What is Contract Compliance?
Contract compliance refers to the practice of ensuring that business operations meet the specifications laid out in a legal contract. Contract compliance is crucial for risk management and forms a large part of the due diligence process. In the context of mergers and acquisitions, submitting a complete and compliant contract to the US Department of Energy is a core requirement. Failing to submit an adequately bundled contract can result in additional review time as well as regulatory and compliance risks. The fundamental aims of any contract compliance program are the same: creating an internally consistent and clearly defined framework of rules and procedures ensures that all business operations meet the minimum appropriate fiscal and legal standards. Contract compliance audits, for example, determine whether or not a party is abiding by the terms of the contract. Compliance audit programs also provide a robust factual tool for determining whether or not a meaningful effort has been made to adhere to the terms of the contract. In other words , a party that has an effective compliance system will almost certainly be able to successfully rebut noncompliance allegations. This is the most basic and intuitive of all of the definitions of contract compliance. As a practical matter, however, the definition of contract compliance is broader. One of the primary goals of contract compliance is to avoid unnecessary liability. Avoiding liability means ensuring that all contract terms not only meet minimum contractual terms, but also minimum legal requirements. For instance, for a contract with a federal agency to be deemed compliant, it must be both materially and technically compliant with federal laws and regulations. Otherwise, the impression of due diligence given off by compliance programs may incentivize the federal government to take a much closer look at other operations. Thus, to avoid triggering additional scrutiny, a contract compliance program should be as close to airtight as possible.
Components of Contract Compliance
The essential elements that comprise contract compliance include the adherence to contract terms, compliance with regulatory requirements, and the meeting of performance standards. Contract compliance is a subset of compliance that is specific to the individual obligations contained within a contract. The various types of obligations imposed by a contract must be monitored through a commercial compliance regime, or program, that is designed to identify risks and, in the event of non-compliance or contractual breach, to enforce compliance through contractual remedies such as the recovery of damages or the award of specific performance.
In the context of any individual contract it is important to fulfill the self-imposed obligations that flow from that specific contract. It is also concerned with how that particular contract fits into the wider matrix of obligations imposed on one or both parties, either by statute or regulation, or by other agreements between the parties to the contract. For example, contractual requirements to comply with laws such as the Foreign Corrupt Practices Act (FCPA) may be a contractual obligation as a result of a specific provision within an agreement. Those same provisions may also impose duties that arise from other agreements, or that are imposed by law or regulation. While it is important to satisfy the provisions of each contract, a unified compliance regime is also required to ensure that all of the agreements imposed on a particular individual or entity are satisfied.
Responsibilities of Contract Compliance Officers
As part of a larger company’s risk management function, contract compliance officers are expected to audit existing contracts for compliance with company policy and law. They review vendor practices, and identify payments that do not conform to approved terms and conditions, usually through a three-way match. Contracts are, or should be, audited for compliance prior to the payment of any amounts due.
Besides auditing for contractual compliance, compliance officers also review new contracts for compliance with company standards to capture and address unknown risks. Most companies use some version of a three-way match in their business systems. They match other information to the contract so that payments based on money due for a product or service can be calculated based on those terms and conditions. Compliance officers also review vendor invoices for accuracy to ensure that charges do not exceed other values found in the contract; they ensure that there are no unauthorized price modifications, and that there is no double counting of discounts. They seek to resolve billing discrepancies before payment is approved.
Compliance officers enforce compliance with company policy and federal regulations. It is not unusual for them to maintain reporting forms or affidavits on which all employees who have been authorized to approve a contract amendment, a bill, or a purchase are required to certify that the bill matches the terms of the contract. They maintain records of all reviews, exceptions, and approvals generated internally, and regarding third parties. They use these records to develop prevention controls, and disseminate information on best practices to other departments within the company.
Compliance officers oversee and perform in specific objective reviews of compliance with contract standards, and generally work in conjunction with your business office or operations to manage risk and compliance matters.
Advantages of Contract Compliance
Contract compliance is a key component of risk management. Companies consistently find that it is much easier to proactively manage contract compliance than to repair the damage done by noncompliance through fines, legal fees, and reputational loss.
Robust contract compliance procedures can also help improve the trust stakeholders have in your organization and its products or services. For example, a third-party compliance audit is a common requirement in private-sector contracts, and having those controls in place protects you and your investors against fraud. Law firms and other service providers can assure their clients of compliance with industry standards such as ISO certifications or HIPAA guidelines, while meeting business-imposed contract compliance requirements can help IT departments.
A strong contract compliance program can also position you in front of potential customers not only as a trustworthy partner, but as a thought leader. Trade groups in many sectors, including financial services, manufacturing, and healthcare, offer certifications for compliance with industry best practices and standards. Information on certification programs and the potential benefits they can confer can be found in the Contract Logix Contract Management blog.
Potential Issues of Contract Compliance
The complexity of contracting, with its potential vast number of terms and conditions, can present a significant challenge to compliance. Determining the best way to comply with a requirement can be a daunting task, particularly if it’s a specialized area, like environmental protection or labor relations. Specialized assistance may be needed from the affected department(s) to recommend a course of action that meets the requirement. Even then, the person in charge of compliance will not be an expert in the particulars either. Recruiting the right person and providing them with access to the resources that will help them craft a compliant solution can be the difference between success and failure.
With limited resources, both in terms of personnel and budget, any compliance effort needs to be prioritized to focus on those requirements that are most critical to the company. Failed performance can result in a loss of revenue, for example, or in sanctions, penalties, or cost disallowances that have a similar impact. Those requirements that potentially carry the greatest penalty should be placed at the top of the priority list. Where performance, as opposed to the failure to meet a requirement, occurs, compliance may be more problematic. That should not be an excuse for failing to strive for excellence though. Employees at all levels should be trained to identify, report, and remediate deficiencies in contract compliance. One or more individuals should have the formal responsibility for developing a corrective action plan to ensure that a failure to comply is addressed and does not recur. That plan should be given the high priority it deserves . Compliance failures are expensive.
Regulations and policies that seem to come out of nowhere, promulgated by someone disconnected from the practical aspects of contracting, can often take an organization by surprise. A small business was quite literally blindsided when it was suddenly required to comply with Davis-Bacon Act requirements due to the project it was working on being determined to be within a disaster area and being funded through FEMA. Fortunately, the small business had experienced individuals who recognized what was going on and quickly developed a best value solution. Regulatory changes must be monitored and tracked because good and bad legislation is enacted every year. As unfortunate as it may be, compliance with the illegitimate and illogical is nevertheless mandatory. How many times have you heard the phrase "we have to do it because it’s required?" If even a few people in your organization have that attitude, your compliance program is broken. People comply with regulations for a reason, because they are necessary. Nothing kills compliance more quickly than an attitude of indifference.
While the objective of a contract compliance program is to improve and maintain compliance, the practical means of determining the success or failure of that program is monitoring for contractual compliance as well as effectiveness of individual and organizational performance. Auditing for compliance with the company’s policies and procedures is a standard practice that works well with compliance checks for contractual compliance. An effectively audited compliance program should ask the following questions:
Contract Compliance Technology and Tools
Software Solutions: With the global proliferation of sales technology, there are a multitude of software solutions available that can help with contract compliance. Traditional systems have focused on pipeline management, CRM data accuracy and revenue forecasting. However, there are several solutions that help with contract compliance at various stages of the contract lifecycle from writing to e-signing and renewals. Some are integrated with CRM systems, while others exist as standalone solutions. The wealth of sales technologies has resulted in solutions that cater to virtually any size business, industry or budget.
Artificial Intelligence: AI is proving to be one of the more disruptive forces in the business world today, as it fundamentally changes industries as the digitization of business continues. Law firms are utilizing AI to save hours on the administrative aspects of legal services. AI is being embedded into CRM and contract management systems, as well as standalone systems, to allow salespeople to execute their job while simultaneously maintaining compliance. Software vendors are adding AI technology to their platforms to provide recommendation engines for next steps.
Automated Reminders: Automated reminders, whether built into the CRM or as part of standalone contract lifecycle management systems, provide alerts on activities relating to a contract. These reminders can also include triggers when specific actions are completed, so follow-up or renewal measures can be taken.
Blockchain: Blockchain technology is sometimes referred to as the Internet of Contracts. Blockchain technology makes changes to contracts visible to all parties involved at the same time. When a contract is signed electronically, changes to the contract are visible to all parties. This means, all parties are notified when the contract is signed, removing the need to send reminders to signature holders who are slow to sign a contract.
Smart Contracts: This is a form of blockchain technology. Smart contracts are self-executed, digitally signed contracts that are automatically enforced when all key conditions are met. This would eliminate ambiguity for terms, such as payment or delivery of goods services.
Digital Rights Management (DRM): DRM solutions protect intellectual property from being used without the express permission of the rights holder. Digital Rights Management is typically associated with digital media, but it can also be applied to content licensing, online transactions, and monitoring usage to enforce compliance with license agreements.
Contract Compliance Best Practices
Understanding the scope of your obligation is essential for compliance, but it’s also necessary to consider how to ensure that your company has a proper framework in place to meet compliance mandates. The following are some best practices:
Develop a robust framework. Whether it is a large corporation with many different departments or a small business with just a few employees, designating one or two specific individuals to oversee your contract compliance obligations and responsibilities is critical. These individuals must be highly qualified and trained so that they can be tasked with the responsibility of ensuring that the framework is being followed and monitored correctly.
Regular training/retraining. Just like you must regularly retrain employees to ensure they properly follow company policy, you must also retrain them as necessary on your company policies and procedures surrounding contract compliance. This should be done on an annual basis , at the very least.
Continuous monitoring. Not only should you continuously monitor your employees to ensure they are complying with your contracts, you should also monitor your customers. You may be able to help them better comply with their obligations by providing them contract management and compliance assistance. This not only helps them, but your business in the long run.
Periodic audits. Conducting audits are another effective method to ensure compliance within your company. One of the most important aspects of contract compliance and compliance with government regulations is ensuring you have complete, up to date and accurate recordkeeping. Not only do your internal audits need to be complete and on time, but your customers should be prepared for audits as well, and those audits should be as easy and painless as possible, especially if they are government-mandated. If government regulators or other third parties come to your company to conduct an audit, you should have a contract compliance team ready to assist with the audit.