Contract compliance has become a standard practice for large procurement groups. The process provides management with valuable information on vendor performance, transparency into third-party relationships, opportunities for process/contract improvements and typically dollars back to the bottom line.
Assessing compliance against contracts can be performed internally by procurement staff, as a function of the organization’s internal audit group or by partnering with a third-party. However an organization elects to tackle the process of contract compliance, below are common factors for a successful auditing program.
1.Dynamic Contract Repository – There are several options available for organizations to store their contracts and track terms, amendments and updates. The functionality should be paired with the organization’s operational needs to maximize effectiveness and workflow.
2.Clear Metrics – Organizations should identify the metrics that are most meaningful and the data points needed to assess compliance and performance. Typical data will be accounts payable payments, vendor billing, benchmarking, and service levels.
3.Standard Contract Templates – Having a set of standard master agreements, statements of work, amendments and related documents that are periodically reviewed and updated will streamline and strengthen the contracting process.
4.Contract Clause Library – A library of standard contract clauses including a description of which clauses are mandatory/optional will improve the contracting process. At a minimum, the clause library should include an audit clause, pricing standards, payment terms, entire agreement clause, term & termination parameters, right to set off, etc.
5.Contract Auditing Program – There are contract compliance issues that can only be discovered through a detailed review of vendor billing records. This process can be performed internally or outsourced to an experienced group that can identify billing issues and help to recovery funds for the organization.
6.Contract Negotiation/Update Workflow – Adhering to a workflow for contract updates helps to ensure that all relevant steps are taken in the contract process. Steps will include updating terms & conditions, negotiation and approval and incorporating any improvements and controls identified through the contract auditing process.