Make Sure Your Contracting Policy Flows Smoothly

This is the last of several posts I have been writing on contracting policies and procedures.  Companies should attempt to implement policies and procedures that provide managers and employees with a clear flow of the steps that need to be taken in order to complete the appropriate level of review for a proposed contract and the procedures for having the contract executed and delivered for safekeeping as required under the terms of the company’s records retention policies and procedures. In general, any person needing a contract should first determine who has the authority to sign the particular type of contract by referring to the then-current delegation of authority promulgated by the president and chief executive officer of the company.  Once the person needing a contract has determined who has the authority to sign the particular type of contract a determination should be made as to whether the signing party has his or her own requirements with respect to contracts that are to be entered into by a specific department or unit of the company. These requirements would be in addition to requirements that are established in any delegation of authority and would typically be designed to ensure that a contract fulfills the goals and objectives of the department or unit, that funds are available and have been properly encumbered, and that other resources necessary for the completion of the contract will be available.  Among other things, a determination should be made as to whether or not the subject matter of the contract requires completion of any company requirements relating to use of a formal bidding process.  In the event that bidding is required, the person needing a contract should work with all the departments involved in implementation of the proposed to contract to develop a comprehensive request-for-proposal.

The person needing a contract and the person who has the authority to sign the particular type of contract, referred to in this discussion as the “sponsoring parties”, should determine what, if any, additional approvals may be required before the signing party is permitted to execute the contract.  Depending on the circumstances, a particular contract may require as many as three separate types of approval, including subject matter approval (i.e., approvals must be obtained from all departments that will be involved in the fulfillment of the obligations of the company under a particular contract), funding approval (i.e., approvals from senior management and finance department because of the amount of money involved in fulfilling the company’s obligations under the contract) and legal approval.  The sponsoring parties should prepare a business case relating to the proposed contract and present it to the president, chief executive officer or any officer who has been delegated authority to review and approve a business case.  Among other things the process of review and approval of the business case should include identification of required subject matter, funding and legal approvals.  The sponsoring parties should consult with all departments that would be involved in the fulfillment of obligations under any contract covered by the business case to identify material issues and concerns that should be addressed during the contract negotiation and drafting process.  Once the business case has been approved a copy should be submitted to the legal department along a list of departments from which approvals of the contract will be sought.  As a general rule, approvals must be obtained from all departments that will be involved in the fulfillment of the obligations of the company under a particular contract (i.e., the “subject matter approvals” referred to above).

Once the sponsoring parties have received an initial draft of the contract they should review the contract to determine whether it conforms to any specific requirements included in the approved business case.  If there is a conflict between the contract terms and the business case the sponsoring parties should attempt to resolve those conflicts with the other party before a draft of the contract is circulated to other departments for subject matter approval.  Once the sponsoring parties have a draft of the contract that they wish to circulate for subject matter approval it should be submitted to the legal department for review and circulation.  The legal department should circulate the contract to all involved departments for subject matter review and approval and will collect comments from all departments; however, the sponsoring parties remain primarily responsible for ensuring that all departments respond on a timely basis. The legal department should collect and consolidate all comments and transmit them to the sponsoring parties for review and further action.

The sponsoring parties should be primarily responsible for reviewing and clearing all comments received from other departments through consultation with those departments and with the other party.  The sponsoring parties should arrange for a revised contract and will provide an explanation in writing to the legal department of how each of the comments has been cleared.  The legal department should circulate the revised contract and explanation to all departments and request their review and approval.  In the event that comments remain outstanding after the process described above has been completed the sponsoring parties and the parties responsible for the outstanding comments should meet with the president and chief executive officer (or the officer to whom they have delegated authority with respect to such contract) to determine what action the company should take with respect to the contract on the terms offered and a written record of the decision should be prepared and transmitted to the legal department.

If, after following the procedures described above, the person authorized to sign the contract has determined that company should enter into the contract the sponsoring parties should transmit a final version of the contract to the legal department.  The legal department will review the document and if it fulfills the requirements of these procedures will arrange for the contract to be signed and transmitted to the other party.  As a general rule, prior to the execution of any contract by any manager, employee or other agent of company, there should be approval as to legal form and validity by the legal department. When the approval of the legal department is required, it must determine that: the contract does not violate any law, regulation or company policy, or conflict with any other contractual obligation of company; the individual signing it has the authority to do so; and any risk management concerns associated with the proposed contract have been considered by the signing party.  When required, the approval of the legal department should be endorsed on the contract. 

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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