Contract Termination: A Simple, 3-Step Approach

05/13/20

Learn how to effectively manage contract terminations. Contract termination involves a contract party ending a contract before its obligations are fully performed by both parties.  The cancellation of a contract should involve crucial financial analysis, contract performance data analytics, and the creation of a notice of termination.  As such, organizations need a strategy to identify contracts that are not meeting contract KPIs, to write notices of contract termination, and to ensure proper contract closeout.  This article will show you how to easily implement this strategy.

A Comprehensive Contract Termination Process

Steps must be taken to provide a more advanced contract termination process that gives valuable insight into what can be improved going forward.  Organizations need tools to identify under performing contracts, to develop a contract writing process with standard notice of termination templates and a dynamic clause library, and to ensure proper contract closeout with budget and invoice payment and tracking.  Here’s a three-step guide for streamlined contract termination with a leading contract management solution.

Legal Disclaimer: This article is not legal advice. The content of this article is for general informational and educational purposes only. The information on this website may not present the most up-to-date legal information. Readers should contact their attorney for legal advice regarding any particular legal matter.
 

Step 1: Identify Contracts That Fail to Meet Performance Goals

With contract management software, teams can identify contracts that fail to meet contract KPIs with several intelligent software tools.

KPI Visualization Tools

For starters, utilities designed to compare contract performance data against that of previous years equip organizations with beneficial contract analytics insights.  Contract performance data solutions offer visually engaging tools for these purposes.

For example, an executive graphical dashboard focused on contract KPIs could present contract performance as compared to the previous year’s.  Organizations could view contract and budget amounts of the current year against those of last year, also complete with a graphical display.  Additionally, the total number of contracts within an organization’s system, the number of open contract tasks to be performed, the number of contracts pending, and contracts set to expire within the next 30 days could all be prominently presented.  Furthermore, one can easily determine how diverse an organization's contract portfolio is at a glance, thanks to tools that display contracts by contract type, department, and contract status.

CobbleStone Contract-Insight 17.5 graphical dashboards.

Tracking Missed Payments & Deliverables

Organizations can track missed payment and delivery milestones – based upon when a counterparty should have performed a payment or delivery according to the terms and conditions of a contract.  This process can be streamlined with a robust contract management solution that allows organizations to configure automated workflow updates for software users if payments and deliverables fail to be met by their set date.

Additionally, advanced contract management software allows users to track risk involved in a contract.  For example, say an organization isn’t receiving payment on time according to a contract’s terms and conditions.  To avoid risk for future contracts, they can track that contract’s lifecycle process to determine how many payments were missed and how many deliverables weren’t performed on time as well as where things went wrong.  From there, they can leverage risk assessment rating tools to track insight into revenue loss exposure, reputation exposure, confidentiality exposure, and more.  A risk assessment matrix is provided based upon the risk information entered, which displays that information at a glance.  Furthermore, notes and comments can be made to keep contract lifecycle management and risk insights in one centralized location.

Risk assessment matrix in CobbleStone Software.

Step 2: Dynamically Write a Contract Termination Letter

To write notices of contract termination for contracts set to be ended, organizations can follow a standard document writing process, with few differences.  Read our recent article on contract writing for more information on how to establish a contract writing process for your organization and perform simple and organized document collaboration.

Organizations can leverage termination templates located within their contract management software system’s template library.  They can use contract data field placeholders to pull key information into a contract termination letter, as well as a dynamic clause library to pull in legal clauses (such as those detailing early termination fees) if they are needed.  Further simplifying and streamlining this process is the ability to email a contract termination letter within a software system or to external users as a templated email.  As such, organizations don’t need to waste time meeting contractual obligations that may be costing them money, hurting their reputation, and distracting them from more beneficial contracts.

Step 3: Ensure Proper Contract Closeout with Financials Tracking

At contract termination, contract management software helps organizations facilitate proper contract closeout while gaining valuable insights to support the health of future contracts.  Organizations can leverage the contract management software’s financial tracking tools to help them effectively manage spend and stay within their budget limit before contract closeout as to avoid penalties.  Additionally, organizations can determine the contract’s remaining budget after contract rescission.

CobbleStone Software Tracking Financial Data Summary Report.

Financial tracking tools can also be used for tracking transaction history.  Debit and credit card sums can be provided.  Organizations can also track how many credits were incurred and how many debits expensed, and they can view a contract’s budget amount against the incurred amount, the budget balance remaining, and the percentage of the budget used.

With advanced contract management software, these financials can be exported to a spreadsheet format for future analysis and calculation.  On the flip-side, financials can be bulk imported using a structured spreadsheet file as well. Organizations can leverage spreadsheet imports with contract management software to simplify the analysis.

Simplify Contract Termination

Things don’t always work out as planned.  This truth applies to contracts as well.  Perhaps an organization is dissatisfied with the way contract obligations are being met (or are not being met).  Maybe they no longer need the products or services of a counterparty.  In any case, a notice of contract cancellation makes it very clear to everyone involved that a contract has been ended.  However, contract cancellation should not entail a notice of termination alone.

Now that you’ve discovered how to perform comprehensive contract termination with the help of contract management software to save time and money, it’s time to enlist the help of CobbleStone’s Contract Insight® for full contract lifecycle management.

Contract Insight can not only help you to identify under-performing contracts, but it can also help your organization to reduce contract terminations in the first place by ensuring better contract management.  Certain things may be out of your organization’s and your counterparties’ control (such as force majeure events).  However, with streamlined, efficient, intelligent, and web-based source-to-contract management software that enables your organization to reduce contract lifecycle bottlenecks, analyze, avoid, and mitigate risk, save time, and save money, you can be more confident that your organization is making smart decisions that lead to contract management success!

Backed by artificial intelligence and supporting integration with a variety of useful source-to-contract tools, CobbleStone’s robust contract management suite can be your organization’s catalyst for better contract management, procurement, and sourcing.

It’s time for your organization to make a positive change for the betterment of your entire source-to-contract lifecycle with a proven contract management software solution!  Take the first step - Book a free demo of Contract Insight today!

Make your case for contract management software. Download your guide now.

Sean Heck

Written by Sean Heck

Sean Heck is a Content Marketing Specialist at CobbleStone Software

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