Contract Management

An important area of control is that purchasing has the right to determine how to award purchase contracts. Will purchasing award a contract based on competitive bidding, negotiation, or a combination of the two approaches? If purchasing takes a competitive bidding approach, how many suppliers will it request to bid? Purchasing should also lead or coordinate negotiations with suppliers. Again, this does not mean that purchasing should not use personnel from other functions to support the negotiation process. It means that purchasing retains the right to control the overall process, act as an agent to commit an organization to a legal agreement, and negotiate a purchase price. Because the source process involves multiple communications among internal customers, purchasing, sales, and the suppliers’ internal functions, purchasing will generally retain the right to be the primary contact with suppliers in the contracting process. However, involving other people from these functions can improve the transfer of information and knowledge between buying and selling organizations as part of the contracting process.

Purchasing departments historically have maintained a policy that suppliers have contact only with purchasing personnel. Although this makes sense from a control standpoint, some firms today are beginning to relax this policy. Today, we recognize that purchasing must act as the primary contact with suppliers, but that other functions should be able to interact directly with suppliers as needed. However, purchasing is ultimately responsible for developing and validating a contract with suppliers. Hence, “contract management is a process associated with defining the contract, defining roles and responsibilities of both parties, and advising when to modify and ensure appropriate escalation.” In doing so, purchasing ensures accuracy of contracting terms and conditions (“T’s and C’s”), and alignment with the category strategy, required service level agreements, and periodic audits to ensure that post-delivery invoices are aligned with contracted requirements. In addition, contract management should be used to trigger proactive sourcing events before contracts expire. Often, this occurs through maintenance of a contract database, which allows internal users to reference documented relationships, while keeping the contracts current, protected, and referenced. When there are disparities between what a supplier is delivering, and the terms of the contract, then contract compliance actions may be required to establish resolution of disparate standard terms and conditions.