4 Contract Management Mistakes – And How to Avoid Them

Contract management is a field that requires many skills. In an article from IACCM, Richard Waugh, Vice President, Corporate Development, at Zycus Inc. recommends that contract managers think more like consultants. Among the consultant skills that he recommends to contract managers is the ability to find the “root cause.”

“Any good consultant knows that finding the root cause of a defective process will be the key to implementing real process change, instead of focusing solely on the symptoms,” Waugh writes. In this article, we will review four contract management mistakes that often are the root cause of problems and how to avoid those mistakes.

1. Relying on Paper-Based Systems

In January 2006, the council members of Nevada met with a printed copy of the city budget. The printout was presenting a $5 million deficit in the water and sewer fund. However, a December 2005 printout of the budget didn’t have that large deficit. The difference between the two paper documents led the council to postpone voting on the budget.

This example exemplifies how paper-based contract management systems can lead to major financial blunders. For organizations that use taxpayer dollars, paper-based systems often lead to project delays that could be easily prevented.

How to Avoid It: A major problem with paper-based systems is that they bring your attention to potential problems. By using a contract management system, you can setup pre-approved ranges for specific fields so that users receive alerts when entering inappropriate values. Also, Goldman Sachs estimates that contract automation could accelerate negotiation cycles by 50%, reduce erroneous payments by 75 to 90%, and cut operating and processing costs associated with managing contracts by 10-30%.

2. Lacking Version Control

Documentation is key for auditing and keeping compliance. Take the Agricultural Bank of Namibia (Agribank) for example. By relying on individual spreadsheets, employees from the Agribank made several data entry mistakes. One of those mistakes was changing an mount from N$59,5 million on one spreadsheet to N$50,4 million on another.

This mistake changed the total arrears from N$9,8 million to just N$710 000! Despite the size of the mistake, bank employees didn’t notice it until auditors were called in.

How to Avoid It: A contract management system keeps versions of working documents so that they can be compared as necessary. If you incorporate internal auditing into the contract lifecycle of your clients, then you have a higher chance of success in catching mistakes along document versions.

3. Not Automating Compliance

In 2004, CECO Environmental Corp., an independent air pollution control company, discovered spreadsheet calculations used by the Company’s construction division for its ‘percentage of completion’ accounting. The mistake affected the cash flows, earnings, and income values before taxes for the period between 2000 and 2003.

While CECO reported this miscalculation immediately after discovery to its independent auditors, the Chairman and CEO of the company was very concerned about how the company was preparing for Sarbanes-Oxley compliance.

How to Avoid It: Nowadays there are several business systems that can help you automate processes for achieving Sarbanes-Oxley compliance. For example, the software from Contract Logix maintains contract history for auditing, keeps a full audit trail, and maintains compliance standards.

4. Providing Full Access to Documents

It’s important to limit the access to critical documents to only those that really need to have access. For example, in 2004 Deloitte & Touche LLP criticized Tweeter Entertainment Group Inc. for having insufficient spreadsheet controls.

There is truth to the phrase “too many cooks in the kitchen.” If too many people have access to the same documents, it can become too overwhelming to keep track of changes and revisions. Additionally, there may be a lack of accountability as it may be difficult to trace the authors of certain changes along several revisions.

5. How to Avoid It

Go beyond password protection and limit the access of confidential contract data to specific users with admin, read-and-write, and read-only permissions through a dynamic enterprise contract management system.

Image Credit: FutUndBeild