Every business is familiar with the overwhelm caused by extensive contract management, and it’s no small wonder. It is a real challenge to manually organize cumbersome piles of important information and to maintain transparency and consistency across all the documents. To mitigate the process’s time consumption, you need some helpful tools.
It’s high time for you to opt for a smart solution—one that can help you address the issue, guide you through all the stages, and add up to overall efficiency.
But first, you have to understand the essentials of how your procurement contracts work. Then, you can effectively detect the bottlenecks and pick the appropriate way to circumvent them.
So, without further ado, let’s check out the basics.
Table of Contents
What Is a Procurement Contract?
Also known as purchase contracts, procurement contracts create legal binds between buyers and sellers. So, just like the way purchase contracts protect the rights of the parties, a procurement contract protects them during the procurement process. It establishes the grounds and parameters for:
- Choosing the right vendor
- Selecting their product
- Vetting
- Contract negotiation
- Payment methods, terms, and conditions
- Order and delivery details
Procurement contracts create legal binds between buyers and sellers
Procurement Contract Strategy: How It Functions Effectively
Clear and succinct communication plays a key role in making procurement work smooth sailing. But there are other prerequisites of an effective procurement strategy:
- Requisitioning. Often, departments lack clear and precise instructions, making it hard for them to get the desired resource. In order to avoid delays, clearly outline which department needs what resource in your order.
- Payment processing. The accounting department should be kept in the loop. They need the invoice to process your order further.
- Analysis. Delays may occur because of misinformation or the lack of information. Therefore, self-analysis is vital to prevent procurement from becoming a bottleneck. Make sure not to request a resource that’s not available to you. In simple words, check your warehouse before sending for the requisition.
- Supply-line management. The calculation is vital when you need a seamless supply of a particular resource. Analyze trends as to when the volume of needed goods accelerates and when it should be decreased.
- Sourcing. For a smooth procurement process, you need to keep your vendors in the loop of your consumption needs as well. Don’t presume they’ll always satisfy your requests — talk to them beforehand.
Procurement Contract Types
There are different types of contracts in procurement. These are established according to the complexity of the project, time period, resources and their availability, and also the financial interest of the buyers and sellers.
Fixed-Price Contracts
Fixed-price procurement contracts mean you need certain goods or services in a certain amount over a specific period and the cost will not change during that period.
Fixed-price contracts are incomplete without a stated price and timeline. Moreover, both contractual parties have specific roles and are ready to fulfill their responsibilities. These contracts are quite common because they’re pretty straightforward and manageable.
Cost-Reimbursable Contracts
Cost-reimbursable contracts are different from fixed-price ones since they may require the buyer to pay for the actual work done, as well as other related expenses the seller might have incurred.
Another difference is that, in cost-reimbursable contracts, the seller has to pay upfront for the raw material or indirect services and so can only claim the profit after the work is complete.
Although these contracts are riskier from the seller’s point of view, they pay higher than fixed-price contracts because the seller receives profit over the initial cost.
Time-and-Materials Contracts
When the vendor is willing to invest time and materials in a specific project, they are likely to establish a time-and-materials contract.
Time-and-materials contracts are common for the tech industry. Essentially, technical support staff spend their time on a particular project and are reimbursed accordingly. The best example of this contract type is customer support, where the vendor functions as a third-party employee of the company.
Time-and-materials contracts are long-term, and they’re more complicated than fixed-price contracts and cost-reimbursable contracts. That’s because the parameters of the project are not straight and evident enough to quantify.
Quality management of all these extensive documents is of utmost importance. At a certain point, it becomes close to unrealistic to streamline the contracts without automation software.
Contract Management in Procurement
Let’s scrutinize the benefits you can reap from a good procurement contract management system and the features you should look for in the software. We’ll cover both in detail.
How Procurement Contract Management Software Benefits Businesses
With solid procurement contract management software in place, you can enjoy lots of advantages.
1. Improving Compliance
First and foremost, the software lets you establish a contract with everything written in black and white. This removes ambiguity and favors accountability.
Moreover, it allows you to streamline your processes according to the specified terms and conditions. On top of that, you have better control over the contract, as only designated people have the right to access the document and edit it accordingly.
2. Minimizing Risks
An organization is exposed to different types of risks, and contract management software helps minimize them. Here’s how it can help:
- With good software managing your procurement contract, the risk of non-compliance is minimized considerably. It offers better control, as you enforce and operate the contract on predetermined terms. In fact, a contract management system can enhance compliance by 55%. And with a better demonstration — like foolproof compliance monitoring and periodic audit trails — the compliance can be enhanced even more.
- For purchasers, procurement contract management software minimizes the risk of overspending and supply shortages. This means fewer supply-chain risks, less costly buying, and improved risk management on the whole.
- Procurement contract management software also helps in creating standards for supplier selection. This will eventually help in vetting suppliers by means of validation and certification tools. Not only that, but the software can also help pinpoint diverse suppliers, especially those that pose a high risk to the business.
- A procurement contract management system can spot irregularities and policy violations, helping you make quick decisions.
3. Resolving Document Management Issues
One of the biggest benefits of contract management software is space saving. For an organization managing manual documents, the software can reduce unnecessary space occupied by filing cabinets. This prevents businesses from outsourcing their document storage.
In addition to that, there are more benefits:
- Facilitating easy data retrieving
- Ensuring updated template usage
- Providing a single database for all documents
- Easier imports of electronic contacts from other document types
- Helping create versions, giving you better control and tracking flexibility
4. Helping Manage and Update Renewal Dates
Appropriate contract management software gives you the ability to archive an expired contract automatically. You can create notification rules and set alerts to make sure you don’t miss a renewal date.
You can use either the default settings or custom settings to configure alarms. Also, you can set an alarm according to a milestone, and it won’t reset until the milestone is reached.
5. Improving Audit Execution
Audits can be challenging, especially when you lack efficient contract management software. With the right software, you can instantly access a particular contract and extract its history with just a few clicks.
In a nutshell, the software is very helpful in maintaining accurate records. Also, it gives you access to the complete audit trail.
6. Enhancing Contract Visibility
When you have a centralized digital repository in place, you don’t need paper-based management systems. The software helps you store files in one place, thereby improving compliance. Moreover, it upgrades your reporting and keeps all the staff on the same page.
Also, the authorized staff can access the system through a password-protected website on any device from anywhere.
7. Optimizing Approval Times
With the help of customizable workflows, you can automate contract management. In turn, it’ll minimize the time spent on the review and provide current status updates.
8. Absolving Unnecessary Expenses
The software gives you flexibility and control. If there’s any unplanned renewal from a service you no longer need, you can eliminate it beforehand and save on legal fees.
9. Increasing Productivity
Good contract management software offers data and analytics, making it easier to forecast and plan your next move. You can check important milestones and avoid manual documentation.
Essentially, you can control all the processes and improve your organization’s workflow, which should be your main focus.
Essential Software Features to Look for
Let’s scrutinize the main features of procurement contract management software:
- It offers easy, safe, and secure access to all the contracts.
- You can use it for better reporting and in-depth analysis.
- It lets you standardize your contracts, no matter the language or processes.
- Contract management software for procurement offers customization you can use to set dynamic workflows. This will help save time for approvals.
- You can eliminate complications in manual documentation, courtesy of e-signature integrations.
- Software lets you track workflows in real time.
- Integrated software helps align multiple systems, such as purchasing systems, invoicing systems, order management systems, etc.
How AXDRAFT Can Improve Procurement Efficiency
If you’re looking for procurement contract management software, AXDRAFT can be a handy option. The software has all the capabilities discussed above, including:
- Instead of surfing your inbox for relevant emails or creating spreadsheets, it captures and records all the contract data, making it effortlessly easy to track.
- Many organizations have been utilizing AXDRAFT for drafting standard contracts for supply and sales. This means zero errors and improved workflows.
- AXDRAFT has a proven track record for setting up automated drafting processes.
- Finally, the customer service is exemplary, playing a pivotal role in their success.
Wrap Up
Procurement contracts legally bind buyers and sellers and protect them during the entire procurement process. These agreements can be fixed-price, cost-reimbursable, or time-and-materials contracts.
A procurement contract management system offers unlimited benefits to your business. It helps improve contract compliance while reducing the risks. However, choosing the right software is absolutely vital.
Smart software always offers you better reporting, in-depth analysis, customized workflows, and quick approvals.
Frequently Asked Questions (FAQs)
The procurement management process involves managing the ordering, receipt, review, and approval of items from suppliers. A procurement process also specifies how supplier relationships will be managed to ensure a high level of service is received.
Contract management is an integral part of any procurement cycle. Purchasing and procurement firms may reduce vendor prices, execute contracts with new parties faster, boost compliance, mitigate risks, and effectively manage internal and external relationships by implementing contract lifecycle management software.
Project management for procurement is usually divided into four major processes: planning, selection, administering, and closing procurements.
A procurement contract states each party’s obligations and usually includes detailed price lists, payment information, conditions of delivery, and other legal terms and conditions.