When Should I perform a Contract Compliance Review?
A contract compliance review is a process of checking and verifying that the terms and conditions of a contract are being followed by both parties. It can help to identify and resolve any issues or risks that may arise from the contract performance, such as overbilling, underdelivering, or breaching regulations .
The frequency and timing of a contract compliance review may depend on various factors, such as the type, size, duration, and complexity of the contract, the level of risk involved, the performance of the contractor, and the availability of resources. Some contracts may require periodic reviews, while others may only need one at the end of the contract term.
- A general process of a contract compliance review may entail the following steps :
- Reviewing effective contractual agreements between parties to identify contract risks
- Scrutinizing invoices and line item billing detail
- Analyzing the systematic processes to understand internal controls and/or process breakdowns
- Conducting onsite verification and interviews with relevant personnel
- Holding an exit conference to discuss findings and recommendations
Is a Contract Compliace Review the Same as a Contract Compliance Audit?
Contract compliance review and contract compliance audit are similar processes, and across different legal circles, the phrases are used synonymously. However, there are a few key differences between the two methods.
Firstly, a contract audit is typically only completed on a signed contract, whereas a contract review occurs on pre-and post-signature contracts. A contract review can help to identify and resolve any issues or risks before they become contractual obligations or liabilities.
Secondly, a contract audit is usually conducted by an independent party, such as an external auditor or a regulator, who objectively examines the effectiveness or veracity of a process, report, or other metrics. A contract review is usually performed by the compliance department or the contract manager, who have a stake in the contract performance and outcome.
Thirdly, a contract audit is generally done on a set schedule or program, and the results are reported to the board or other senior authorities. A contract review is done on more of an ad hoc basis and is not necessarily planned and scheduled in advance. The results are reported to the department head, who then decides if findings are critical enough to be brought to the board.
What are some examples of contract compliance issues?
Contract compliance issues are problems or risks that arise from the failure or inability of one or both parties to adhere to the terms and conditions of a contract. Some examples of contract compliance issues are :
- Overbilling or underdelivering on goods or services
- Breaching confidentiality or data protection clauses
- Violating regulatory or legal requirements
- Missing deadlines or milestones
- Failing to report or communicate properly
- Changing prices or currency without agreement
- Having buyer or supplier turnover
- Making clerical errors or losing documents
How can I avoid contract compliance issues?
Contract compliance issues can be costly and time-consuming to resolve, so it is better to avoid them in the first place. Some ways to avoid contract compliance issues are :
- Create standardized templates for contracts that include clear and consistent terms and conditions
- Establish an approval workflow that ensures contracts are reviewed and approved by the appropriate parties before signing
- Embrace flexibility and transparency in the contractual relationship and communicate any changes or issues promptly
- Monitor contract performance and track key metrics and milestones
- Conduct a contract compliance audit periodically to check and verify that both parties are fulfilling their obligations
- Implement and use contract management software that can automate and streamline the contract lifecycle, provide visibility and oversight, and alert for any potential risks or non-compliance issues
How can I resolve contract compliance issues?
Contract compliance issues can be resolved in different ways, depending on the nature and severity of the problem, the relationship between the parties, and the desired outcome. Some possible ways to resolve contract compliance issues are :
- Negotiation: This is a direct and informal way of resolving issues by communicating with the other party and trying to reach a mutually acceptable solution. Negotiation can help to preserve the relationship and avoid escalation of the dispute.
- Mediation: This is a voluntary and confidential process where a neutral third party (a mediator) helps the parties to communicate and explore options for resolution. Mediation can help to clarify the issues, identify the interests, and generate creative solutions.
- Arbitration: This is a binding and private process where a neutral third party (an arbitrator) hears the arguments and evidence from both parties and makes a decision that is enforceable by law. Arbitration can help to avoid litigation and save time and money, but it may also limit the parties' rights and remedies.
- Litigation: This is a formal and public process where a court of law decides the outcome of the dispute based on the law and the facts. Litigation can help to enforce the rights and obligations of the parties, but it can also be costly, time-consuming, and damaging to the relationship.
What are the Dangers of Neglecting to Perform Contract Compliance Reviews?
Neglecting to perform contract compliance reviews can expose your business to various dangers, such as :
- Losing money or opportunities due to overbilling, underdelivering, or missing discounts or rebates
- Damaging your reputation or brand due to breaching confidentiality, data protection, or regulatory requirements
- Facing legal disputes or liabilities due to violating contractual terms or obligations
- Wasting time and resources due to resolving issues or disputes that could have been prevented
- Missing deadlines or milestones due to poor communication or coordination
- Losing control or visibility over your contracts due to lack of oversight or management
Is a Contract Compliance Review Part of Due Diligence?
A contract compliance review can be part of due diligence, depending on the type and purpose of the due diligence. Due diligence is a process of verifying and investigating various aspects of a business, such as financial, legal, operational, environmental, etc., before entering into a transaction or agreement with that business . A contract compliance review can be a component of the legal due diligence, which aims to assess the legal risks and liabilities of the target business .
A contract compliance review can help the due diligence process by:
- Checking if the target business has complied with the terms and conditions of its contracts with customers, suppliers, employees, etc.
- Identifying any breaches or disputes that may affect the value or performance of the contracts
- Evaluating the quality and enforceability of the contracts
- Reviewing the contractual obligations and rights of the target business
- Assessing the impact of any changes or termination of the contracts
Should I Perform a Contract Compliance Review Before Signing Any Contract?
- Yes, it is advisable to perform a contract compliance review before signing any contract. This can help you to:
- Understand the terms and conditions of the contract and how they affect your rights and obligations
- Identify and negotiate any unfavorable or unclear clauses that may pose risks or liabilities
- Ensure that the contract is consistent with your business objectives and expectations
- Verify that the contract is compliant with the relevant laws and regulations
- Avoid any disputes or misunderstandings that may arise from the contract performance