6 Tips to Conduct a Successful Contract Compliance Audit

Procurement teams negotiate hard to secure benefits and favorable terms put into written contracts. However, all that hard work is for naught if those benefits are not realized. The real work begins once all the concerned parties have signed the negotiated agreements.

Of the many daily contract management challenges legal teams face, one that often keeps them awake at night is managing contract performance. During this stage, even the most skilled stakeholders can overlook unintentional non-compliance.

To ensure that the agreed-upon terms of a contract are being performed in line, it is crucial to conduct periodic audits. This audit can be performed at a micro-level (i.e., single contract review) or a macro level (i.e., entire portfolio review).

Regular contract compliance audits ensure that the company receives the benefits. They measure contract effectiveness, identify and improve profitability, and verify data reported by vendors you are working with. So, let’s look at a few considerations while performing a contract compliance audit


6 Key Steps in Contract Compliance Audit:

Set the Right Onset 

Conducting a periodic audit of long-term contracts can be downright daunting; however, it is a necessary part of the contracting process for ensuring compliance. A contract compliance audit is highly recommended when a business undergoes merger/acquisition or personnel changes. This brings a third-party relationship into the picture or terminates an existing vendor contract.

The enterprise can save time, anticipate the review process’s length, guide, and manage the entire exercise, by determining the audit process’s scope and parameters. Avoid scheduling the audit of your contracts simultaneously as any other complex process, such as during tax or budgeting season.

Define Clear Audit Goals

The entire contract review process is pointless if there are no clear contract compliance audit goals or objectives guiding it. A clear understanding of which contracts will be under audit and what you hope to assess with the review is key to an effective contract audit.

A company may examine its contracts to evaluate potential redundancies and efficiency. A formal contract compliance audit program strengthens your organization’s definitive plan to optimize ROI. It achieves this by demonstrating the enterprise risk management function, the financial and supply chain performance, to stakeholders.

Manage Cost and Risk 

Contract compliance audits can help executives achieve cost-cutting objectives by uncovering unrecorded liabilities, missed savings, overpayments, or under-reported revenue, thereby increasing cash flow.

A contract compliance audit can help reduce key risk factors related to transparency between companies and their third parties. It does so by promoting communication and yielding trust needed to reduce friction & poor-quality assessment.

Ensure Compliance with New Market Penetration

Companies are increasingly exploring new technology, market growth opportunities, and supply chain partners in emerging markets. But the distance and complexity involved can hinder communication and transparency, restricting the enterprise from ensuring compliance. Organizations can benefit from contract compliance audits when entering new international markets and making new technology investments. They need to monitor & reduce the risks and costs associated with the third-party lifecycle.

Prioritize Contracting Party Collaboration

It is crucial to have strong working relationships with contracting partners under review to achieve a successful contract compliance audit. The information gathered during the audit is used to find areas that could be improved in the future to enhance the relationship between all parties. This is necessary for ensuring compliance in the long run.

An audit can help identify the root causes of the missed KPIs and SLAs by the third party and contribute to resolving such operational challenges. Similarly, non-compliance risk can be identified while engaging in contracts with small, private companies.

Report Insights and Remedies

A contract audit needs to be conducted to understand if each party is meeting its contractual obligation. Potential issues and the opportunities to mitigate them need to be identified. In the end, those involved in the process should summarize the findings in a report.

They should use the summary to discuss the future contract risk management plan and strengthen the recommended controls as we advance. Contract compliance audits are necessary to ensure your compliance with governmental & industry regulations and serve as a critical process for ensuring maximum ROI.

Many organizations do not have the personnel, training, or technology resources to conduct such reviews in-house successfully. Keeping an internal contract compliance team composed of professional auditors would typically not be financially viable. With the right approach, the contract compliance auditing process can be made more insightful, accurate, and relatively painless.

The most economically responsible system needs to hire a competent contract compliance firm on a contingency fee basis. The other alternative is to automate consistent contract compliance audits successfully with a powerful Contract Lifecycle Management tool.

Ultria CLM offers unparalleled insights into your contracts’ content. It provides you with relevant information about contract performance and regulatory compliance via a single view customizable dashboard. Ultria is keen on achieving and ensuring compliance across all agreements and will help you follow the best practices.



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