Total construction spending in the United States continues to rise and is estimated to have eclipsed $2.1 billion in September 2024 alone. You want to strike while the iron is hot.
Nothing gets done in construction until all parties sign a legally binding agreement.
The stages of the contract lifecycle are the same regardless of the job size. Every contract has a beginning, middle, and an end. Any missteps during the contract lifecycle can cause delays, fines, penalties, and a potential loss of business.
What Does the Contract Lifecycle Entail?
The contract lifecycle is the entire length of a contract from beginning to end. The first stage is initiation, in which two parties agree to enter into a legal agreement. Many stages take place. You draft, negotiate, execute, and complete a contract during its lifecycle.
All parties must meet obligations, responsibilities, and other conditions, all monitored by a contract lifecycle management process.
You can renew contracts or terminate them. The lifecycle of a contract doesn’t end there. Tools like contract lifecycle management (CLM) software help execute, monitor, analyze, and archive contracts.
What Is Contract Lifecycle Management?
Contract lifecycle management is a process to oversee a legal document from start to end.
Managing the lifecycle includes authoring, negotiation, execution, and performance monitoring. Like the role of an internal audit, a contract management process ensures standardized documents, fulfilled obligations, and managed risk.
CLM used to be difficult for small businesses. It was a concept mostly left to large businesses and enterprises.
Today, cloud-based CLM solutions make it easy for businesses of any size to track contract lifecycles.
Why Is Contract Lifecycle Management Important?
CLM is important because it helps you better manage every job and potential deal. The average construction backlog in the US is 8.6 months. You need to manage each new contract for nearly nine months before starting the work.
A lot can get lost in the shuffle during backlog time, let alone when a project commences.
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Here are some of the benefits of managing the contract lifecycle:
- Raise efficiency: speed up processes with electronic signatures and other tools. The faster a contract is agreed and signed, the sooner you can get to work.
- Increase visibility: have contracts available to all parties from drafting to expiration. Everyone can ensure obligations and liabilities are accounted for.
- Ensure compliance: better visibility and compliance monitoring tools keep track of legal requirements.
- Promote collaboration: manage contracts in real time jointly with the other parties. Everyone can review edits and suggest changes easily before approving a document.
- Save money: standardize your contracts and avoid losing money due to errors, legal fees, and project delays.
- Manage risk: ensure your contracts are accurate, compliant, and bullet-proof should a job or client go south. CLM helps ensure you get paid.
- Shorten contract cycles: speed up lifecycle stages with digital solutions and automated workflows.
- Better insights: gather data on every contract to assess and improve how you create, negotiate, and execute legal documents.
- Secure: store every contract document securely in the cloud and control access privileges.
- Deliver value: reduce time spent on administrative tasks and focus on deliverables.
Optimizing the Stages of the Contract Lifecycle Process
Let’s examine each stage of the contract lifecycle.
Contract Initiation
The initiation stage is where you and the client identify the need for a contract. You outline primary objectives, such as constructing a housing extension or a multi-story building. Gather vital information such as scope, materials, requirements, and timelines.
What about hiring a subcontractor for one phase of a design and build project? You’ll need specific information before creating and signing that legal agreement as well.
Proposed job details will form the foundation for the contract. Create templates to gather the same information for every inquiry. Divide these up by project types, such as residential and commercial. New builds vs. modifications should also have different initiation forms.
Use document management software to streamline template creations. Send digital forms to potential customers for completion.
Authoring, Drafting, and Template Creation
Next up, it’s time to start drafting. Before getting too deep, it’s important to point out that you should seek legal advice during contract creation.
Construction contract services can fast-track drafting tailored to your state’s requirements. Alternatively, you can find contract solutions online that offer templates for contractor agreements.
You’ll want to have a template library that includes:
- Design-build contracts
- Subcontractor contracts
- Fixed-price contracts
- Lump sum contracts
- Time and materials contracts
- Unit price contracts
- Cost-plus contracts
- Incentive-based contracts
- Guaranteed maximum price contracts
Don’t sleep on CLM software and legal document templates. In a recent report, professionals ranked drafting as the most important and time-consuming stage.
An assortment of pre-draft templates gives you options to match contracts to jobs. Contract clause libraries give you added flexibility and speed up contract generation.
With a viable construction contract on hand, it’s time to start drafting. Make sure you can fill in every blank.
Review and Contract Negotiation
Once the draft has been completed, all parties must review the contract. They have the opportunity to examine the contract fine print and further tailor the agreement.
For you, this could include payment terms, required building materials, and deadlines. The client may wish to alter the scope of the project or include additional contract clauses.
CLM solutions make it easy for users to see proposed changes. They also give you version control, ensuring all parties always have access to the most up-to-date draft.
Use collaboration tools to speed up contract review and negotiation. Automatic alerts notify those who need to examine proposed changes. This can be sent to your legal department, project managers, and any other vital stakeholders.
People can approve edits quickly, reducing the time spent on drafting. Many tools enable them to do this on their mobile devices.
Contract Approval
Contract approval is a relatively simple stage of the construction contract lifecycle process. The hard work of authoring the document is done. Two or more people will need to have a final review to approve any contract.
In most cases, much more than two people will need to sign off before approving the final draft. Large companies will run documents through legal professionals and several decision-makers.
You may do something similar. Even a residential build will often need approval from several sets of eyes.
One single individual can hold up the approval process. The longer delays go on, the closer you get to losing the job.
An effective CLM approach for fast approval rates is:
- Identify stakeholders during the initiation process.
- Add contact details to document management software.
- Use automated alerts and notifications for review.
- Continually communicate with stakeholders.
Use document collaboration tools to streamline each step of the approval stage.
Contract Execution
Contract execution is not the same thing as a project execution phase. The execution of a contract is the point at which the document becomes legally binding. How does that happen? All involved parties sign the contract.
So, how do you streamline execution? Two words: electronic signatures.
With e-signatures, stakeholders and decision-makers can legally sign agreements as soon as they’re ready. They can even use mobile apps to finalize a contract when out of the office.
Obligation Management
Contract obligations are the meat and potatoes of your business. This is where your true skills and those of your team get to shine. You complete a milestone. Your obligations have been fulfilled. Now, it’s up to the client to return the favor.
What non-construction activities can streamline the contract obligation?
Many contract management systems track progress and create accountability. Likewise, project management tools can document tasks and track timelines.
Give stakeholders, builders, and subcontractors access so everyone can stay on the same page. Use payment solutions like Handle that are tailored to construction projects.
Going digital ensures you’re paid quickly and prevents project delays. You can also send automated invoices and payment reminders and manage lien waivers.
Compliance Monitoring
Compliance is also part of the contract lifecycle. Every building project must adhere to industry standards and local jurisdictional requirements. Both parties must comply with any additional stipulations, such as payment compliance requirements and local operational regulations.
Here are some best practices for optimizing contract compliance:
- Use cloud-based document storage so everyone can reference the contract.
- Keep comprehensive records of everything from modification requests to permit applications.
- Maintain constant communication with key stakeholders for the project.
- Stay updated on daily operations with a project management system.
- Implement predictive analytics with third-party risk management platforms to identify early compliance risks, such as supply chain or safety issues.
- Maintain accurate budgeting and stay up to date with metrics such as working capital and cash flow.
Amendment, Renewal, or Termination
At some point, the terms of the contract are fulfilled, and its obligations expire. Rolling agreements for something like yearly maintenance allow for easy contract renewals.
With rising overhead costs, it’s often beneficial for contractors to re-negotiate terms. If so, you can propose amendments according to the original contract clauses.
Otherwise, you’ll be better served drafting up a new contract repeating the entire cycle.
All of this can be handled seamlessly with document and contract management tools. Set reminders for all parties well in advance of contract termination.
This will ensure all parties have time to review and decide the next step.
Analysis and Reporting
When a contract is terminated, you want a debrief on the situation. What went well? What didn’t work as intended? Were there any bottlenecks?
Meet with your team and gain feedback on the entire construction contract lifecycle. You’ll get better insights by using contract analytics tools. Track contract performance at each stage and identify potential issues.
Use customer surveys to get feedback from the client’s perspective. Analyze the data and adjust and optimize your CLM.
Archiving
After evaluating a past contract, there’s not much left to do. Every contract ends up as a historical piece of information. It’s a reference for future contracts.
Rather than using mountains of paper, manage and archive all of your contracts in the cloud. Employ database services that keep data secure and allow you to scrape for data when needed.
Being able to search all of your contracts by date, type, client, profit, and other details will help your team find what they need. It will also make your life easier should you get audited.
Contract Lifecycle Management Is the Way
Getting a deal is important to keep your pipeline full. Authoring a contract may be the most time-consuming and intimidating task related to legal documents.
That doesn’t mean, however, that you can afford to neglect the other stages of the contract lifecycle.
Use the right tools and policies, and you’ll be on your way to continuously optimizing how you deal with contracts. You’ll be able to secure deals quicker, fill your backlog, and deliver better value to customers.
Contributed by AuditBoard: AuditBoard transforms how audit, risk, ESG, and InfoSec professionals manage today’s dynamic risk landscape with a modern, connected platform that engages the front lines, surfaces the risks that matter and drives better strategic decision-making.