Businesses rely on agreements with other businesses to get things done. Your formal and informal agreements with suppliers, service providers, subcontractors, landlords, and others are a critical part of your day to day operations. So businesses should adopt some contract best practices to assure stability and avoid unexpected losses or turmoil. An annual contracts review is a great place to start.
1. Organize and Centralize Your Contracts
The first step in preparing for an annual contracts review is to ensure all your contracts are organized and easily accessible. If your contracts are scattered across various locations or stored in different formats, now is the time to consolidate them into a centralized system. Consider using a contract management software that allows you to store, organize, and manage your contracts in one place. This not only makes it easier for you to access them but also simplifies the process for others in your organization.
2. Review Contract Terms and Conditions
At least annually, take the time to review the terms and conditions of all your contracts. Look for key clauses that could impact your business, such as payment terms, renewal dates, termination clauses, and termination notice requirements. Understanding these terms will help you identify any potential financial obligations or risks such as automatic renewals of a service you might not want, or that you might want to change in scope or provider. You should calendar upcoming termination notice dates to avoid a contract renewal you might not want.
3. Ensure Compliance with Contractual Obligations
You should review whether your business has complied with the contractual obligations and taken advantage of opportunities in your agreements. This includes everything from payment terms and delivery schedules to confidentiality and non-compete clauses. Make sure to document any actions taken to comply with these obligations and address any instances where compliance may have been breached. Keeping a record of communication and any resolutions can be invaluable during an audit.
4. Verify Contract Validity and Expiration Dates
Ensure all contracts are valid and up to date. Verify the expiration dates of your agreements and identify any that may need to be renewed or renegotiated. If a contract has expired or is nearing expiration, take action to renew or terminate it as necessary. Keeping your contracts current will prevent any surprises during the audit and help maintain good relationships with your partners and clients.
5. Identify and Account for Contingent Liabilities
Contingent liabilities are potential liabilities that may occur depending on the outcome of a future event. They can have a significant impact on your business. Review your contracts for any clauses that could result in contingent liabilities, such as indemnity clauses, warranties, or performance guarantees.
7. Conduct a Risk Assessment
Conduct a risk assessment of your contracts to identify any potential risks or uncertainties that could impact your business. Consider factors such as counterparty risk, contract dependencies, and changes in market conditions. Address any high-risk contracts by taking proactive measures to mitigate potential issues. This can include renegotiating terms, securing additional guarantees, or diversifying your supplier base.
8. Engage Legal and Financial Professionals
Finally, engage legal and financial professionals to assist with the review and preparation of your contracts for the audit. A contract lawyer can help ensure that your contracts are legally sound and compliant with applicable laws and regulations. Meanwhile, a financial professional can assist with the accounting and financial reporting aspects of your contracts. Together, they can provide a comprehensive review and help you address any potential issues before the audit begins.
Conclusion
Doing a contracts audit may seem daunting, but with proper planning and organization, it can be a straightforward process. By organizing your contracts, reviewing terms and conditions, ensuring compliance, and engaging professionals, you can minimize risks and ensure smooth results.
If you have any questions about doing a contracts review for your business or need assistance with your contract management, feel free to contact our office. We’re here to help you navigate the complexities of contract law and ensure your business is set up for success.