Effective Contract Creation Process: The Complete Guide
Jan 20th, 2023
What is the most effective way to create a contract? It depends on whether you’re doing it the traditional, paper-bound method or using automated contract lifecycle management software. There’s a lot less work involved when all your contracts are electronic.
- The three elements that must be included in every legally binding contract are offer, acceptance, and consideration.
- Creating a contract the traditional way is a 10-step process that involves a lot of detailed writing from scratch.
- Contract lifecycle management (CLM) software automates the contract creation process, makes it more efficient, and reduces the risk of human error.
3 Elements Every Contract Must Include
Whether you’re creating a contract the old-fashioned way (by hand) or using a modern approach (with automated contract management software), every contract you create must include the same three basic elements to be legally binding:
- Offer: A proposal made by one party containing specific terms. The other party can accept, reject, or modify the contract.
- Acceptance: If the second party agrees to the terms of the offer, they accept the contract.
- Consideration: This is the exchange of value between the two parties. Consideration can include goods, services, money, property, and similar items.
When an offer is accepted and consideration negotiated, the contract is still not legally binding until both parties sign the contract. Either party can back out of the contract at any point before it is signed, but after it’s signed both parties are legally obligated to fulfill the agreed-upon terms.
SOURCE: Corporate and Business Law via YouTube
How to Create a Contract: The Traditional Way
People have been creating contracts for centuries. Over the years, the process of creating contracts has evolved into a standardized form with 10 common steps. If you’re creating physical contracts, this is the process to follow.
1. Identify Contract Goals
Before you set pen to paper or fingers to keyboard, you need to determine what you want to accomplish in a contract. There are many questions you can ask, including:
- Why are you creating this contract?
- How will it benefit your company or organization?
- What’s it worth to you?
2. Negotiate Contract Terms
Once you’ve identified your goals, it’s time to start negotiating the terms with the other party. You should begin negotiation before you put a single word on paper. Know what you want to pay or provide and what you want to receive in return. Don’t expect to fully agree with the other party on the first pass. In most negotiations, both parties will need to give a little to come to an agreement – but know just how far you can go before the terms become unacceptable.
3. Include Basic Information for Both Parties
Negotiations complete, start putting key information on paper. Include the full legal business names of both parties, key contacts, and contact information.
4. Specify Contract Details
General descriptions out of the way, you now need to include all the details about what is being exchanged in the contract. Include financial details, quantities, descriptions of goods and services provided, and more. No detail is too unimportant to include in a contract.
5. Specify Payment Terms
It’s important to specify not just how much each party is paying or receiving but also how those payments are to be made. This includes a schedule of payments and acceptable payment methods.
6. Determine the Schedule for Deliverables
Accompanying the payment schedule should be a schedule for deliverables – that is, those goods and services exchanged as part of the contract. Spell out the precise dates all deliverables are due.
7. Describe How the Contract Ends
How does the contract conclude? You need to think through and detail not just how a contract begins but also how it ends. Does it expire after a given time? Or when all deliverables have been delivered? Can it be renewed – and, if so, automatically or with renegotiation? Who owns what at the end of the contract?
8. Detail How Disputes are Handled
What do you do if the two parties have a disagreement over deliverables? Instead of automatically going to court, you may want to detail methods of mediation to handle disputes. You also need to specify which state has jurisdiction over the contract, especially if the two parties are based in different states or have locations in multiple states.
9. Review, Edit, and Approve Contract Terms
After you have written the contract, it needs to be reviewed by key individuals and departments inside your company and inside the other party’s company. The review process typically involves some editing and changes, and you’ll have to walk the contract through the appropriate process to get approval from key stakeholders.
10. Sign the Contract
The contract isn’t legal until authorized representatives from each party have signed it. Make sure you include space for signatures and the time necessary to get those signatures on paper.
How to Create a Contract: The Automated Way
Creating a contract the traditional way is a lot of work. It’s also prone to errors and takes a lot of time to complete. Fortunately, there’s a better way to do it.
Contract lifecycle management (CLM) software automates the entire contract creation process. CLM software does away with paper contracts and manual processes for digital contracts and automated processes. This new way to create contracts is faster, more efficient, and more accurate than doing it all by hand.
How does CLM software automate contract creation? It’s all done on computers:
- Contracts are initiated and initial information is provided by filling out computer-based forms.
- Contracts are created from pre-approved templates and clauses so nothing has to be written from scratch.
- Negotiations and editing are accomplished electronically with all changes automatically tracked.
- Reviews and approvals are also routed electronically, automatically going to the correct person or department in the correct order.
- Signing by both parties is accomplished via e-signatures.
- Electronic signatures speed up the execution process, reducing turnaround time by 80%.
- After execution, automatic notifications are sent when deliverables are due so there aren’t any missed deadlines.
- All contracts are stored in a central digital repository that enables robust reporting and analysis.
- At the end of each contract, automatic notifications are sent reminding both parties so contact can be renewed or renegotiated if desired.
It’s all automated. It’s all electronic. It’s all extremely efficient. CLM software reduces the risk of human error, ensures more standardized contracts, and guards against missed deadlines. And, because all contacts are stored in a single electronic repository, it’s more secure than passing around physical documents. It can also save you money – according to Deloitte, up to 60%.
Choose Contract Logix for Effective Contract Creation Process
For a more effective contract creation process, turn to contract automation professionals. Our premium contract lifecycle management (CLM) solution automates the entire contract creation process, from inception through execution. Organizations that use our CLM solution get improved efficiency, a faster process, and lower costs – you’ll never go back to the old way of doing things.
Contact Contract Logix to learn more about effective contract creation.
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