Every contract embarks on a journey from inception to conclusion, a journey often meticulously planned at the start but less frequently navigated with care at its end. While ample attention is lavished on the initiation phase (from negotiation to contract signature and into transition if one is required), the final chapter of a contract’s life, whether concluding naturally or by termination, is frequently overlooked. This oversight does not stem from a lack of importance but perhaps from a reluctance to confront the inevitable. The conclusion of a contract is a critical phase, irrespective of whether you’re on the buying or selling side, demanding foresight during initial negotiations and a clear understanding of crucial elements that will guide a smooth and strategic closure.
A well-crafted contract anticipates the possibility of termination and addresses how prepaid or committed costs, often termed “stranded costs,” will be handled. It’s essential to establish the responsibility and conditions under which these costs will be recovered. Some examples of stranded costs include:
- Prepaid Software, Maintenance, and Services Contracts used in the performance of the services and in the event the agreement or commitment cannot be novated to the customer
- Undepreciated portion of hardware acquired specifically for the service
- Leases or rentals of property or equipment
- Costs associated with disengaging or reassigning personnel dedicated to the contract.
For a smooth transition during a contract termination or expiration, it’s crucial to have a detailed checklist or project plan. This plan ensures that all necessary tasks are comprehensively covered. Key steps in this process include:
🗸 Making sure proper notice has been provided based on the contract requirements.
🗸 Clarifying the scope of the termination, whether partial or full.
🗸 Addressing any applicable termination fees.
🗸 Ensuring all stranded costs are resolved.
🗸 Managing how Work Orders or Statements of Work will be handled in the event they are still active at the time of termination.
🗸 Strategically handling employees or contractors directly linked to the contract, considering options like transfer, termination, or continuation.
🗸 Preparing an exit-focused contract summary to inform business and account teams of critical terms and responsibilities.
🗸 Overseeing all obligations related to contract exit.
🗸 In services contracts, defining the resources, services, and requirements for any Termination Assistance period.
🗸 Drafting amendments to the contract for any paid termination assistance services.
🗸 Assessing the need to transfer any third-party contracts.
🗸 Initiating knowledge transfer sessions.
🗸 Maintaining an updated Issue and Risk Register for challenges or risks that emerge.
🗸 Holding regular governance meetings to ensure timely completion of all requirements.
🗸 Confirming the return or destruction of all confidential information as per the agreement.
🗸 Ensuring that contractual documents are retained and accessible for a duration that meets contractual and records retention policy requirements.
🗸 Finally, it’s beneficial to compile lessons learned at contract close-out, documenting insights for future contracts.
In conclusion, as you navigate the final steps of contract close-out, an essential activity is ensuring the completion of all financial obligations, including the payment of any outstanding invoices. This step not only signifies the fulfillment of all contractual obligations and deliverables but also cements the professionalism of the entire process. Importantly, even as the contract reaches its end, maintaining a professional and amicable relationship is paramount.
The manner in which a contract concludes can leave a lasting impression; it’s an opportunity to demonstrate reliability and goodwill. Regardless of the reasons for the contract’s termination, keeping the lines of communication open and engaging positively paves the way for potential future opportunities and collaborations. In the world of business, the end of one contract can often be the beginning of another, and a well-handled exit might open the door to new ventures and sustained partnerships.
Want to gain foresight on successful contract exit strategies from initial negotiations through to contract termination or expiration? Schedule a complimentary consultation.
by Nancy Nelson