Contract Review Procedure Explained (ISO 9001)

What is the Contract Review Procedure?

A contract review procedure is a documented system of processes, activities, and checks that a business goes through when drawing up contracts. It defines the roles and responsibilities of all parties involved, how documents are reviewed, and the level of oversight and approval needed.

Contents

Documentation

This procedure provides a formalized process for effectively examining contracts using suitable resources. It helps ensure that contracts are complete, accurate, and compatible with other contracts.

Purpose

The purpose of a contract review procedure is to reduce the risk associated with contractual relationships and to control agreements with third parties such as customers, suppliers, or partners. Besides, it aims to ensure the business can meet customers' quality requirements, making it a critical tool in quality management.

Because these documents are essential for business operations, a formalized review process helps ensure that contracts will be valid when put into practice. They can also help your business detect and prevent legal disputes, reduce the time needed to prepare contracts, and increase contract management efficiency.

5 Steps

The Contract Review Process In 5 Steps

Generally, the contract review process involves five crucial activities, namely:

  1. Communicating with the customer
  2. Determining and reviewing customer requirements
  3. Order entry 
  4. Changing or amending the contract
  5. Contract risk assessment

Let's examine these in detail:

1 Communicating With the Customer

This involves gaining and clarifying customer requirements through dialogues and negotiations. As part of this process:

  • The business needs to know who is responsible for making what decisions, such as which contracts must go through a review procedure 
  • The business also needs to find out where it can get information about contract terms and conditions
  • Once the customer requirements are clear, it's necessary to discuss the contract terms with customer representatives in detail

This is because a contract review procedure should be coordinated with other business activities such as negotiation, order entry, or design work. And it cannot cover every aspect of a contract agreement without enough details provided by the customer.

2 Determining and Reviewing Customer Requirements

Contract requirements should be determined and reviewed before the contract is finalized to consider changes during negotiation phases. To determine customer requirements, it's necessary to:

  • Review product specifications, such as needs for technical or functional qualities
  • Identify who will use the product or service
  • Identify contract conditions, such as requirements for a delivery date or payment terms
  • Determine the quantity and value of products or services to be provided

Tip: It’s best to obtain customer approval on draft and final versions to have a complete understanding of what's required by the customer.

3 Order Entry and Work Order

After determining customer requirements, a business needs to find ways to produce products or services that meet those requirements. To do this, an organization needs to use a system for handling work orders.

Work order management is a process that allows processes to work together and coordinate their activities, making sure orders are executed promptly following customer requirements.

4 Changing or Amending the Contract

Businesses should have a process in place to document and resolve differences between customer requirements and what the organization can deliver.

As a result, organizations often use 'amendment documents' issued by customers through their representatives after review to make changes to contracts. The amendment document describes the modification in detail. Businesses should make sure that the amendment document is issued:

  • When they do not agree with changes to contracts, or
  • When an organization cannot complete contract obligations

Businesses need to follow this procedure to amend deficient contracts so they can prevent disputes later.

One common form of shortcomings in contracts results from requirements that change during the time it takes to prepare the contract, such as product specifications or payment terms. Handling these changes, therefore, is an essential part of the contract review process.

5 Contract Risk Assessment

When it comes to risk management, organizations should consider factors such as:

  • Adjustments that are difficult to make in contract terms and conditions
  • Terms with potential for disputes
  • Payment terms that may lead to cash flow problems

Businesses need to evaluate their contract review process based on the results of this risk assessment, then identify ways they can help to prevent problems that may lead to disputes.

A business can use its risk assessment results when making a risk management plan. They also need to decide how they're going to manage risks related to contracts as part of the plan, including what approaches to take and whom to rely on for information about potential cash flow problems or other potential challenges.

This video describes contract review strategies and best practices in detail:

https://www.youtube.com/watch?v=ho2hV1RDiYg

Benefits of a Contract Review Procedure

The benefits of a contract review procedure include:

  • Improves business understanding of requirements from customers
  • Provides a process to solve disputes before they arise
  • Helps businesses avoid litigation by implementing steps to prevent or resolve contract disputes early

Generally, a review procedure is not just limited to contracts. Instead, it can also be used to increase quality in internal processes.

common mistakes

Common Mistakes in the Process and Ways To Avoid Them

When writing contracts, organizations should keep in mind that the most common mistakes that can lead to disputes after an agreement is signed include:

  • Not clearly specifying the quantity or quality of products or services provided
  • Failing to identify any risks related to contract completion in advance
  • The business might omit terms related to payment if they expect the customer will pay in full upfront, but this often leads to problems
  • Not clearly defining what penalties or fine print a business can use if there is a dispute between the two parties

To avoid these problems, businesses should:

  • Assign rights and responsibilities for accomplishing contract obligations and communicating them to all involved parties
  • Ensure contracts are completed according to customer requirements
  • Complete contractual obligations on time

Conclusion

Contracts are a fundamental part of any business. They ensure that all parties involved in an agreement know what their obligations are and how they will be held accountable for meeting them. There is also clarity provided on the consequences if one party fails to meet its responsibilities.

The benefits of implementing contract review procedures can include better risk management, more effective third-party agreements, improved operational efficiency, and reduced legal costs. 

Therefore, it's worth implementing a process to ensure that your contracts are up-to-date and adhere to quality and legal standards.

Author: Richard Keen
Updated: 16th September 2021

Richard Keen

Richard Keen

Richard is our Compliance Director, responsible for content & product development.
But most importantly he is ISO's biggest fanboy and a true evangelist of the standards.
Learn more about Richard

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Contract Review Procedure

The purpose of this procedure is to ensure that all tender and contract requirements together with additional requirements that are not specified but are necessary for fitness for use as per applicable legislation, regulations and requirements for availability, delivery and support are adequately defined and that the company is capable of meeting the requirements of its clients.

Forms & Reports also included:

  • Contract Review Process Activity Map
  • Requirements Review Checklist

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