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Best Practices for Contract Management: Compliance Audits

Best Practices for Contract Management: Compliance Audits | Exari

February 28, 2018 Jamie Wodetzki Contract Management  

Why Contract Compliance Audits Are Key to Effective CLM

The process of contracting does not end once contracts are negotiated and signed. In fact, you might even argue that this is when the real work begins. That’s when both parties are now legally responsible for meeting the obligations of the contract. All too often, though, organizations have little to no insight into their contracts, leading to noncompliance with the stipulations of the contracts.

Because the potential costs and legal ramifications of contract noncompliance are so significant, it’s vital to conduct regular contract audits. Unfortunately, the word “audit” has a tendency to induce stress just by uttering those two syllables. It’s daunting to even think about poring over contracts to determine whether obligations are being met, or to identify potential issues and opportunities within the existing contracts. Despite the challenges, though, contract compliance audits are among the best practices for contract management, and with the right plans and tools in place, they can be efficient, insightful, and ultimately, beneficial to the bottom line.

Defining the Audit

In general, contract audits are defined as an evaluation of your company’s contracts to verify and ensure that systems, policies, and controls are being met, and that all obligations and stipulations are taking place as agreed upon and scheduled. Unlike financial audits, which typically take place annually, contract audits happen more often; in some businesses, payment audits take place monthly or quarterly, for example, while other compliance audits are milestone driven. Contracts that are approaching renewal, for example, are typically ideal for auditing, as the contract performance can be used as leverage in renegotiating the contract.

One of the reasons that many people get overwhelmed by the prospect of a contract audit is that they assume that it’s an all-encompassing task. In other words, they assume an audit means that every point of every contract will be reviewed. This is at best an inefficient way to conduct an audit, and at worst, it will do little more than create chaos.

Instead, contract compliance audits need to be goal and purpose-driven. Understanding what you are hoping to accomplish with the audits and what you are looking for is key to an effective audit. In some cases, you might be auditing a single contract, verifying that conditions have been met. In other cases, you might look at your entire portfolio, with a focus on evaluating expenses. By determining the specific parameters of the audit, and establishing an objective for the exercise (e.g., identifying cost overruns and redundancies that are costing your company money, or confirming that deadlines are being met) you can keep the audit manageable, guide the process, and avoid wasted time and frustration.

Conducting the Audit

Conducting an efficient contracting audit requires more than just setting parameters and objectives. Timing the audit is vital as well. In some cases, you may not have any choice in the matter. When your company is engaged in a major financial transaction, such as a merger or acquisition, or seeking funding from investors, a contract audit is likely to be a requirement in the process. However, if you are conducting the audit for your own purposes, avoid scheduling it during a time when your company is in the midst of other stressful or time-consuming processes, such as tax or budgeting seasons.

Effective audits also require a great deal of communication. Letting the other parties involved in the contracts know that you’re conducting the review helps keep the process cordial, and ensures that you are getting the full picture of contract performance. Stress that the process is not meant to be accusatory or to “catch” your partners or customers doing something wrong, but rather to find areas that could be improved going forward to improve the relationship and outcomes for all parties.

Using CLM Software

Remember when we mentioned the idea of poring over contracts — and how that is stress inducing? It’s not exactly productive either. Imagine your legal team spending hours surrounded by piles of documents, carefully reading each clause to find pertinent information. Even if they know what they are looking for, it’s a cumbersome and time-consuming process, and probably not the best use of time for your highly paid legal experts.

If your contracts are stored in filing cabinets and shared drives, without any type of organization or management in place, this is the scenario you face, though. With a contract management platform, however, you can easily extract the data you need for analysis, saving time and reducing the likelihood of human error. Exari Vision offers unparalleled insights into your contracts, turning the contents of your contracts into data, allowing you find exactly the information you need for your audits, quickly and easily. Whether you are looking for information about payment performance obligations or information about regulatory compliance, it’s all there with a few clicks.

Contract compliance audits are a necessary aspect of managing your business, and of ensuring your own compliance with industry and governmental regulations. However, with the right approach and a contract management platform in place, the process can be relatively painless, more accurate, and more insightful.

To learn more about how Exari Contracts can help make your contract auditing better and ensure you’re following the best practices for contract management contact us now.


Jamie Wodetzki is Exari’s Co-founder and Chief Product Officer.