Whether a business consists of a sole proprietor doing freelance work or a multi-national corporation with tens of thousands of employees, the review and approval of contracts is something most businesses have to do. While a very small business can probably get away with an informal and ad-hoc process, a larger organization can probably benefit from a more formal process involving more than one individual and multiple steps. In these more complex situations, the clearer the contract approval and review process, the better off the business will be.
What Is a Contract Review and Approval Process?
The act of examining, changing, finalizing, and signing a contract makes up the contract review and approval process. It can be as simple as a single person skimming the contract, then signing it a few minutes later. It can also consist of a more involved process where dozens of people (both inside and outside the business) read and revise the contract to ensure it achieves stated goals while also putting the business in the best position possible and minimizing risks.
What’s the Difference Between Contract Review and Approval?
Contract review is where decision makers for the business (as well as their legal counsel, if available) examine a proposed contract to confirm it creates the appropriate agreement as intended by the business. This can potentially include different types of reviews from different perspectives.
For example, the accounting department might ensure the “numbers” add up as they should. The legal department then ensures the contract limits the business’s legal risks as much as possible while also being a contract that the business can reasonably enforce should the counterparty breach one or more of its terms.
Contract approval occurs when the decision-making authority, such as a CEO, board of directors, or business owner, officially binds the business to the contract, often with a signature from the designated individual(s).
What Happens If Your Business Lacks a Clear Contract Review and Approval Process?
There are good and bad ways to review and approve a contract. That said, even the best review and approval processes can lead to a bad contract for a business when the process lacks clarity, predictability, or clearly defined objectives. With an unclear approval and review process, a business can potentially face:
- Delays: Draft contracts can get lost on someone’s desk or email inbox, or there can be confusion about which particular revisions are needed.
- Increase in errors: A contract review process that lacks clearly established objectives, standards, and oversight is at higher risk of containing mistakes.
- Cost increases: Taking longer to review and sign off on a contract can result in a financial detriment to the business. In a best-case scenario, an employee or attorney for the business spends extra billable or overtime hours to complete the contract review and approval process. In a worst-case scenario, a delay or mistake in the contract can result in a significant loss in revenue or a lost business relationship.
- Lack of accountability: An unclear process means it’s difficult to know the current status of the contract at any given time and identify who is responsible for issues that may arise.
- Incomplete due diligence: Following up or confirming representations made by the counterparty is a necessary part of many contracts. Failure to do this could lead to a business entering into a contract it shouldn’t have or to terms that are less advantageous than they could have been.
- Poor communication: If important individuals don’t know where a contract is or what its status should be at a particular stage in the process, it’s difficult for them to communicate properly. It can also lead to misunderstandings.
- Confusion during the revision process: If a contract is going through multiple revisions, a clear review and approval process is essential to prevent wasteful revisions or reviews. It’s also important to avoid approval of an outdated version of the contract.
- More conflicts: This applies not just to interpersonal conflicts, but also to contractual provisions that conflict with each other or other business objectives and goals.
Characteristics of a Clear Contract and Review Process
A clear contract and review process will consist of at least four major characteristics.
Unambiguous Approval Thresholds
This is more applicable for larger businesses, as not all contracts will require the same approval process. Bigger businesses with multiple individuals who can sign off on contracts must make it clear which contracts require which individual(s) for approval. This is important to avoid delays and potential enforceability issues.
Established Revision Protocols
Contracts often get revised, especially the more important they are for a business. A clear review process must have a defined method of keeping track of changes that contracts go through to avoid confusion. This may involve the use of a central location for the draft contract where all changes are made. This can avoid different versions of the contract floating amongst multiple individuals without any of them being fully aware of which person has which version.
Pre-Defined Communication Channels
The more people involved in the review and approval process, the more difficult it can be to avoid confusion during contract discussions and negotiations. The last thing a business wants is someone who needs critical information about the contract, but doesn’t know where to find it or lacks the authorization to access that information.
Defined Responsibilities
“Took many cooks in the kitchen” can pose a problem not just for culinary professionals, but also for business and legal ones. Too many lawyers or managers making decisions during contract negotiations or revisions can potentially lead to “analysis paralysis” or interpersonal friction amongst those involved.
Benefits of a Clear Contract Approval and Review Process
If a business implements a clear and well-understood contract review and approval process, that business can expect:
- Reduced errors.
- Faster turnaround times for contract review.
- Fewer instances of misunderstanding or miscommunication.
- Less legal and compliance liability risk.
- Greater workflow efficiency.
- Financial and time cost savings.
Reexamine Your Contract and Review Procedures With Jimerson Birr
Contracts are an important part of any business. If your business finds itself consistently reviewing, revising, and approving contracts during the course of operations, you need a clear contract review and approval process that’s communicated and understood by all relevant individuals. Depending on your business, this might be something you can develop on your own. But if you need help or additional guidance, contact Jimerson Birr to speak with one of our business contract attorneys.