Managing contractual obligations is no small feat. Every contract comes with its own set of commitments, whether it’s adhering to payment schedules, protecting confidential information, or meeting delivery deadlines. Missing even a single obligation can lead to serious consequences, including financial losses, strained relationships, or legal penalties.
But how can you ensure that no commitment slips through the cracks? Effective contract obligation management holds the key. By proactively tracking, monitoring, and fulfilling obligations, organizations can avoid costly mistakes and maintain strong partnerships.
In this blog, we’ll walk you through the essentials of contract obligation management. From understanding its importance to overcoming common challenges and adopting best practices, you’ll gain the insights needed to streamline your process and stay compliant. Let’s begin.
What is Contract Obligation Management?
Contract obligation management refers to the process of monitoring, tracking, and fulfilling contractual obligations in an organization. Managing obligations comes later in the contract lifecycle management process, where signed contracts are monitored for commitments.
The complexity of obligation management varies with the scale of operations. For example, enterprise-level companies have cross-departmental obligations that are challenging to track. Startups, on the other hand, have isolated obligations with clear responsibilities.
Who manages these obligations? Contract managers, compliance officers, and departmental heads usually monitor and ensure fulfillment of contract obligations. Different departments deal with different types of obligations. Here are a few examples of contract obligations for different departments:
| Department | Obligation Examples |
| Sales | Collection of payments at the end of the quarter. Client account management with post-sales support when needed. |
| HR | Payment of employee compensation and benefits upon terms agreed in the contract. Adherence to employee work hours, safety regulations, and other labor laws. Taking steps to enforce an NDA, enforcing confidentiality of sensitive company data. |
| Procurement | Delivery of goods within the timeline agreed in the contract. Monitor vendor adherence to industry standards and regulatory requirements. Ensure that the goods to be delivered meet the predefined quality benchmarks. |
| Legal | Uphold terms related to intellectual property rights and trademarks. Ensure that all organizational operations comply with local and international laws. |
| Finance | Monitor and approve organizational expenditures under contracts. Ensure timely payment of taxes and adherence to tax compliance. Ensure all payments of all contracts (vendor invoices, employee salaries, and taxes) are made on time. |
Obligation management helps ensure all departments in your organization stay on top of their commitments. However, there’s more to it. The coming section discusses the importance of contract obligation management.
Why is managing contractual obligations important?
Managing contract obligations helps ensure no commitment goes unfulfilled. There are many reasons as to why you should manage and track obligations. These are:
Improves relations with counterparties: Missing obligations results in soured partner relationships. Effectively managing obligations helps ensure satisfactory business terms with all contracting parties.
Helps avoid legal penalties and lawsuits: Certain obligations like confidentiality in a non-disclosure agreement are critical. Managing the obligations of such agreements helps improve compliance and avoid fines, penalties, and lawsuits.
Improves overall contract management: Managing contractual obligations helps streamline other parts of the contract lifecycle management process like tracking and compliance.
Avoids breach of contract and termination: Overdue obligations often result in breaches of contracts. Well-managed obligations help avoid contract breaches and dodge unwanted agreement terminations.
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In retrospect, contractual obligation management significantly reduces business risks. However, managing obligations is challenging and presents considerable hurdles.
4 Common challenges in managing contractual obligations
Undoubtedly, managing obligations is important. However, tracking and managing obligations across dozens of contracts takes significant time and effort. Here are the key challenges in obligation and commitment management:
1. Time-consuming Obligation Tracking
Based on your organization’s size and scale, you may be dealing with dozens or even hundreds of contracts at a time. Tracking contracts for obligations can certainly be challenging in this case, especially when each contract differs in clauses, terms, and governing laws.
A construction company has numerous deadlines for completing project phases. Due to inefficient obligation tracking, a milestone is missed, causing project delays and triggering penalty fees in the contract.
2. Undefined Responsibilities in Obligations
With many departments sharing roles and responsibilities, there are chances of miscommunication. Shared responsibilities between teams like legal, procurement, and operations. In this instance, the accountability for obligations like milestones, deadlines, and compliance becomes blurred.
In a software development contract, the responsibility for providing necessary data for integration is not clearly defined. As a result, both parties assume the other is responsible, delaying the project and leading to a breach of contract.
3. Scattered Contracts Across Different Teams
Contracts can be stored in folders, files, computers, and even tools like CRMs, ERPs, finance management software, and HR management systems. This results in cross-functional teams losing the needed visibility in contracts. Consequently, contracts relevant to different departments are not tracked due to a lack of visibility.
A retail company has contracts with various suppliers managed by different departments. Without centralized access, the procurement team overlooks a contract renewal deadline, leading to supply chain disruptions and lost revenue.
4. Inconsistent Contract Formats and Language
Unstandardized contract creation results in inconsistent agreements, often due to differences in formats and languages depending on the contract’s type and applicable legislation. Moreover, contract language and wording may vary depending on who drafted the agreement. As a result, legal teams have to spend more time understanding and managing agreements.
A manufacturing company enters multiple supplier contracts with different formats and terms. Due to inconsistent language, one contract includes penalties for late payments, while another does not. This confusion leads to unexpected fines and disputes when payments are delayed.
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So far, you know the challenges in contract obligation management. What’s the solution? You can effectively manage obligations by following a few contract administration best practices specific to obligation management.
How to Manage Contractual Obligations: 5 Best Practices
Here are 5 best practices that you can implement in your contract lifecycle management process for effective and flawless obligation management:
1. Auto-track Obligations with CLM Software
Contract lifecycle management tools offer functionalities to auto-track contract obligations.
You can set reminders for each obligation—leaving nothing to chance.
With contract creation, review, approval, signing, storage, and tracking unified in one platform, it is easy to maintain obligations for all agreements.
HyperStart CLM’s obligation tracking solution tracks your obligations using AI—leaving nothing to chance.
2. Establish Clear Responsibilities for Obligation Tracking
Evaluate which team has the infrastructure and knowledge to handle specific obligations.
Business teams may manage obligations tied to operations, such as product or marketing observations.
Legal teams may handle obligations with regulatory reporting due to their expertise.
3. Use Obligations as Business Opportunities
Legal teams can gain positive exposure and engage with the business more holistically.
Effective obligation management fosters long-term cooperation between legal and business teams.
It can transform stereotypical tensions into a mutually beneficial relationship.
4. Avoid Auto-renewing Contracts Without Renegotiating
Evergreen contracts are designed to auto-renew unless canceled.
Recurring agreements have a fixed window time for renegotiating the deal.
Missing the renegotiation period can leave companies stuck with unwanted services or products.
Tools like HyperStart CLM help generate renewal reminders to notify organizations of upcoming renewals, enabling them to plan renegotiations promptly.
5. Prioritize Obligations Based on Risks
Identify and prioritize contract obligations according to the level of risk they pose to the business.
High-risk obligations, such as those with legal or financial consequences, should receive immediate attention.
Medium-risk obligations, like operational or partnership-related tasks, should be closely monitored.
Low-risk obligations can be managed with routine tracking but should not be neglected.
Implement these best practices to elevate your organization’s management of contractual obligations. You can also use contract management software like HyperStart CLM for automated and effortless obligation tracking.
Automate Obligation Tracking and Management with HyperStart CLM
Managing obligations can be cumbersome. With thousands of contracts stored across different software, folders, and emails, it is challenging to know which commitment is due at what time. However, with HyperStart CLM, you can automate contract obligation tracking and gain better visibility on agreements.
HyperStart CLM helps stay on top of obligations with automated reminders. Our AI auto-analyzes contract clauses and extracts key obligations. Renewal alerts ensure that you never miss another renewal.
You can set up a central dashboard that visualizes all your agreements—giving excellent clarity on all agreement obligations. Powerful AI tracking sets obligations on auto-reminder, ensuring nothing is left to chance.
Get a demo of HyperStart CLM today.
