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In any case, you run the risk of overlooking or overreading something, as the details are often hidden in long and opaque to laymen. The consequences of unrevealed important details can be extremely negative for companies. A correct evaluation of contracts is therefore essential.
The legal department is usually responsible for review and evaluation, but individual specialist departments can also be involved in the contract review process.
In this article, we go through the 5 essential steps for evaluating a contract, which also work for untrained legal staff:
- Easy proofreading for obvious mistakes
- Proportionality test
- Determination of appropriateness
- Capture essential information
- Any subsequent changes
What is the evaluation of contracts?
Contract evaluation basically includes all processes of evaluating and reviewing contracts in order to determine their validity and effectiveness. This primarily addresses the question of whether an existing contract is error-free, appropriate and appropriate. The process usually requires a detailed and often repeated review of the document, which can also involve specialists. Contract evaluations are important for companies because they ensure that contracts are in line with goals and business strategy. They also enable companies to identify potential risks or problem areas before concluding a contract.
How do you evaluate a contract?
For the contract review, you should go through the above mentioned points of the guide. The order doesn't matter. Identified problem areas or concerns should be immediately noted in the document or, if possible, assigned to a responsible person as a task for examination.
In addition, the Key parameters of a contract be recorded in a spreadsheet as a separate document or on the first page of the contract.
For the evaluation of contracts in special areas, it is advisable to call in people with specialized knowledge from the specialist departments or external experts, as these documents are often only accessible to these people.
5 important criteria that you should consider when evaluating a contract
1. Easy proofreading for obvious mistakes
A contract is often an evolved document that has passed through many hands over time. Contract documents are regularly expanded on copy-paste actions by various people and parties in stressful situations. Insertions are often no longer removed as a result, resulting in flourishing wild growth, complex formulations and inserts that no one really understands anymore.
In addition to the use of bulky contract templates, it often happens that contract data is no longer checked before it is sent to the customer and errors creep in, especially when the contract is carried out by many hands and responsibilities have not been defined beyond doubt.
In this mix, it is often difficult to identify and correct inaccuracies. This can be aggravated by the fact that contracts contain references to other contracts and the content of these contracts may contradict each other.
You should also regularly check the contract for grammatical errors and presentation, as customers draw conclusions about the product or service offered through the quality of the presentation of the contract.
Here are a number of common mistakes that can be uncovered with closer examination:
- Ambiguity due to linguistic imprecision
- Errors in calculating prices and quantities
- Conflict in the contract
- Unnecessary duplication in the contract, i.e. passages of text are in several places in the contract, possibly well disguised by different wording
- Wrong statement about product or service
- Grammatical mistakes
- Blurred and ambiguous wording
- Unnecessary capitalization of terms and headings
- Inconsistency in the use of terms and definitions within the contract
- omissions of words
- Wrong use of punctuation
- Poor readability as a result of long, overloaded sentences
- Typos and spelling mistakes in the contract
- Use of undefined terms
- References to non-existent or even incorrect paragraphs
2. Proportionality test
If you revisit the idea of the contract as an established construct from above, it is not unlikely that a contract is inappropriate Contractual clauses contains. Since these points also or in particular include the evaluation of the subject matter of service, it is often necessary to involve the specialist department.
The review of a contract should pay attention to the following points:
- Impossible or only limited implementation of the agreed services
- Implementation outside known standards
- Unrealistic timelines
- Some areas are not and or cannot be described correctly
- Omissions in important places that should be described with greater precision
- Blur where accuracy is required
- Exaggerated or one-sided designs
3. Determination of appropriateness
The most important and at the same time most complex part of contract review is determining whether it is appropriate. In this review step, it is necessary to determine whether the agreed contract adequately represents the intended business or the product or service to be delivered.
It is best to let the specialist department or purchasing department disclose the original requirements and criteria for the completed transaction for the contract to be reviewed.
The following list provides a number of questions to help you get a good idea of whether the contract is appropriate. Record questions and answers together in one document to avoid questions later on.
- Which assumptions have been made whose implementation is essential for the contract and have these been sufficiently documented?
- Do the requirement specifications in the contract meet the requirements of the specialist department or purchasing department and are the specifications detailed enough?
- Does the contract reflect the planned business in its entirety?
- Is the contract based on plausible assumptions?
- Are the price parameters and pricing mechanisms described in sufficient detail?
- Is there sufficient clarity among the contracting parties which services must be delivered by which deadlines?
- Do the agreed deviations from your company's usual conditions represent an acceptable risk?
- Have the identified risks of the contract been discussed with the responsible persons in the company and assigned their appropriate management?
- Were sufficient resources allocated to lawfully fulfill the contract?
- Does the contract take into account possible price changes and, if so, what do these scenarios look like in order to bring about a significant change in the price?
4. Capture essential information
A contract usually contains a variety of relevant data that must be made available to various parties within the organization. For example, the HR department needs an overview of all hired employees. Accounting and payroll, on the other hand, require the appropriate salary data. The number of parties involved varies depending on the type of contract.
Because on the key dates of a contract over the course of a Contract cycles If you have to access it several times by different parties, it is usually worthwhile to record all relevant data in a separate document or table as part of the contract review. This ensures that not every party that needs access to the data has to make the effort to read the entire contract carefully.
The type of information that can be extracted from contract documents should include:
- Contracting parties and all their contact details for inquiries
- Handling of confidential information and any agreement to disclose it
- Timetable and deadlines for implementing the agreed activities
- Significant deviations from our own established standards
- regulation of the handling of intellectual property, regulation of intellectual property rights that are used or granted during the term of the contract
- Contact details of the persons and departments responsible for the fulfilment/implementation of the subject matter of the contract, all contracting parties.
- List of all tasks necessary for contract performance, including the person responsible or department for all contracting parties
- Agreed omissions that are not usually completed in this form
- Still open issues, things that need to be clarified after signing the contract
- Risks that were agreed in the contract and whose handling must be ensured during the contract cycle
- Agreed service level during the contract period, including the name of the responsible person and department
- Measures to extend or terminate a contract
- Carrying out a scenario analysis and its effects on the key parameters of a contract
5. Any subsequent changes
If, after evaluating the contract, you wish to renegotiate possible concerns and risks or other unpredictability after consultation with the relevant departments (e.g. the legal department and/or sales department), you must submit all changes to all parties to the contract.
Many of the points can often be changed during a clarifying discussion, as business people usually focus on the successful execution of a transaction and not on the time-consuming dispute in court. In any case, you should write down the amended points in writing and have them traced by all parties so that the decisions made can be remembered in the future as well.
In any case, the path to change and, in particular, the intended effect for all contracting parties should also be documented. In the event of a dispute over the reading of a paragraph, it is also important to prove the intent behind the amendment.
Following the completed change, you should not forget to update the documents for analysis.
