At any given time of the fiscal year, a company may be in the middle of a multitude of various contracts. From procurement to trademarking to contracting a consultant, so many crucial business processes rely on the existence of contracts. This is why it is crucial to understand and optimize your contract creation and management process. 

However, the contract creation and management process is already a time-consuming area of work. But, what if you introduced contract analysis into your company as well?

As a business owner, you know that contracts define relationships, set expectations, and protect your interests. But let’s face it – contracts can be complex and intimidating, especially if you’re not a legal expert. That’s where contract analysis comes in. Just like how AP automation makes your accounts payable process a breeze, contract analysis helps you navigate the intricacies of legal agreements with confidence and ease. This article will explore why contract analysis is so crucial and how it can benefit your business.

Contract analysis

So what is contract analysis? It is the process of identifying areas of a contract, either in-process or completed, that can be improved. Improvement could mean any number of things, including reducing costs, simplifying processes, or identifying different objectives or needs.

Another objective of contract analysis is to identify the similarities and differences between different contracts. This analysis helps companies understand the relationship and similarities between seemingly different contracts and also helps significantly reduce contract drafting for future contracts. 

By taking the time to thoroughly analyze a contract before signing on the dotted line, you’ll gain a clear understanding of what you’re getting into and can make an informed decision about whether it’s the right move for your company.

Why does contract analysis matter?

Contract analysis is a precious yet overlooked area of the contract management process. As with any area of business, analyzing and reflecting on how things can be improved for future iterations may not seem necessary, but can go a long way in improving the efficacy of your business practices. 

A thorough contract analysis can help you identify areas to cut costs. Maybe the pricing model you decided to go with ended up costing you more than anticipated. Perhaps you went with a fixed price lump sum pricing but would have saved money by negotiating a cost-reimbursable plus fixed fee model because the vendor’s costs ended up being quite low. Without critically thinking about these decisions after the fact, your company may end making the same costly decision in the future.

Contract analysis can also help you streamline the contract management process for the future. Your company may be inadvertently wasting time drafting similar clauses or structures for different contracts without noticing the similarities. By doing a comprehensive analysis of the types of contracts your company utilizes, similar clauses, similar structures and related topics, you may be able to improve your contract workflow by grouping certain contracts together based on various characteristics.

Also, looking for similar clauses or language can help your company identify boilerplate copy. While boilerplate text may have a negative connotation in the marketing and journalism world, it can actually be quite useful for contract managers to have. Boilerplate copy increases standardized amongst legal documents. It can also save your company some time when drafting future contracts if you know when to use them. 

Contract analysis can also reveal insights about stakeholder and vendor relationships. You might not realize it at the moment, but committing time to strengthen vendor relationships will go a long way in building a reliable network of sellers for the future. While these qualities may not be as easily measured as cost and deliverables, analyzing contracts can help to see where you could improve bonds with your sellers. For example, through contract analysis, you may identify a pattern of your vendor consistently meeting milestones early. To reward them for their timeliness, you may want to suggest a cost-plus-incentive-fee pricing model for your next contract, citing their punctuality. This shows that you are attentive to their work ethic and appreciate their timeliness. Managing these relationships may manifest in other ways, but contract analysis can help reveal a few areas to build on.

Oftentimes, contract analysis may seem redundant or somewhat pointless. What’s the point of going through long documents that you already had to spend hours reading through if you don’t have to? While the answer may not be explicit, this blog post shows that there are many hidden insights revealed through thorough contract analysis. 

Optimizing Performance and Efficiency

When you know precisely what deliverables, timelines, and performance metrics the contract expects of you, you can align your operations like a pro to meet those requirements. Aligning your operations in this way means you’ll be able to allocate your resources more effectively, improve productivity, and ultimately, see a healthier bottom line. It’s a win-win situation.

Identifying Risks and Opportunities

By carefully combing through the terms and conditions of a contract, you can spot areas that might put your company at risk legally, financially, or operationally. But here’s the thing – you might also uncover hidden gems, like chances to save money, generate revenue, or form strategic partnerships. It’s like a treasure hunt but for your business.