The Ultimate Guide to Contract Compliance: Why It matters and how to achieve It

Contracts, besides clearing ambiguity, must enforce terms and contingencies, and make them binding- this is called  contract compliance.

In this blog, we unpack everything you need about contract compliance. We’ll talk about its definition and why it should matter to you (trust us, it does!). 

We’ve also identified major challenges businesses like you will face when maintaining compliance along with best practices and how automation can help streamline this process.

What is Contract Compliance?

Contract compliance ensures that all involved parties and stakeholders adhere to the terms and conditions as agreed which will help in building trust and reliability. It also helps maintain the balance of the agreement, ensures fairness, and protects the interests of all involved parties.

Let's look at a practical example to understand this concept:

Imagine you're managing a commercial office lease agreement. The tenant has agreed to a 5-year lease with specific terms: monthly rent of $10,000 due on the 1st. It covers certain business hours, carrying required insurance coverage, and responsibility for utilities and minor repairs under $500. 

Contract compliance means ensuring all these obligations are met—the tenant pays rent on time, maintains proper insurance certificates, operates within agreed business hours, and handles the specified maintenance responsibilities. Meanwhile, the landlord must comply with their obligations like maintaining common areas, providing agreed-upon security services, and responding to major repair requests within the contractually specified timeframe.

Contract compliance isn't a one-size-fits-all concept. The specific requirements and challenges can vary greatly depending on the type of contract and the industry it pertains to.

For example, in an employment contract, compliance would focus on ensuring the agreed-upon salary, benefits, and working conditions are upheld. In a supplier agreement, the key compliance areas are timely payments, adherence to ordered quantities, and maintenance of quality standards.

However contract compliance becomes even more complex in B2B scenarios, let’s take a look:

• IT services:  For an IT services contract, there are often stringent Service Level Agreements (SLAs) that dictate metrics like system uptime, incident response times, and data security protocols. Ensuring full compliance with these SLAs is critical.
• Marketing agencies: A marketing agency contract could include compliance requirements related to content approval workflows, data privacy standards, and transparency on media spend and placements. If any of these are missed or not followed, agencies could lose clients and pay penalties.

However, regardless of the contract type, compliance generally covers all aspects related to the contractual terms —payment terms, delivery date, quality standards, and Intellectual property rights (IPR).

Who is Responsible For Contract Compliance?

Contract compliance is not a singular responsibility but a shared obligation among various departments and employees within an organization. It truly depends on the size and complexity of the business, the nature and number of the contracts, and specific compliance requirements. 

It is a shared obligation among employees who interact with contracts or perform related work and have a role in ensuring compliance. While it's a shared responsibility among those who work with contracts, many businesses designate specific roles to oversee this process. For instance, contract managers or compliance officers play a vital role. These specialists are responsible for defining monitoring processes, setting compliance expectations, and conducting regular assessments to ensure contractual obligations are met.

The other key stakeholders involved in ensuring contract compliance are Finance and Accounting teams, IT and Data Management teams, Legal and Compliance teams, Operational teams, and Quality assurance and control.

While not all businesses can establish separate compliance departments, effective contract compliance management is still essential. Legal and business teams can collaborate to ensure adherence, but using specialized software can greatly enhance their efforts. This is where contract compliance software plays a crucial role that helps to streamline the compliance process. Also, a thing to note is this approach not only helps in maintaining compliance but also in creating a more efficient and less error-prone contracting process.

The contract compliance software helps with the following processes:

• Automation of workflows: These tools can automate sequential approval processes, ensuring that all the stakeholders involved review and sign off on contracts in the right order.
• Template management: Users can create templates for different contracts they use often with built-in conditional logic, enabling the inclusion of fall-back positions and reducing the risk of non-compliant terms.
• Centralized document management: The software provides a centralized repository for all contracts which makes it easier to track, manage, and review contracts for compliance.
• Alerts and reminders: With the help of automated notifications, one can keep relevant parties informed about upcoming deadlines, renewal dates, and other critical contract milestones.
• Reporting and analytics: Many solutions offer robust reporting capabilities, allowing organizations to gain insights into their contract portfolio and identify potential compliance issues proactively.
• Integration capabilities: Contract compliance software can often integrate with other business systems, ensuring consistency across different departments and processes.

What Are The Benefits of Contract Compliance?

Contract compliance is crucial for businesses of all sizes. It helps all parties ensure that everything is on track and will increase your chances for renewals and expansions of contracts. 

According to a study by World Commerce & Contracting, poor contract management and compliance costs companies an average of 9% of their annual revenue, on average,  due to missed deadlines, hidden clauses, and unfulfilled obligations. Through proper contract compliance, organizations can recapture this lost value and improve their bottom line.

Let’s look at different reasons why contract compliance is important:

1. Legal and regulatory protection: Ensuring all parties stick to the agreement significantly reduces the risk of disputes, lawsuits, and regulatory violations. Proper contract compliance acts as a safeguard against both legal disputes and regulatory penalties, particularly in heavily regulated industries where contracts must meet specific government requirements. This dual protection helps organizations avoid costly litigation, maintain their operating licenses, and preserve their reputation in the marketplace.
   

2. Protects your brand’s reputation: At any point in time, if you fail to meet any of the terms or standards in the contracts, it can cause damage to your company's reputation. For example, if your contract stipulates a 48-hour response time for customer support tickets, consistently missing this deadline could lead to negative reviews, lost customers, and damaged business relationships. That’s why consistent compliance is important, it helps to maintain a positive image. And, when you consistently meet your obligations, you become known as a reliable business partner.

3. Enhances operational efficiency: When everyone understands their responsibilities, operations run smoother. This transforms business processes from unpredictable to well-oiled, much like a finely tuned machine.

4. Protect your bottom line: Imagine you're a landlord renting out office spaces. If your tenants don't pay rent on time or at all, it could seriously impact your cash flow and profitability. Contract compliance ensures you get what you're owed and when you're owed it. 

5. Avoids disputes: When all parties stick to the agreed terms, there's less room for misunderstandings and disagreements. It's like having a clear rulebook that everyone follows. 

What Are The Challenges of Contract Compliance?

A comprehensive contregular audits, defined roles and responsibilities, centralized storage of all active contracts,  automated reminders of key milestones and deadlines and regular audits to find areas of non-compliance. Without these core components, organizations can struggle with a variety of contract compliance obstacles.

 Let's take a closer look at some of the common challenges:

1. Volume of contracts: Large organizations create thousands of contracts every year across different business units, product lines, and vendor relationships. Without a centralized, automated system to monitor contracts, it becomes nearly impossible for legal and procurement teams to stay on top of every requirement, payment term, renewal date, and other key details that need to be fulfilled.

2. Intricate legal language: Most contracts include legal terms that can be difficult to interpret and understand. Sometimes, contracts may have conflicting or overlapping terms, leading to confusion.

3. Time-consuming and expensive legal reviews: Hiring legal professionals to review contracts can be expensive and time-consuming, hindering efficiency and potentially delaying critical business decisions.

4. Limited visibility: If contracts are stored in different locations or systems, it can be challenging to access them promptly when needed. The lack of a centralized contract repository can lead to gaps in compliance monitoring.

5. Changing regulations: Evolving legal and regulatory landscapes require constant updates to contract terms. It’s important to ensure that all your existing contracts remain compliant with new regulations.

6. Inefficient approval system: Manual contract approvals and reminders can slow down the process and hinder compliance.

7. Lack of standardization: Inconsistent contract formats and clauses across departments can make it hard to enforce compliance. Without standardized templates, there can be variations in contract terms, which can lead to gaps in compliance.

8. Human error: When manually tracking and managing contracts, there's a higher risk of missing key deadlines, obligations, or terms due to human oversight. This can lead to unintentional breaches or missed opportunities for renewal.

What Are The Best Practices for  Ensuring Contract Compliance?

Whether you're using specialized software or managing contracts manually, these best practices will help you establish a robust framework for maintaining compliance, reducing risks, and optimizing your contract management processes.

Establish clear roles and responsibilities

One of the first and foremost steps in the contract management process is assigning roles and responsibilities. If it is unclear who’s responsible for what in the contract workflow, confusion can arise, and important tasks may be missed. That’s why it is necessary to delegate tasks to the right stakeholders. 

Document automation software like Docupilot allows administrators to establish clear roles and responsibilities by controlling who can view, edit, and approve documents throughout the contract workflow. 

For example, the legal team might be responsible for drafting the contract, while the procurement team handles negotiations, and the compliance team monitors regulatory adherence. This clear delegation ensures that the appropriate expert manages each part of the process, reducing the risk of errors or delays. 

Monitor key dates and milestones

Use contract management software to set alerts and reminders for upcoming deadlines, such as contract renewals, deliverable due dates, and payment schedules. This way you can ensure that all contract terms are met on time, thus avoiding penalties and maintaining good relationships with business partners. 

Set and track key metrics

Businesses must keep track of metrics such as contract turnaround time, compliance rates, first to final draft, deviations, and savings achieved through negotiations that’ll provide them valuable insights into the health and efficiency of the contract process. 

Develop a Contract playbook

Stakeholders involved in a contract often encounter questions about various aspects of the agreement, such as the regulatory requirements that need to be adhered to, the specific terms or clauses that might affect their responsibilities, or which supporting documents they should refer to for clarification. 

A contract playbook serves as a go-to guide in these situations. It provides clear, accessible information that ensures everyone is on the same page. A well-crafted playbook that outlines standard contract terms, negotiation strategies, and approval processes promotes consistency and efficiency in contract creation and management.

Conduct regular audits

It is important to perform periodic reviews of your contract portfolio to ensure ongoing compliance and identify potential issues early. For example, if a company regularly audits its vendor contracts, it may uncover that a supplier has consistently failed to meet delivery timelines, breaching the terms of the agreement.  

This proactive approach involves reviewing contracts in detail, including performance metrics, deliverables, and payment terms. By comparing these contractual obligations with the actual performance of suppliers, companies can identify discrepancies, such as consistent failures to meet delivery timelines. By identifying this issue early, the company can take corrective action, renegotiate terms, or explore alternative suppliers and ensure the business remains compliant and minimize any operational disruptions.

Implement automated workflows

Using contract management software to automate approval workflows, notifications, and reminders, you can significantly reduce manual errors and streamline the entire contract lifecycle. It’ll help you speed up approvals, ensure deadlines aren’t missed, and enhance compliance tracking by providing real-time visibility into contract status. 

A document automation software like Docupilot can help you with the entire document creation and approval process according to your specific requirements. 

Provide compliance training

You should conduct regular compliance training to educate your team members on the latest regulatory requirements, internal policies, and best practices for contract management. For example, these training sessions would cover topics like reviewing contract terms and conditions to identify compliance obligations or setting up automated reminders and alerts for key milestones and deadlines  This will help contract managers understand their role and responsibilities in ensuring full compliance. 

Standardize contract templates

Having a repository of legally binding, pre-approved templates ensures that everyone uses consistent language, reducing errors or discrepancies that could arise from manual drafting. 

Docupilot excels in this area by providing a robust template library, allowing businesses to create, store, and manage templates for frequently used contracts like NDAs, service agreements, or purchase orders. Your legal and procurement teams can access and utilize these documents and focus on more complex agreements.

What is Contract Compliance Software?

Contract compliance software, also known as contract management software, helps businesses manage, monitor, and ensure adherence to the terms and conditions of their contracts. It automates and streamlines all the stages in contract management from drafting and negotiation to approval, execution, and ongoing maintenance. 

Key features of contract compliance software often include:

• Contract repository and organization:
• Automated alerts and notifications for key dates and milestones
• E-signature capabilities
• Performance tracking and reporting
• Audit trails and compliance documentation
• Integration with other business systems (e.g., ERP, CRM)

This software is crucial for businesses, particularly those dealing with numerous or complex agreements to streamline contract management processes. It helps them to keep track of contractual obligations, deadlines, and performance metrics. It also helps reduce risks associated with non-compliance and improve overall contract visibility and efficiency.

Factors to Consider while Choosing Contract Compliance Software

Here are the factors one can consider while purchasing contract compliance software:

1. Core features and functionality: It should have all the basic features mentioned above such as automated workflows, contract repositories, e-signature capabilities, analytics, and more.

2. Integration capabilities: Look for software that integrates seamlessly with your existing systems, such as CRM, ERP, and document management software. 

3. Security and compliance: Ensure your software uses strong encryption to protect sensitive contract data and comply with relevant industry-specific regulations, such as GDPR (General Data Protection Regulation) or HIPAA (Health Insurance Portability and Accountability Act), to safeguard sensitive information.

4. User-friendliness: Look for software that’s intuitive and can be quickly adopted by your team, minimizing training time and costs.

5. Scalability: As your business grows and your contract volume increases, choosing software that can scale accordingly is crucial. For example, the software must be able to accommodate the growing volume of contract data without running out of storage space or compromising performance. 

6. Customer support: There can be issues or roadblocks while using any software. And, a good customer support team is key to resolving them. Ensure that the contract compliance software you choose has a strong customer support team that is readily available to assist you via chat, call, or email. You can even check review websites to see if the support team has a track record of promptly addressing issues and resolving problems efficiently.

Contract Compliance with Docupilot

Contract compliance software can be a game-changer, offering features like centralized document management, automated alerts, and integration capabilities with existing business systems. Docupilot is one such solution that provides powerful tools to help organizations significantly automate and streamline their contract compliance processes.

Docupilot offers several key features to help businesses streamline contract compliance:

• Centralized contract repository
• Pre-built contract templates
• Automated Compliance Monitoring
• Automated approval system
• Integrated Systems

Are you interested in giving Docupilot a try? Sign up for our 30-day free trial and check out how Docupilot can empower you to maintain robust contract compliance without getting bogged down by manual, error-prone processes