Contract Review & Approval Procedures Part II

In my previous post I discussed the importance of contract review and approval procedures as part of a company’s overall control environment. As companies get larger and the scope of possible contracts expands they opt for a fairly comprehensive form of contract review and signature authority policy.  Such a policy might cover the following areas:

  • Overview of the contracting procedures;
  • Responsibilities of parties initiating contracts;
  • Requirements regarding formal bidding procedures (i.e., requests for proposals);
  • Subject matter and funding approvals;
  • Legal department approval;
  • Risk management issues including use of insurance and indemnification provisions;
  • Time frames for review and approval process;
  • Contracting authority;
  • Board of directors’ actions and documents evidencing board actions;
  • Processing of funding requirements for contracts;
  • Retention of contracts and recordkeeping requirements; and
  • Contract administration and performance review.

The policy should emphasize that contract review is much more than simply following a series of formal steps and procedures and it is essential that all officers, managers and employees initiating a contract be held personally responsible for reviewing and understanding the proposed terms of the contract and ensuring that appropriate insurance requirements and indemnification provisions are included therein.  In addition, every effort should be made to remove undue pressure from the review process and persons initiating a new contract should allow sufficient lead time to allow for completion of any required review and approval process described in the policy.  In many cases a complex contract may require several months of negotiation and preparation and departments that may be impacted by a contract should be notified well in advance of the expected start date for the contract.  As a general rule, six to eight weeks should be set aside for legal review and review by other departments.

The policy should clearly delineate the responsibilities of everyone involved in the contract process.  For example, all officers, managers and employees initiating a contract:

  • Are responsible for reviewing and understanding the proposed terms of the contract and ensuring that: the language in the contract accurately reflects the business goals and objectives of the company and the department or unit initiating the contract; the contract is in the best interest of the company; the company will be able to fulfill all of its obligations under the contract in a cost-effective and timely fashion; and the language in the contract is clear and consistent and addresses all material contingencies that can be reasonably foreseen for the life of the contract.
  • Are responsible for ensuring that all of the necessary approvals described herein are obtained and that sufficient time is allocated to allow all persons involved in the review and approval process to fulfill their responsibilities in an orderly fashion.
  • Should, before the company invests time and resources in the contract review process, prepare a description of the business case for the contract, including the goals and purposes of the contract, the reasons for contracting with the particular party, and the expected benefits and costs associated with performance of the contract.

All departments involved in performing the company’s obligations in a contract should be responsible for timely and full review of the proposed contract.  Among other things, authorized representations of each department should be responsible for reviewing and understanding the proposed terms of the contract and ensuring that the department will be able to fulfill all of its obligations under the contract in a cost-effective and timely fashion and the language in the contract relating to the duties and obligations of the department is clear and consistent and addresses all material contingencies that can be reasonably foreseen for the life of the contract.  In addition, all departments are responsible for complying with all other company policies and procedures relating to post-signing administration of contracts and fulfillment of contractual obligations.

The content in this post has been adapted from material that will appear in Business Counsel Update (Summer 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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