As an Account Executive or Project Owner, are you certain that the services being delivered align with your contractual commitments? Understanding your contractual obligations and assessing them against the real environment are two different things. It’s a common scenario faced by many stakeholders, particularly those not involved in day-to-day delivery who often lack insight into how the contract is performing or if it is being executed in accordance with agreed upon obligations. Without the proper oversight, important obligations can be missed by both sides, triggering expensive delays, revenue losses, contract breaches, and other significant issues. In this article, we will explore the importance of differentiating between what is contracted and what is being performed, offering insights and strategies to help you bridge this critical gap.
Ensuring the fulfillment of contractual promises and holding the counterparty accountable is a significant challenge for contract teams. A practical strategy to address this involves integrating check points into your contracting processes for the key activities committed by both parties. Some examples of these check points are the application of service levels during local business hours (instead of 24×7), any changes to the software support would be treated as a billable project (instead of continued support for software even if changed), and the performance of software upgrades on a time and material basis (versus as part of the monthly Service Charge).
How to Create an Effective Contracted vs. Performed Review Process that Works
If you haven’t previously defined this process, here are a few quick tips for getting started:
- Collect contract performance obligations from your contract (note this means not only key actions and deliverables, but all performance obligations).
- Schedule review meetings with relevant delivery teams with a defined agenda for requirements of review so that stakeholders arrive prepared.
- Review each of the obligations with a focus on identifying whether the obligation was performed as written, over performed or not performed/under performed.
- Determine steps to correct over/under performance.
- Address missed obligations and determine process to correct them.
- Ideally, this activity should be performed every 6 months on critical accounts to ensure continued compliance.
- A report identifying the differences found, along with the associated values, should be issued to track progress and financial implications.
Benefits of a Contracted vs. Performed Review of Contract Key Provisions:
Implementing these “reality check” reviews within your contract management process can yield significant advantages, particularly in safeguarding your company’s financial well-being. By preempting costly mistakes and diminishing the likelihood of damaging business relationships, these reviews foster successful outcomes for all involved parties. Our experience with various clients has highlighted several key benefits that are commonly observed from conducting these assessments:
- They significantly lower the risk of margin erosion and the potential for contract default.
- These reviews ensure both parties are adhering effectively to their contractual obligations.
- They provide a thorough, audit-like review comparing what was promised in the contract against what is actually being delivered.
- They increase awareness and vigilance within accounts teams.
- These reviews bolster leadership confidence in the contract management process, highlighting its crucial role in achieving business objectives.
In one notable instance, a company unearthed several discrepancies in a large IT services contract through our review process. They realized that cost of living adjustments (COLA) were not consistently being applied. Additionally, the company was inadvertently over-delivering on certain services while simultaneously incurring penalties for underperformance in other areas. This combination of oversight and imbalance in service delivery was leading to significant revenue leakage, amounting to over $300,000 annually. This discovery highlighted the critical need for rigorous contract reviews to identify and rectify such costly inconsistencies.
Prioritizing the integrity of your contracts is essential for every stakeholder involved. If you’re looking for guidance in this area, our team of seasoned contract professionals is here to help. We can assist you in meticulously extracting contractual obligations, either manually or using advanced technology, and in conducting these vital reviews of your current operations. Such proactive steps not only boost confidence in your processes but also pave the way for ultimate success in contract management. Remember, navigating the realities of contract compliance doesn’t have to be daunting or time-consuming when you have the right support at your side. Contact us to learn more today.
by Nancy Nelson