Contract Compliance Audits: What They Are and What You Need to Know

Have you ever blindly accepted your take-out order at a restaurant, only to later be disappointed at home? Perhaps you ordered a sandwich and onion rings (because you’ve been craving rings for a month now), only to discover at your kitchen table that the (clearly incompetent and hateful) server gave you the sweet potato fries instead. Or perhaps you ordered the house pizza with explicit instructions to hold the black olives, only to learn that a cook (probably with impaired taste buds) put them on there anyway. In both of these instances, a quick “order compliance” audit before exiting the restaurant certainly would have been helpful!

Similarly, a company’s business partners sometimes fail to live up to their obligations. But unlike a hungry pizza purchaser who discovers the problem promptly and easily, a business is not always immediately aware of contract compliance failures. That’s where audits come in.

In this article, we’ll explain the necessity of contract compliance audits, give some pointers on how to conduct them, and explain how contract management software makes the process easier.

What Is a Contract Compliance Audit?

Different organizations may define the meaning of “contract compliance audit” in slightly different ways, but the term generally refers to a company’s review and analysis of one or more of the company’s contracts to evaluate whether the parties to the contract have performed all material obligations and complied with all material terms of the agreement.

Depending on the circumstances, a company may have a reason to audit only one contract; all contracts relating to one vendor or customer; all of the company’s contracts; or various other subsets of the company’s contracts.

Why Are Contract Audits Needed?

In modern times, the increased complexity of business has caused enterprises to enter into more contracts than ever before. A failure to conduct contract audits can result in increased costs, decreased revenues, and corresponding impacts to the bottom line.

Let’s look at some examples.

Consider a straightforward, simple contract that requires a monthly payment from one party to the other. It’s not uncommon to hear that a company has either continued to pay after the contract ended, or that a company did not receive all payments or services agreed to in a contract. Sometimes, the parties forget that a new contract changed payment terms from an old contract. In other cases, the parties forget that a contract contains a clause that automatically creates changes at a certain time. These companies clearly have tracking issues.

Other examples include contracts containing increased complexity. For example, some contracts cover much longer periods of time. Thus, the costs of resources can change dramatically, and technology can evolve tremendously.

To address these contingencies, the parties may include a benchmarking clause to trigger reviews. But of course, once the contract is tucked away, the benchmarking clause may be totally forgotten.

Another example is an automatic renewal. With such a clause in the agreement, the contract will renew at a predetermined price if a notice of non-renewal is not sent by a certain date. These renewals provide an important chance to negotiate and reduce costs. Therefore, it’s essential that the contract be reviewed well before the expiration of the date to communicate non-renewal. Again, the issue is tracking dates.

Common Steps in a Contract Compliance Audit

1. Identify one or more contracts, types of contracts, or contractual provisions to be audited. Depending on what the company is trying to accomplish, examples might include one contract with a benchmarking clause, or every contract that does not contain a venue provision.

2. Create goals to accomplish with the audit. For example, perhaps the company wants to identify every contract with an auto-renewal clause and determine if each was considered appropriately before the auto-renewal took place. Another example is making sure that all payments have been received from a particular customer.

3. Perform the audit.

4. Communicate with stakeholders to resolve disagreements. For example, an audit may reveal substandard performance of incomplete payment. Good communication can be critical at this stage to avoid costly litigation.

5. Institute appropriate changes in future contracting procedures to eliminate future problems. This often involves better contract management procedures, including the adoption of appropriate contract management software.

How Contract Management Software Can Help

Not only can ContractSafe help you perform an audit of your current contracts, but ContractSafe contract management software also has tools that can help you reduce the need for audits in the future. Below are just a few of our helpful features.

• Organization - ContractSafe makes it easy to get all of the company’s contracts stored in a single repository. Related contracts, such as those from a particular customer or a particular project, can be linked. You can link related contracts (such as those from a particular customer or project); assign folders and tags to better organize contracts; sort and filter key information; create custom fields; and report and download to Excel with a simple click.

• Searching - The scanned contracts can now be speed-searched as quick as lightning. If you need to identify every contract with a benchmarking clause or an auto-renewal clause, it can be done in a snap with keyword searching.

• Date Tracking and Alerts – ContractSafe will send you reminders of all your key dates. The system will also track any date you choose. For example, you can set a reminder date before notice is required to terminate an auto-renewal so that management can consider it carefully. You can include termination dates, renewal dates, or a date to review a benchmarking clause. The system will send automated email reminders and keeps a calendar of upcoming dates.

• Compliance Tracking.  ContractSafe allows you to create and track anything you want.  You can easily create checkboxes for each year’s compliance check to track this process.  Also notes sections for any finding or exceptions.

• Convenience of the Cloud – Not only are these features available, but because our use of the cloud, contracts can be accessed from anywhere with a computer and an internet connection. Plus, you get all the extra security benefits that we provide!