Contract Management: Advanced Issues
Contract management is about risk management. This presentation addresses six important topics in commercial contract management: regulatory compliance, performance obligations, representations and warranties, insurance tracking, counterparty risk, and contract portfolio.
Contracts operate within a legal context of federal, state, and local law. Lawyers and contract managers responsible for managing contracts need to perform routine compliance reviews by contract.
The majority of contract provisions discuss behavior of both parties. Actions are required, permitted, or prohibited. Under certain conditions, the performance obligation can change. This metadata framework transforms text into data to improve contract management.
Parties often make promises about the condition of their business or the subject of the contract. Reps and warranties can be as mundane as the promise that the organization is organized in a specific jurisdiction. The promise might be essential to the detail, such as ownership of intellectual property and the license is free from any third party claims.
Contracts allocate risk between the parties. To address unknown contingencies, contracts often require a party to carry insurance and maybe even name the other party as an "additional insured." Insurance polices, however, usually expire during the term of the contract. If you do not track the expiration of the other party's insurance policy then you may not get the benefit of the policy when its needed.
Contracts connect one organization to another. Organizations consist of people, and as such they change overtime for good and ill. Contract managers need to keep careful tabs on counterparties, independently of contracts.
A single large customer or reliance on one supplier of a key product or process are well understood risks, but many organizations under appreciate contract portfolio risks.
Portfolio risk is unique to each organization. Typical sources of contract portfolio risk include:
- customers concentrated in a specific geographic location where economic conditions can affect the group;
- customers concentrated in a particular sector where regulatory changes or economic event can cause reversals in a significant segment of the customer base;
- contracts containing the same material provision ruled unenforceable by a court;
- several purchasing or licensing contracts that contain pricing escalators not tied to organization performance; or
- contracts that contain provisions that limit strategic alternatives like new capital structures, acquisitions or restrictions on an organization's activity.
These challenges to your organization are clear only through the lens of contract portfolio analysis.