profitable contractual agreements. The contract creation and execution process becomes pointless if the invested parties do not adhere to the terms specified in the legal document. Hence, organizations must adopt advanced contract compliance and obligation management systems to get the most value from their contractual agreements.  

Moreover, establishing compliance and obligations can help businesses to mitigate financial and legal risks incurred by breach of contract. Compliance also enhances the chances of contract renewal and expansion. Thus, in the long run, effective contract compliance and obligation management mean lesser losses and higher returns.