Procurement contract management is crucial for the wholesale buying and selling of goods — setting the framework for how you deal with customers, partners, and business vendors.
Contracts bind parties to service-level agreements, but just because they’re valid doesn’t necessarily mean they’re consistently enforced effectively.
It’s your procurement contract managers who are key to this operation, negotiating accurate and compliant contracts and swooping in to resolve disputes wherever they arise.
Key takeaways
- The procurement industry is built on legally-binding contracts, whether you’re a buyer or a seller
- Contract management is crucial for product shipping, quality, and minimizing disputes
- The role of contract managers is to focus on risk mitigation strategies and overall project value
- Using contract software is essential for keeping track of all the moving parts
- PandaDoc’s management software helps streamline contract processes
What is contract management in procurement?
Contract management in procurement is the formal system of business transactions.
It’s quite a broad topic, covering the initial stages of vendor selection and negotiation through to dispute resolution and the contract’s closure or renewal.
Procurement contract management aims to provide businesses with end-to-end control of their transactions.
Whether goods are being procured for a construction project or a hospital, stakeholders need assurances that the vendor will hold true to the arrangement.
Otherwise, they’ll lose access to resources required to maintain operations.
Contract management provides these guarantees through service-level agreements; that goods will be delivered on time, to-spec, and in the agreed quantities.
And, if the contract should not be fulfilled, the buyer may recoup their losses through a remediation clause.
In short, a good contract management process involves a thorough contract development process, keeping receipts, and holding the other party to their obligations.
The contract manager should have a ‘Plan B’ if things go awry and will steer the business toward consistent procurement and good value for money.
Why is procurement contract management important?
Contract management is important throughout the entire procurement contract lifecycle.
We’ll try to illustrate this with examples:
In the contract’s initiation phase, management is responsible for finding vendors whose products/services align with their strategic goals.
For instance, if an organization focuses on sustainability, the procurement manager must ensure that their supplier adheres to these environmental standards.
During the execution phase, the procurement contract management process is instrumental in risk identification and mitigation.
It’s up to managers to conduct risk assessments to anticipate potential disruptions — whether that’s a small-scale supply chain issue or a much more significant geopolitical challenge.
In the closure phase, management focuses on maximizing the overall value derived from the contract.
Imagine a procurement contract for the supply of concrete to a construction project.
The manager is responsible for comparing the product’s quality vs the contractual terms, communicating with the seller, and creating new documentation for renewing (or renegotiating) the contract.
As you can see, management plays a crucial role at each step of this journey.
When managers are absent or disengaged from their objectives, the company’s entire supply chain and ability to generate revenue is jeopardized.
It makes procurement management a cross-sectional and highly challenging role that cannot be brushed aside.
Top 8 objectives of contract management in procurement
In this section, we’ll cover eight essential contract management fundamentals that should shape your business’s approach to procurement.
Reducing procurement costs
As a procurement contract manager, your job is to negotiate the best possible payment terms for the services you require.
You should strive for cost-effectiveness at every step of the contract lifecycle, whether bargaining for better deals or cutting unnecessary expenses.
Monitoring supplier performance
Your contracts should outline minimum service levels before penalties apply or the contract is terminated.
Of course, you’ll also need a way to measure supplier performance, whether that’s a system of in-house performance metrics or a review by an independent QA (quality assurance) body.
Cultivating positive supplier relationships
The better your relationship with vendors, the more robust your supply chain will be.
Try to build a broad network of local and global suppliers to enhance the reliability of your logistics operations.
Maintaining open communication
Procurement contracts are rarely a once-and-done event.
You need to know whether shipments are running on time or if changes need to be made, and your suppliers should hear your concerns before they blow up into a bigger problem.
Proactively minimizing disputes
Admittedly, fostering friendly relationships with vendors is hard when you’re constantly in conflict.
This is why you must proactively approach supply chain issues with clear routes for resolution and escalation.
Managing contract amendments
Business needs evolve, and you’ll have to renegotiate contracts as your relationship scales up or down.
Navigate these rocky waters by being honest about your circumstances and entering good-faith negotiations with suppliers.
Ensuring accountability
You should hold your business and suppliers accountable for their obligations outlined in the contract.
This sets the precedent for a healthy and transparent working relationship where both parties trust each other.
Ensuring legal compliance
As a manager, it’s your responsibility to create watertight procurement contract management systems against data loss and theft.
You’ll also need an understanding of your industry’s regulatory environment, such as whether there are import controls on the products you wish to order.
What stages does the procurement contract management process include?
Procurement is no simple task; it can take weeks for a wholesale delivery to arrive, mainly if supply chain shortages or blockages occur.
In this section, we’ll examine each stage of a standard procurement cycle and what this means for your contract management processes:
1. Identifying your needs
The prelude to procurement involves identifying your business’s needs.
You need to settle the score on a number of questions before you can even consider looking for a supplier:
- Do you genuinely need to procure externally, or could the task be handled in-house?
- What are your specific product or service specifications? i.e., product quality and quantity
- How flexible is your budget, and what external factors depend on it?
- Are there any regulatory requirements that could affect your procurement search?
2. Evaluating potential suppliers
Once your needs are defined, you can filter your search for the perfect procurement deal.
Remember, this is about more than simply finding a suitable supplier; you’re aiming to create a strategic partnership for the long term.
As such, your selection criteria should be stringent:
- What are the suppliers’ track records in delivering high-quality products or services?
- Can they scale operations to meet your evolving needs?
- What bottlenecks could they face in meeting the procurement contract?
3. Drafting the perfect bid
Crafting a compelling bid is an art form — it’s not just about listing your requirements.
It’s about convincing the recipient that your deal would be a win-win situation.
You need to consider how your bid could stand out from the competition, such as by hinting at a long-term partnership.
4. Negotiating the contract
Contract negotiation is one of the most challenging parts of the procurement process, and it requires a hands-on approach from management to get it right.
You need to go into this with an understanding of what your non-negotiable terms are (your red lines) and your budget limits.
You need to be flexible and fair and come out the other side with a finalized contract free of ambiguities.
5. Setting up invoicing / payment systems
The next step is to set up a payment system that ensures your supplier is always paid on time, or else it could block your deliveries from being sent.
Be sure to request invoices that break down the costs for individual items and their quantities, as this is crucial for calculating your monthly expenses.
6. Performance evaluation
Contracts are living documents; they need to be examined over time as your needs evolve.
You must continuously review your procurement deliveries and communicate with your supplier when issues arise.
Ask yourself these questions before the first delivery arrives:
- Whose job will it be to check the vendor’s invoice against the delivered goods?
- What key performance indicators (KPIs) will measure supplier performance?
- Are there mechanisms in place to escalate and rectify performance issues?
7. Contract renewal / closure
Anticipating the future is integral to sustainable procurement.
On one hand, you should be forward-thinking in your approach, trying to find mutually beneficial terms for scaling a procurement deal.
At the same time, you need an exit strategy with clear criteria for when a contract will be terminated and what your ‘Plan B’ is.
What challenges do procurement contract management teams face?
Late or substandard deliveries
Perhaps the most frustrating aspect of procurement is when your deliveries do not arrive on time, are defective, or non-compliant with specifications in the contract.
It not only means more paperwork but also places a bottleneck on your business’s internal supply chains.
Procurement contract managers can counter this risk by building a vast network of contacts, meaning there are alternatives should a supplier let you down.
You’ll also need a thorough risk assessment system to know how likely these situations arise and what exactly to do if they come to fruition.
Legal risks
The procurement contract management process must deal with a myriad of regulatory spheres, in everything from data protection to labor and environmental laws.
It requires a broad knowledge of the law or could result in hefty fines and supply chain bottlenecks.
And what if a contract is breached, and all conflict resolution procedures fail?
Bringing a legal case against your supplier is expensive and time-consuming, with no guarantee that the tribunal court will rule in your favor.
You need contracts free of any ambiguities, with the seal of approval from a legal expert.
Finding good value contracts
Contract managers must never lose sight of their main objective — to ensure procurement services provide a good return on investment.
Now, achieving this is tricky.
You need to maintain relationships with multiple suppliers to compare what services they can offer you and to improve your bargaining position.
Plus, you need a system for making data-driven decisions rather than acting on anecdotal experiences.
What is the role of a contract manager in procurement?
Contract management and procurement require decisive leadership on all fronts.
From an outside perspective, you might assume that the contract manager deals with contract negotiation, signing, and record-keeping.
In truth, their role is far more extensive than that.
A big part of the job is risk management — AKA predicting the reliability of contracts, always having a ‘Plan B’, and keeping in constant communication with the supplier.
There’s also the legal aspect of it all.
The contract manager needs an astute understanding of the industry’s regulatory environment to navigate it without issue.
Their contracts must be unambiguous and protect the stakeholder’s interests at all costs.
Where do procurement contract managers work?
Procurement and contracts managers work in different capacities depending on the industry and size of their business:
In-house contract managers
In enterprise contract management, it’s typical for businesses to hire and train their contract managers.
These managers typically have teams to whom they may delegate time-consuming aspects of the procurement process.
Likewise, they would have access to their contract management software platform for tracking each procurement stream and easily comparing each supplier’s value.
Contract management agencies
For smaller businesses with little prior experience in the procurement industry, it’s more likely that they would use a contract management agency.
This means the business can access specialized skills and experience from the offset, which they may learn from if they ever want to hire full-time, in-house personnel.
Specialist contract lawyers
Procurement contract managers often collaborate closely with lawyers during the contract development and negotiation phases.
There’s often a ‘revolving door’ between these two industries for the relevant knowledge of legal frameworks and experience handling disputes in the contract lifecycle.
That said, a contract lawyer wouldn’t be involved in the day-to-day activities of contract management — think of them as an adviser you bring in to help with the high-stakes decisions.
5 procurement contract management best practices
In this section, we’ll break down five procurement contract management best practices that you should integrate into your workflows:
Create templates for your contracts
Using pre-made templates for contract development saves time and results in a higher-quality document.
It serves as a visual guide for the information to include, which steers you in the right direction during the contract writing phase.
A straightforward design also means you’re more likely to spot errors and scan the document to be saved as text.
Only use lawyer-approved language
Getting a contract lawyer to review your agreements before signing means a lower chance of ambiguities that could jeopardize your supply chain.
You can also re-use and insert these clauses across your documents when procuring the same products/services from different suppliers.
This makes it easier to build a large network of suppliers and have back-up options at the ready should one let you down.
Have open communication with your suppliers
So much of what you do in procurement relies on transparent, open communication.
If a delivery is going to be delayed, you must know at the earliest possible stage to plan around it.
If there are causes for concern in the wider supply chain, you must hold immediate risk mitigation discussions with your suppliers.
And if procurement quality is suboptimal, you need a route for painless dispute resolution.
These are just some examples of why having a direct line to your supply teams is so important.
Adopt a contract management software platform
A unified software package can handle many of the tasks in the procurement contract lifecycle.
Imagine: you could find a ready-made template to assemble your bid, use collaborative tools to negotiate real-time amendments, verify with secure eSignatures, and set up automated reminders at crucial moments.
It also handles the file storage question — with guaranteed safe data handling.
Use an analytics platform for comparing historical data
Big data is how procurement managers determine if a supplier is delivering good value for money.
You need somewhere to record and track KPIs, such as product quality or delivery timeframes, to make informed decisions.
Otherwise, you’re simply acting on a hunch — which isn’t going to improve your margins.
Top 5 procurement contract management software tools
1. Google Sheets
The token ‘budget’ option.
Google Sheets is the most economical contract management tool, as it’s completely free to use.
However, it’s only really good for small-scale operations, as you’ll have to build everything from scratch yourself.
And even then, you’re missing out on features like automated notifications and adding eSignatures.
It’ll also be your responsibility to create your contract documents, which need input from a legal adviser before you sign anything.
2. ContractWorks CLM Software
ContractWorks has built an attractive contract management procurement software for enterprise use.
One of their main selling points is their AI Smart Document Tagging feature, which makes locating and tracking contracts easier.
However, it’s only really good if you can stomach the $700/month price point.
3. DealHub
DealHub is an automated contract platform built primarily for integration with Salesforce.
With an extensive content library and document analytics tools, it’ll save you time throughout the procurement lifecycle.
Reach out to their sales team for pricing information.
4. Spotdraft
For contract managers who want to focus on finances, Spotdraft offers a solid feature list.
You can integrate their platform with most mainstream sales, legal, and financial software — ensuring your billing information is always accurate and up-to-date.
It also has a library of standard contract templates, making procurement bid proposals easier.
However, pricing options are only available through a custom quote.
5. PandaDoc
Obviously, we’re biased toward our platform, but we think PandaDoc’s contract management software is one of the best options for procurement managers.
Our all-in-one solution handles the entire contract lifecycle with tools for collaboration, management, and contract tracking.
This makes it easy to create contracts at scale and never miss a beat when deliveries or renewals are approaching.
Plus, you can access 1000+ free business contract templates for rapid contract development and approve them with secure PandaDoc eSignatures in real-time.
You can get started for $19/month with our Essentials package.
Learn how PandaDoc contract management software can make the procurement process easy
No one pretends that procurement contract management is an easy job — you must be able to write secure contracts, create risk mitigation strategies, and always have a Plan B in case a supplier lets you down.
We created PandaDoc: to help managers create secure contracts, collaborate with suppliers, and keep on top of significant events in their calendars.
You’ll never miss a beat with real-time procurement tracking features and automated notifications for both yourself and your partners.
Get started with a 14-day trial.
Disclaimer
PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDoc services are governed by our Terms of Use and Privacy Policy.