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Every business relationship relies on contracts. Contracts are made with vendors, employees, customers, partnerships, etc. These agreements must be managed carefully, which is where contract management comes into the picture. In order to effectively implement contract management, however, it is necessary to understand what it entails.
Contract management is not just contract administration. Rather than simply drawing up the contracts, the manager works to ensure that the entire process runs smoothly. The contract manager is involved in not just the planning and development but also the execution of the contract, and beyond to the point of renewal. Typical contract management activities include:
- Contract creation
- Relationship management
- Contract amendment
All contracts are legal documents that establish the right and responsibilities of the parties involved. Contracts can be created for almost any situation, and will ideally involve legal. There are four basic contract types, and they are chosen based on the factors and data available. While the list is not exhaustive, it is a good starting point. These common contracts are:
- Fixed Price Contracts: The price of the item or service is usually fixed and will not change, which benefits the buyer. Variations of this contract include firm fixed price, fixed price with adjustment, fixed price with incentive, fixed price with downward price protection, and fixed price with redetermination.
- Cost Reimbursement Contracts: These contracts benefit the seller. The buyer agrees to pay a price, free, or partial fee. Common types of these contracts include cost-sharing and cost without fee.
- Letter Contracts: These contracts allow the suppliers or vendors to take action before the details of the agreement are finalized. The buyer is at risk if liability limits are not clear.
- Partially Defined Contracts: Created when one or more aspects, such as goods, services, and deliveries, are not known ahead of time. These include value contracts, quantity contracts, and time and material contracts.
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