Contract termination involves rigorous financial analysis, contract performance data analytics, and the creation of a notice of termination to avoid a breach of contract. Unfortunately, contract termination involves tight deadlines and specific terms of the contract required to terminate a contract. Organisations need a strategy to identify contracts not meeting contract KPIs, write notices of contract termination, and secure proper contract closeout.
This article will show you how to implement this strategy readily with the help of contract management software.
What is contract termination?
Contract termination involves ending an active contract before it’s entirely performed per both parties’ agreed-upon terms and conditions. If a written agreement is terminated before parties’ complete obligations, the requirement to fulfil these obligations becomes void. Termination of contracts must be completed with care and mutual agreement to avoid missed obligations, lawsuits and other harmful consequences.
There are several types of termination, including termination for convenience, impossibility of performance, termination for default, and several other reasons to decide to terminate. There doesn’t necessarily need to be a breaching party to justify termination or cancellation of a contract and the establishment of a termination date. It all depends on the terms of any specific contract, so a one-size-fits-all mentality doesn’t fit this process.
A comprehensive contract termination process
Organisations need tools to:
- identify underperforming contracts
- develop a contract authoring process with standard notice of termination templates and a dynamic clause library
- confirm proper contract closeout with budget and invoice payment and tracking.
Steps must be taken to foster a contract termination process that gleans valuable insight into process improvement. As such, here’s a three-step guide for streamlined contract termination with a leading contract management solution:
Step 1: Identify contracts that fail to meet performance goals
Teams can identify contracts that fail to meet contract KPIs with several intelligent contract management software tools.
Contract lifecycle management metrics
Functionality to compare contract performance data against previous years can equip organisations with beneficial contract analytics insights. Contract performance data solutions can offer visually engaging tools for these purposes.
For example, an executive graphical dashboard focused on contract KPIs may present contract performance compared to the previous year’s. Organisations can view the contract and budget amounts of the current year against those of last year.
Additionally, you can easily display metrics such as:
- the total number of contracts within an organisation’s system
- the number of open contract tasks to be performed
- the number of contracts pending
- contracts set to expire within the next 30 days.
Furthermore, one can easily determine how diverse an organisation’s contract portfolio is at a glance. Organisations can display contracts by type, department and status to analyse this contract portfolio diversity.
Tracking missed payments and deliverables
Organisations can track missed payment and delivery milestones against contract terms and conditions. Automated contract workflow updates can alert users if payments and deliverables fail to be met by their set date.
Additionally, advanced contract management software can allow users to track contract risk. For example, if an organisation isn’t receiving payment on time according to a contract’s terms and conditions, they can track that contract’s lifecycle process to determine payments that were missed, and deliverables not performed on time. Additionally, they can see where things went wrong.
From there, they can leverage a contract management risk and opportunity assessment tool to track insights. Such insights include revenue loss exposure, reputation exposure, confidentiality exposure and more. A risk assessment matrix can be provided based upon the risk information provided, which can display that information at a glance. Furthermore, notes and comments can be made to keep contract lifecycle management and risk insights in one centralised location.
Step 2: Dynamically write a contract termination letter
Organisations can follow a standard document writing process to write contract termination notices for contracts set to be ended. Please read our article on contract authoring to learn how to establish a contract writing process for your legal document.
Organisations can leverage termination templates within their contract management software system’s template library. They can use contract data field placeholders to pull key information into a contract termination letter. A dynamic clause library can help organisations pull in contract termination clauses (such as those detailing early termination fees). And auto-redline functionality allows users to automate the inclusion of preferred language.
Users can also email a contract termination letter within a software system or as a templated email. So, they don’t need to waste time meeting contractual obligations that may:
- cost them money
- hurt their reputation
- distract them from more beneficial contracts.
Step 3: Promote proper contract closeout with financials tracking
At contract termination, contract management software can help organisations facilitate proper contract closeout and gain valuable insights to support the health of future contracts. They can manage spending and stay within budget limits before contract closeout to avoid penalties. Additionally, they can determine the contract’s remaining budget after contract rescission.
Financial tracking tools can also be used for tracking transaction history. Organisations can also track how many credits were incurred and how many debits were expensed. They can view:
- a contract’s budget amount against the incurred amount
- the remaining budget balance
- the percentage of budget used.
These financials can be exported to a spreadsheet format for future analysis and calculation with advanced contract management software. On the flip side, financials can be bulk imported using a structured spreadsheet file. Organisations can leverage spreadsheet imports with contract management software to simplify the analysis.
Simplify contract termination with contract management software
Things don’t always work out as planned. This truth applies to contracts as well. Perhaps an organisation is dis-satisfied with the way contract obligations are being met (or are not being met). Maybe they no longer need the products or services of a counterparty.
In any case, a notice of contract cancellation makes it very clear to everyone involved that a contract has been ended. However, contract cancellation shouldn’t entail a notice of termination alone.
Ensure you manage your contracts effectively for the full lifecycle of the contract.
Contract Insight is an award-winning, widely trusted contract lifecycle management software solution, which has helped thousands of organisations from a vast array of industries within both the public and private sectors to optimise the contract process, boost revenue, promote productivity, centralise CLM processes, and reap the most value from contracts.
To learn how to more easily draft contracts, get contracts reviewed, collaborate on negotiations, and much more to improve contract management processes, book a free demo of Contract Insight® contract management and eProcurement software today!
Contact John O’Brien, CEO at Four Business Solutions – global business consultants and software integrators specialising in business process improvement.