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Legal tipsFebruary 5, 2020

Best Practices for Tracking Contractual Obligations

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People may wonder what the primary purpose of a contract is. Some seasoned litigators would say it’s to ensure maximum protection for a party should the matter be brought to court. Ironically, contracts often lay the groundwork for painful litigation. Others would rather highlight the practical side of a legal regime that a contract sets for its parties or beneficiaries. In our experience, though, the underlying idea of drawing up a contract is to provide its parties with legal guidance. Following them, the parties will learn the most efficient and transparent ways to fulfill their business obligations. It’s a shame, but in practice, contract administration often sparks off disputes instead of preventing them. So what can your legal department do to mitigate damage while fostering healthy cooperation? The answer lies in tracking obligations under a particular contract. Let’s find out how to track them effectively.

A well-compiled contract ensures that the business partners are on the same page as to the cooperation vectors. Both the client and the contractor formally commit to the contractual obligations and agree on all the details. Nevertheless, managing contractual obligations throughout the contract lifecycle often causes troubles. According to the Arcadis Global Construction Disputes Report 2019, failure to properly administer the contract is the third global reason causing disputes. Managing contractual obligations is obviously not a cakewalk, so try out our tips to track your obligations under contracts properly.

Before You Start…

It’s not an actual step to follow, but rather a general rule to set up. Try establishing a well-ordered repository for storing your contracts in a format that works best for you. Communicate the details, including document properties and proper naming, to all the members in charge within your LD. Full text search would be a great advantage for such a repository, since it allows you to find necessary contracts and clauses faster. Don’t forget to keep associated metadata, too, as it lets you filter and visualize various contract data. AXDRAFT is one of the available tools to do this.

Option One - Contract Matrix

Following the execution stage in the contract lifecycle, contracts usually pass from the sales to the operations team. A legal department plays a monitoring role at this stage. The sales and operations teams will need actionable insights from the contract. Mind that these teams rarely have a legal background. So if they need to analyze and interpret the whole contract, reading between the lines won’t save the situation. The resulting delays and failures might bring about severe operational and business risks.

A contract or operational matrix is an easy-to-implement, effective approach that will make a difference in a situation like this. It suggests breaking a contract down into understandable pieces and explaining vague clauses. Illuminating insights will clarify key contract points and present them in simpler terms. Through a combination of technology, analytics, and legal background, you can ensure a clear understanding of the entire contract. From our experience, a well-functioning matrix should include the following parameters:

  • Scope of services/deliverables
  • Responsible persons/third parties
  • Due date
  • Reporting date
  • Actual delivery date
  • Format of operation
  • Specific performance requirements
  • Key contact people
  • The next factor to consider while compiling a contract matrix is the level of detail. Too many details might turn the matrix into a mere copy of the existing contract. But at the same time, including only the basics you run the risk of giving too little information to the team members. The right balance here is key.

    When it comes to the technical side of things, you could use readily available free Excel templates or tweak them to your needs. Import information from a contract to Excel by using Data tab and then selecting Filter to get rid of unnecessary clauses. Over time, your team will build up a database of completed clauses, and it will take even less time to create an obligation matrix.

    Option Two - Contract Parsing

    To make sure that contractual obligations are tracked throughout the company, try automation. Contract parsing software serves the purpose. You feed a signed contract into it, and it reads it searching actionable information that can be parsed out into key terms. Without your assistance, contract parsing tools will send information - for example, dates - directly to the production team and align it with the dates used by the management team. It’s a sizable opportunity since automation lifts an administrative burden off your shoulders. Just don’t forget to double-check how it can be cross-integrated with your internal systems.

    It’s a little too soon to talk about the mass adoption of contract parsing technology, so there isn’t any single vendor we could strongly recommend. But you can find out more about companies offering contract parsing solutions in LawGeex Legal Tech Buyer’s Guide under Contract Management and Legal and Matter Management. If you are not ready to invest in all-in-one contract parsing solutions, no worries, there are some other options for you. You may start with natural language processing datasets on GitHub. They come with step-by-step instructions on how to run them for text files. It might require that you do some coding, but the system created personally will be tailored to the specific needs you’d like to address.

    Option Three - Advanced Contract Drafting

    In the early stages of the contract management lifecycle, you can choose the approach to use toward your contract drafting and obligations management. This decision may have a huge impact on contract obligation tracking. It also depends on the software you’ll select for contract management.

    Try addressing contractual obligations from another angle. If you automatically save key entries from a contract as soon as it has been drafted, further processing won’t be even needed. Relevant options and input fields from an automatically drafted contract convert into smart notifications and trackers. Contract collaboration, negotiation, and approval can be managed with workflows to track every stage of the lifecycle. And all that happens automatically, making your life - and contractual obligations tracking - easier.

    The most important thing here is to think about the software platform to choose. A software solution that singles out and automatically saves key entries from a contract can help you keep your contractual obligations tracking up to par. It reduces delays and notifies the right people at the right time so that they can make use of contract notifications, alerts, and task reminders. Be scrupulous and you’ll find contract drafting solutions on the market that come with this handy functionality.

    AXDRAFT is one of the platforms that knows how to do this trick. Just one example for you. Let’s say you mark several dates in your contracts as milestones. They’re automatically saved in a related project. When you approach the deadline, the system will notify responsible stakeholders in your team in advance.

    Afterword

    Smart legal departments know that contract management does not stop the moment a contract is signed. Quite the opposite, it marks the beginning of an active period in the contract’s life. Contractual obligations are critically important and need to be managed as carefully as negotiations or approvals. Poor tracking of contractual obligations will cost companies a considerable percent of their revenue. So don’t take chances by using outdated practices and do think through your contract lifecycle with all the required stages. And don’t forget our tips: we worked them out to help you.

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