The contract period is one of the most critical provisions in any agreement because it determines the length of your business engagement.
While some contracts remain in place indefinitely, others have a strict expiry date.
To ensure your contract renewal process goes smoothly, we recommend opting for auto-renewal. Automatic contract renewal reduces business slowdown and its financial impact, but you need a proper workflow to see the process through.
Read on to learn more about the contract renewal process.
What is contract renewal?
Contract renewal is one of the last stages in a contract’s lifecycle.
When the initial terms of a contract expire, the parties can agree, either actively through written consent or passively through automatic renewal, to renew the terms of the contract.
Once a contract is renewed, the arrangement outlined in the document continues. But you can negotiate the terms of a contract before the renewal date if you want to change your business relationship.
People usually take this opportunity to leverage volume discounts.
You can also opt-out of automatic contract renewal before the term expires.
Ok, but how will I know when my contract will expire?
Commercial contracts, like non-disclosure agreements and equipment rental agreements, will define the length of the contract’s terms in a section typically called “DURATION OF TERMS.”
You can also find the length of the agreement at the beginning of smaller contracts.
But, there’s no hard and fast rule for where the term length will be in the contract or in what section this information will appear. That’s why it’s essential to read all contracts carefully.
Here’s an example of a contract renewal clause from our copyright license agreement template:
“This Agreement will commence on [date] (the “Effective Date”) and continue until [date] (the “Termination Date”) or until either party provides written notice of termination to the other party with a [number of days] notice.”
In this example, the clause was placed directly under the identification clause and beside the governing law clause. The termination notice period clause is also present here.
Typically, a contract will come with a renewal notice period clause. Some US states require businesses to give notice, usually 30 days, before automatic contract renewal.
Other states, like Indiana and Idaho, have no renewal notice period clause.
At PandaDoc, we follow a renewal notice of 90 days in order to provide a proactive and smooth engagement with our customers.
Sounds good, but do I receive a new contract after renewal?
Contract renewal typically includes creating a new contract, and there are many instances where a previous contract can be renewed without manually reviewing its terms.
For example, a cell phone company will auto-renew your cell phone contract if you pay month to month. Some cell phone companies won’t lower or raise your rates until you dissolve the original contract by willingly entering into a new one.
Even when the payment and delivery terms of your phone contract don’t change, a different contract is created to replace the prior agreement.
Since laws alter frequently, the contract will likely include new amendments, but the terms probably won’t change on your end.
If you’re looking to renew a contract without creating a new document, get an extension.
What’s the difference between renewing and extending a contract?
You’ll probably hear the terms “renewal” and “extension” used interchangeably, but a contract extension is very different from a renewal.
While contract renewals present you with the opportunity to improve your documents and meet the goals of your contract stakeholders, extensions are treated more like an add-on.
Contract renewals and extensions result in the continuation of a business partnership, but an extension will usually contain the exact same terms agreed upon previously. In most cases, a new contract isn’t created.
Contract extension is a good idea if: You have an agreement that governs a specific, term-limited project that needs more time to complete.
Contract renewal is a good idea if: You’re satisfied with your current business relationship and you want to continue it.
Why bother with the contract renewal process?
Business owners are busy people, so we understand that adding a contract management process to your workflow can be a big ask.
Wouldn’t it be better to quickly address contracts with auto-renewal?
While flipping the automatic contract renewal setting on your contract management software can save you a lot of time and money, it’s still beneficial to renew contracts manually some of the time.
Here’s why.
1. It saves you time and money
Wait, wouldn’t manual contract renewals waste your time?
They can if you have hundreds of contracts, but a proper contract review process has to include organization skills in order to be effective.
That’s what a contract management system is for!
But even with an optimized workflow, there’s still a chance that your business partners will cancel their contract with you, even if your renewal provisions never expire.
However, if you focus on maintaining your business relationships by discussing the terms of your agreement yearly, you won’t have to look for new partners. This saves you time and money during the acquisition process.
Plus, old customers are more likely to negotiate with you and offer more favorable terms than new partners, saving you even more money.
2. It creates stronger business relationships
You can’t build higher-value relationships with a company if you favor automatic renewals over a personal connection.
It would also be impossible to stay on good terms with your clients unless your contracts include all the legal protections, renewal dates, and other provisions that keep the relationship fair.
In fact, you wouldn’t be able to maintain a great relationship with your employees if you didn’t include a termination clause in your employee contracts. These provisions let all parties know the extent of your relationship and offer legal protection to everyone involved.
Typically, employee contract renewals are simple, but the same can’t be said about business contracts.
Since these intimate connections must be fostered over time, you need to maximize your existing relationships by taking a proactive approach to renewals.
In the end, performance monitoring against contract milestones and renewal dates is a primary factor in keeping any relationship or project on track.
3. It leads to proper contract management
Contract management is an essential part of any contract management process, and the best contract management software can help you do it.
Although we sang the praises of a manual renewal process in the previous sections, we wouldn’t recommend manually storing your contracts.
Unless you want to sort through emails, contract repositories, and spreadsheets on a decentralized database, stick with contract management software.
Since you’ll need to update a previous contract after the original contract execution, you’ll need to set up a system that makes this process a breeze.
When you’re organized, contract renewals won’t feel overwhelming to the point of avoiding.
But why participate in contract management?
According to Aberdeen Group, businesses that participate in contract management are:
- More likely to manage their contract costs
- More likely to reduce overall business risk
- More likely to receive higher reviews
- Less likely to lose clients during a renewal
- Less likely to receive complaints
- Less likely to fail in the negotiation stage
If you don’t have a contract review process, those statistics are sure to convince you why you need one right away.
6 tips for an effective contract management workflow
The best way to prepare for contract renewal is to develop a workflow. Here are some best practices you should add to your contract renewal strategy to make it effective.
1. Don’t put off a contract review until it’s time to renew
Life can come at you fast, but you probably know when your contracts are set for renewal.
Don’t put your renewal process on the back burner, or you could miss out on negotiation opportunities.
If you aren’t renewing your contracts on the same day of the year, or at least the same month, rework your workflow so your other contracts are set to renew at a similar time. This way, you can easily review the terms of your contract ahead of time.
2. Have a library of contract templates and terms
Have you asked your team what a perfect contract looks like? Have you had the time to look up contract-based terms or correlate your ideal master agreement?
If not, the process of creating contracts can be intimidating, but if you use a software packed full of legally binding templates, you won’t have to. Simply look up the document you need, fill in the blanks, and send it off to your business partners and clients.
3. Communicate with your partners throughout the process
It makes sense to speak to your business partners when renewing your contracts. After all, you need to make sure all parties involved are happy with the services provided.
However, you may forget to speak to your employees during this process.
Your employees interact with your customers and clients daily. They may be able to offer unique insight on how to improve your processes or your relationships with your partners.
4. Speak to a legal team to improve contracts
Contract management comes with a lot of legal red tape. You need to follow contract law, include the essential elements of a contract, and avoid vitiating factors that could void your document.
Sounds like a lot of work, and without a lawyer or a repository of legal contracts, it often is.
Keeping an attorney on retainer isn’t cost-effective for most small businesses, but you can charge a contract lawyer hourly to review previously made documents to ensure they protect you and your clients appropriately.
5. Automate data collection and tracking
Businesses need data to scale their processes and make more money.
In the past, data collection was complex. You needed a whole department of analysts to find and track metrics that could make or break your business.
Unfortunately, most manual processes are prone to human error and exorbitantly expensive, meaning most businesses couldn’t utilize data to the fullest.
Now, any company can use analytic tools built into their business management software to automatically track important metrics, like turnaround time and cost per acquisition.
You should take advantage of these tools to streamline contract creation and automate tedious tasks.
6. Only include the right people for a secure process
Securing a contract means preventing others from seeing, manipulating, or sending the document to people who shouldn’t have access.
However, it’s common for clients and business owners to send contracts over email, one of the least secure methods of sending information.
The right e-signature software can send your documents via an encrypted channel that only allows access to parties via their email address and password.
This ensures that no one gains access to your files. Plus, with e-signatures, you don’t have to meet your clients in person.
Why proper contract renewal management is important
In our previous section, we looked at how you can develop the best renewal workflow.
But why is this process necessary?
Proper contract renewal management is necessary because:
- You’ll have a centralized depository for all of your contracts
- You’ll have an effective way to track agreements
- You’ll save time and money
- You’ll never miss a renewal date
- You’ll never lose a contract ever again
However, is it better to perform manual contract renewals, or should you automatically renew most contracts?
There are positives and negatives associated with both methods, but we recommend relying on an automatic renewal most of the time.
Why manual contract renewal processes aren’t ideal
Simply put, manual renewals take much longer than an automatic process.
Not only that, but a manual process can deny organizations the ability to address complicated contracts, use contract data to forecast revenue, and see how clauses affect their company.
It’s essential that all parties schedule time for a historical review and strategic consideration of the terms they want to discuss during a contract renewal, but you don’t have to be in the same room to negotiate a contract.
Remember that you can negotiate the terms of a contract, whether you’re manually or automatically renewing.
However, there are some positives that come with a manual process.
With a manual process, you may find contract renewal opportunities you may miss with an auto process. That’s because you may not speak with your employees before renewing a contract.
For example, if your sales team changes the way they post-processed payments to their client’s credit cards, they may want you to negotiate how all of your clients pay their invoices from now on.
Even small changes can make a significant impact on your team’s morale.
Manual processes relying on myriad renewal terms can actually decrease risk exposure, as you’ll have more time to consider a contract’s terms before you’re locked into a new agreement.
You may accidentally enter into a contract that’s illegal due to changes in the law if you don’t prepare ahead of time for your contract renewals.
A manual process gives you that extra bit of time to stay up to date on US law, but you risk losing your customers in that lull period.
To improve legal protection, reduce costs, and meet your obligations, you may want to hire a team that can keep you compliant regardless of what renewal method you use.
Procurement teams and finance professionals should be up for the job.
If you choose to only review your contracts manually, understand that you have to have a solid process in place to achieve scalable success within your company.
On the other hand, a contract auto-renew avoids the complicated task of getting a large team together to accomplish the same tasks a contract management software can handle with ease.
Why should I stick to an auto-renewal process?
Business owners can save time with an auto-renew process because.
No business interruptions
Automatic renewal means services can remain available to both parties at all times.
Since parties don’t have to renegotiate payment, review price terms, or make other future arrangements, your organization won’t experience any service interruption. The same can’t necessarily be said about a manual renewal.
Less negotiation
If you’re happy with the current terms of your contracts, you don’t need to set up a formal meeting or manually review your documents.
Instead of wrestling with varying renegotiation dates, just automatically renew your agreement via software.
Guaranteed revenue
Manual reviews are ideal when you aren’t happy with the services provided. Unfortunately, a manual review leaves you open to business interruptions and a possible loss in revenue.
But when you renew automatically, you’re guaranteed another year of revenue without relying on your sales team.
Easier forecasting
After the renewal period, your team will be able to forecast your revenues.
With an automatic contract renewal process, your team will be able to add loyal clients to your forecasts because they aren’t worried about the contract termination.
No paperwork
Organization can be a challenge for most businesses. Once you scale, you’ll need a filing system that relies less on physical documentation.
It’s harder to keep track of traditional contracts, but electronic documents are easier to store and find. Plus, e-documents are harder to manipulate and less predisposed to human error.
Need a way to automate the contract renewal process?
Want to cash in on all the benefits an automated contract renewal process can bring?
No matter your company size, industry, or business needs, the PandaDoc platform can help. With our contract management software, you’ll always know when it’s time to revisit your contracts and initiate the renewal process.
Still not convinced? Sign up for a free 14-day trial to see exactly how you can use our over 750+ contract templates in your contract workflow.
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