Contracts can be a pain in the neck to manage, especially when you're dealing with a high volume. And when compliance requirements are added to the mix, things can get even more complicated. 

Any mishap directly leads to financial loss. For instance, Amazon, an eCommerce giant, has repeatedly faced the brunt of contract mishaps. In 2019, Amazon was fined €4 million by the Paris Trade Court for unfair conditions in its contracts with third-party sellers.

In 2022, the French authorities again fined Amazon €3.3 million for failing to update contracts with third-party sellers in a timely manner. That's only the financial impact of non-compliance in contracts. The impact on brand reputation is not immediately tangible, but it does affect the company down the line.

To avoid such issues, we'll guide you through the processes and best practices to ensure contract compliance in this post.

What is contract compliance?

Contract compliance refers to the procedures and checks that businesses implement to ensure that they're following the rules and regulations laid out not only by the government but also internally by their own policymakers.

Effective contract compliance is an essential part of contract management strategy, which aims to ensure that contracts are executed efficiently and effectively, from pre-signing to post-signing stages. Also, compliance requirements can come from various sources, including internal stakeholders and external regulations set by governments and industry leaders.

So, how do you measure whether your business is staying compliant? By assessing if you're meeting goals and checkpoints in your contract and also keeping with all the laws and regulations set by government authorities.

Easier said than done! There are a lot of challenges that you might come across while ensuring contract compliance.

The importance of contract compliance

“While it doesn’t always get the love it deserves, a robust compliance function is an important part of risk-reduction at companies of any size. As such, in-house lawyers should get behind the creation of a compliance group if there isn’t one or enhance the existing one whether it sits in the legal department or not.”

~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: Building a Strong Compliance Department

Effective contract compliance can save you time, money, and headaches down the line. By ensuring that you're meeting your contractual obligations and adhering to regulations, you're reducing the risk of costly legal disputes and protecting your business's reputation.

#1 Legal protection

Ensuring contract compliance means adhering to the terms and conditions of the contract, reducing the risk of legal disputes or breach of contract claims. This protects your business from costly legal battles and potential reputational damage.

#2 Financial protection

Non-compliance can lead to costly penalties, fines, or legal fees. Effective contract compliance can help you avoid these costs, saving you time and money down the line.

#3 Enhanced reputation

Commitment to compliance can enhance your reputation and position your organization as a trustworthy and reliable partner. This can lead to increased business opportunities and positive business relationships with clients and vendors.

#4 Operational efficiency

Contract compliance can help reduce administrative burdens and improve workflow. By ensuring that everyone is on the same page and working towards the same goal, you can streamline your processes and operate more efficiently.

#5 Better vendor relationships

Effective contract compliance can help build trust and establish a positive working relationship based on mutual respect and understanding. This can lead to smoother negotiations and a stronger, more productive partnership.

So, let’s see how you can implement an effective contract compliance process in your organization.

Also read: Tracking Contract Compliance: Tools & Best Practices

The risks of non-compliance

Source: Scott Lane via LinkedIn

Non-compliance is a major threat to the growth of every business, especially in the modern business environment where competition is fiercer, and regulations are more demanding than ever.

It’s up to contract-facing departments to ensure there are no compliance gaps, as even the smallest oversights can leave the business exposed to serious risks, including:

#1 Regulatory sanctions

Failure to comply with regulatory policies can result in sanctions from government bodies or industry policymakers. These can range from hefty fines to license suspension.

#2 Contract disputes

Non-compliance with contractual obligations can trigger disputes between counterparties. What starts as a disagreement can quickly escalate into a costly legal battle, draining both time and resources. Worse still, if the court rules against you, you may have to pay damages or compensate the other party in ways that can harm your bottom line. 

Source: Sean Hogle via LinkedIn

#3 Operational disruptions

Imagine your business operations getting paused because of a suspended license or an ongoing lawsuit. Non-compliance can cause operational disruptions, throwing your business out of sync and taking a toll on general productivity.

#4 Competitive disadvantage

A history of non-compliance is like a scar on your business’s reputation. Customers, partners, and investors won’t be as eager to work with a business that’s regularly caught on the wrong side of compliance.

This can put you at a serious disadvantage in the market, causing you to lose valuable partnerships and miss out on fresh opportunities.

Who is responsible for contract compliance?

Who is responsible for contract compliance largely depends on your organization's structure. But below are the top roles/departments that are involved more in the overall compliance monitoring process:

#1 Contract manager

Contract managers oversee the entire contract lifecycle, ensuring all necessary terms are added to the contract and execution/renewal happens on time. In some organizations, the project manager acts as a contract manager.

#2 Legal department

The legal department reviews the contract and highlights any missing terms that could lead to non-compliance.

#3 Procurement teams

The procurement team often deals with third parties, such as vendors and suppliers. This team oversees that third parties meet their contractual obligations, especially in terms of delivery, quality, and cost.

#4 Project Manager

A project manager checks if internal teams are completing deliverables in a timely manner and meeting contract expectations.

#5 Finance department

The finance department checks if payment terms and conditions are met, and all the contracts meet financial compliance.

#6 Contract compliance specialist

“Compliance brings stress and excitement at the same time. We handle matters involving the SEC, FINRA, DHS/USCIS, as well as the California DFPI and regulators from other states. So, navigating through these regulatory authorities is distinctive to what I do.

It's like a triangle because you have the lender, borrower, and investors, and around that triangle you have the regulatory authorities. We strive to create a safe space for our investors and be the best one-stop-shop for their investment needs.”

~ Mine Ekim, Managing Director, Legal & Compliance, Golden Gate Global
From Big Law to Business Impact

Some organizations also appoint a compliance officer or a contract compliance specialist to ensure contracts are in sync with federal laws and contract obligations are met

#7 Internal audit teams

As different teams take care of parts of the contract, the audit team brings an extra pair of eyes by conducting contract compliance audits and validating the overall contract compliance.

KPIs for contract compliance

Source: Aaron Govindasamy via LinkedIn

Putting numbers to contract compliance is a great way to understand how well your organization is staying on track. It gives you a clear snapshot of where things are going smoothly and where you might be running into trouble. Some important KPIs include:

#1 Compliance rate

This is simply the percentage of contracts that are compliant with regulatory policies and contractual provisions.

A higher rate indicates stronger adherence to contract terms and regulatory guidelines.

#2 Frequency of contract disputes

This KPI tracks how often disputes arise due to non-compliance with contract terms. The more frequent the disputes, the more likely there are gaps in compliance.

#3 Contract renewal rate

Contract renewal rate refers to the percentage of contracts renewed upon expiration.

A higher renewal rate means you have a good relationship with your customers, which also indicates a healthy compliance record.

#4 Total costs of non-compliance

This measures the total financial cost of non-compliance, including fines, penalties, legal fees, and any other expenses that arise as a result of non-compliance with contractual obligations and regulatory policies.

The Challenges in ensuring contract compliance

Ensuring contract compliance may be a crucial part of any business, but it's not without its challenges. Let's take a closer look at some of the common hurdles that can make the compliance process a headache.

#1 Multiple stakeholders

‍Contracts often involve several stakeholders, making it difficult to ensure that everyone is adhering to the terms and conditions of the agreement.

#2 Complexity of contracts

Contracts can be filled with legal jargon and technical terms that can be difficult to understand and implement.

#3 Keeping up with changes

“With rapidly evolving technologies, the legal framework tends to lag behind. Whenever there is any amendment in a related regulation, you should be able to suggest necessary changes to the product team to ensure compliance.”

~Juliette Thirsk, Head of Legal at Peach Payments
The Counsel Corner: Streamlining Legal at a FinTech Startup

Continuously monitoring contract compliance and adjusting to changes in regulations, policies, and industry standards is absolutely non-negotiable. While you may get updates about changing company policies, keeping yourself updated about the changes in corporate governance and regulations is no cakewalk. 

#4 Limited time and resources

In-house legal teams are often stretched thin, and resources may be limited. This can make it challenging to devote the time and attention needed to ensure that contracts are compliant.

#5 Lack of communication

Without clear lines of communication, it can be difficult to ensure that everyone involved in the contract process is on the same page and working towards the same goal. This can lead to confusion and misunderstandings that can result in non-compliance.

#6 Managing vendors

Dealing with a large number of third-party vendor contracts can be a challenge, especially when you have to ensure that they are meeting their contractual obligations.

#7 Loss of version control

It's important to keep track of all versions of a contract and ensure that everyone involved is working from the latest version. If there are multiple versions of a contract floating around, it can be difficult to ensure compliance with the correct version.

Source: Peter Thomson via LinkedIn

How to start compliance tracking? 7 Tips for contract compliance 

The ideal way to overcome compliance challenges and start contract compliance tracking is by using technology and automating your contract management processes with the help of robust contract management software, such as SpotDraft.

SpotDraft simplifies the contract management process, saving you time and reducing the risk of costly contracting errors.

“SpotDraft is helping solve the entire workflow management relating to legal contracts. From the draft stage to enabling multiple teams working on it to sending it to external parties for signature and finally storage/retrieval of the contracts.”

~ Pocketaces

Here are some of the features of SpotDraft that will help you manage contract compliance:

#1 Intelligent contract templates

SpotDraft offers a range of customizable templates that can be tailored to your specific needs. You can create templates for different types of contracts, such as NDAs or vendor agreements, and then use them to streamline the contract creation process. This ensures you are not missing any necessary contract terms.

#2 Automated contract approval workflows

You can set up automated workflows that ensure all contracts are reviewed and approved by the relevant stakeholders. This helps to reduce the risk of non-compliance and ensures that everyone is on the same page.

#3 Centralized repository

All of your contracts are stored in a centralized repository. This helps you track the important dates and deadlines. Also, the centralized repository is secure, and all sensitive information is encrypted to ensure the contract data is safe and in line with your cybersecurity and privacy policies.

#4 AI-powered contract review

SpotDraft uses AI to analyze your contracts and flag any potential issues or areas of concern. This helps to ensure that your contracts are compliant with regulations and adhere to best practices.

#5 Real-time analytics

With SpotDraft's analytics dashboard and reporting capabilities, you can track the key performance indicators of your contracts in real-time. This helps you to identify any areas for improvement and make data-driven decisions that drive better business outcomes.

#6 Guardrails

Guardrails act as reminders for key terms and clauses in contracts that require special attention, such as non-compete clauses or termination clauses. This feature ensures that all contracts are reviewed and approved by the relevant contract stakeholders before they are executed, minimizing the risk of non-compliance.

For instance, if you have a contract exceeding a certain value, you can set a guardrail for further approval before it’s sent out for signature. With this feature, you can meet all compliance requirements or rules you have set internally.

Manual compliance monitoring will be less effective as the organization grows. With Spotdraft, you can automate a huge load of compliance tracking easily.

#7 Automated reminders

SpotDraft allows you to set up recurring reminders for key contract dates, such as renewal dates. These automated alerts reduce the requirement for manual contract monitoring and ensure you do not miss any follow-up actions required on a contract.

Checklist for contract compliance

A contract compliance checklist is simply an outline of questions or tasks that you can review to ensure that every area related to compliance has been adequately covered.

It covers relevant contractual provisions, applicable regulations, stakeholder identification, and more. The goal of a contract compliance checklist is to make it easier for contract-facing teams to stay in line with contractual obligations and regulatory standards.

Here are key points typically covered in a contract compliance checklist:

• How long does the average contract lifecycle take?
• What is the average lead time for contract reviews?
• Is your clause library up to date and in line with current regulations?
• Is there a mechanism for tracking contract renewals?
• Are all parties identified in each contract, and are their responsibilities outlined?
• Have all required regulatory filings been completed?
• Are deadlines clearly communicated in each contract?
• Is there a process in place for managing contract amendments and modifications?
• Are there clauses addressing dispute resolution procedures?
• Is there a system for monitoring contract performance and compliance over its lifecycle?
• Are confidentiality and data protection provisions compliant with applicable laws and regulations?
• Is there evidence of contract execution by authorized representatives?
• Have any third-party obligations or dependencies been identified?

Ultimately, what’s contained in your checklist might be different. Just ensure it is tailored to suit your company’s current situation.

9 Best practices to ensure contract compliance

Here are some best practices that can help you stay on top of your contracts and reduce the risk of non-compliance:

#1 Build standard templates for different types of contracts to reduce errors

Develop standardized contract templates for common agreements such as NDAs, vendor contracts, and employment contracts. This ensures consistency in language and terms and reduces the risk of errors or omissions.

#2 Stick to a robust contract approval process to reduce risk

Implement a clear and structured contract approval process. This process should include specific criteria that must be met before a contract can be approved, such as financial review, legal review, and vendor approval.

Also read: The Perfect Contract Review Checklist

#3 Establish clear roles and responsibilities to avoid confusion

Clearly defining who is responsible for what can help avoid confusion and ensure that everyone knows what is expected of them.

Ensure that everyone involved in the contract management process understands their role and responsibilities. This includes not just the legal team, but also other departments such as procurement, finance, and sales. 

Consider creating a contract management committee with representatives from each department to ensure that all parties are on the same page.

#4 Create a centralized repository for contract documents for easy access

Store all contracts and related documents in a central repository. It can be in the form of a document management system or a cloud-based platform. This centralized repository ensures that all documents are easily accessible and searchable and reduces the risk of lost or misplaced contracts.

Also read: Contract Storage: Tips to Store Your Contracts Effectively

#5 Track important dates and deadlines to meet obligations 

Many contracts include specific deadlines for payment, delivery, and other actions. It's important to track these dates to ensure all parties are meeting their obligations. For example, if your company has a contract with a vendor to provide services, you must track deadlines for submitting invoices and making payments. You can use this free MS Excel spreadsheet to track these important milestones.

#6 Maintain a document with the latest changes in laws & regulations

Keep a document or database with the latest changes in laws and regulations relevant to your industry. This ensures that your contracts remain compliant with current standards and reduces the risk of non-compliance.

You can use legal research tools and online databases like Westlaw/LexisNexis/Manupatra (for India) to stay up-to-date with legal developments.

Also, consider joining industry associations and networks to stay informed about new legal developments and best practices in your industry, and don’t forget to attend conferences, seminars, and webinars relevant to your business area.

#7 Conduct regular audits and reviews to identify areas for improvement

Regularly review and audit your contracts to ensure compliance. This can include checking for proper documentation, adherence to contract terms, and vendor performance. Use these reviews to identify areas for improvement in your contract management process.

#8 Monitor vendor performance to ensure compliance to obligations

It's important to ensure that vendors are meeting their contractual obligations and adhering to regulations. You need to monitor performance metrics, conduct site visits, or request documentation to verify compliance. For example, if your company has a contract with a vendor to provide services, you may need to monitor the quality of the services provided and ensure that the vendor is complying with any applicable regulations or policies.

#9 Document and report compliance to maintain a clear paper trail

To ensure that you have a record of compliance, it's important to document all relevant information and maintain a clear paper trail. Store detailed records of vendor communications, performance metrics, and compliance documents somewhere safe and easily accessible, like some CLM software especially designed to maintain your repository.

Also read: The Perfect Contract Risk Assessment Checklist

Use SpotDraft for effective contract compliance tracking

SpotDraft eases your contract management process while ensuring and monitoring contract compliance at all contract stages, such as:

• Initiation: Using contract templates, you can ensure you send out contracts with all necessary terms. SpotDraft AI feature also flags issues in contracts to help you identify issues in the initiation stage itself.
• Approval: You can set automated approvals and guardrails for specific clauses needing further approvals to ensure contracts meet all rules and regulations set internally.
• Execution: You can send documents for signature with SpotDraft's signature, which is compliant with key regulations, including ESIGN (USA), eIDAS (Europe), and ECA (UK).
• Implementation/Termination/Renewal: You can set automated reminders for any key contract clauses to monitor progress and be up to date on when a contract is up for termination/renewal.

Request a live demo to see all the features in action!

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