(Updated with additional information December 15, 2015)
All organizations enter into business contracts at some time in their life cycle. Common commercial contracts include employment agreements, sales contracts and invoices, purchase orders, utility contracts, construction projects, goods or services that are highly regulated or with detailed technical specifications, intellectual property (IP) agreements and international trade.
Unfortunately, it is not unusual for not-for-profit organizations to find they have entered into a contractual relationship that did not receive the required level of oversight, discussion and approval. Such contracts dramatically increase the risk of harm to your organization.
Reducing the risk of bad contracts
While necessary, these contracts can bring about exposure to financial and legal risk if implemented improperly. Common errors include, but are not limited to, inaccurate invoices being paid, insufficient documentation and basic contract terms not being enforced. These errors can result in unnecessary costs, onerous obligations or expensive and draining litigation, but they can also be minimized with responsible contract administration.
Contracts can be explicit—written down and signed—or implicit, as in the proverbial handshake deal. When you agree on a simple exchange with a friend and “shake on it,” the two of you have entered into a contract together and, hopefully, an amiable one! In such a circumstance, you might not think to articulate every potential circumstance that may occur under your handshake contract, which would be understandable.
However, when it comes to commercial contracts, an organization must take great care to protect itself, its directors and staff, and its interests. Contract law is a complex and varied discipline upon which tens of thousands of pages have been written and just as many lawyers make their living!
Employment contracts are especially important in light of recent changes to the common law regarding terminations, off-duty conduct, consideration and restrictive covenants.
Contracts done right
Contract administration can work to protect the organization and to create mutually beneficial exchanges between the organization and contracted parties.
Essentially, effective contract administration means that your organization treats the execution of contracts as an important event and subjects the process to special controls. In other words, to effectively manage contracts, you must go beyond the handshake.
Have a look at the process below. Are all the points familiar?
- Understanding or articulation of the organization’s priorities, interests and needs
- Identification of risks and opportunities
- Identification of the type of contract required
- Exploration of potential suppliers
- Development of a request for tenders, quotes or proposals (RFQ, RFP)
- Articulation of RFP/RFQ or tender assessment criteria
- Assessment of tenders, quotes or proposals
- Supplier credit and reference checks, if appropriate
- Contract discussions or negotiations
- Development of contract language
- Development of contract fulfillment characteristics (e.g., milestones, deliverables)
- Communication of contract terms
- Contract extension or change controls
- Approval processes
- Contract fulfillment tracking
- Payment controls
- Contract completion
- Supplier records and management
This is the foundation of a strong contract administration process. Such controls are essential for basic due diligence, whether it’s reporting to your board of directors, your members, the public in annual reports, or the Canada Revenue Agency.
Contract essentials
Clear language, carefully outlining the specific terms of a contract is essential.
Contracts that are strategically or financially significant to the organization should have the benefit of expert advice.
The guidance of a seasoned professional in contract law can make your contract administration much easier for you and your organization and save you undue worry as well as potential financial loss.
How do your contract administration processes measure up?
Before you jump to google to search for a contract lawyer, why not review the Legal and Regulatory section of Not-for-Profit PolicyPro?
You can try it free for 30 days!
Jeffrey Sherman, MBA, FCPA, FCA
Jeffrey is a popular presenter, and was an adjunct professor at York University for 15 years. He is a frequent course director and course author for many organizations, including provincial bodies of Chartered Professional Accountants across Canada.
He has written over 20 books including: Canadian Treasury Management, Canadian Risk Management, and Financial Instruments: A Guide for Financial Managers (all published by Thomson-Reuters/Carswell), as well as Finance and Accounting PolicyPro and Information Technology PolicyPro (guides to governance, procedures, and internal control), and Cash Management Toolkit for Small and Medium Businesses (all published by Chartered Professional Accountants of Canada [CPA Canada]).
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