Inventory of contracts is often overlooked area which can give rise to risk to organization.
A typical organization with decent size may have the following departments:
- Sales Department
- Marketing Department
- Purchase Department
- Stores Department
- Human Resource
- Payroll
- Administration
- Commercial
- Accounts
(This is a very simple list. MIS used by organization would give a clear picture)
All this department can and will enter contract through out the year. Generally contracts for sale and buy will be in a large number. These contracts can be for one time activity, for a part of year, year or spread across years.
No department has the total inventory of the contracts. (Sales and buy may have due to volumes).
Some of the issues faced are:
- Inventory is available, the period may not be available.
- Contracts contains clauses which are applicable for a several years after expiry of contractual period.
- Contracts might have entered into when the company has come into existence.
It become extremely important to have a complete inventory of contracts, their validity period, validity of contractual clauses.
I have seen organizations who are not able to confirm to the board that they have taken complete inventory of contracts entered into by the organization. Some of these organization are not able to confirm even after months when the issues has been raised.
This task becomes more challenging when organization is into existence for more than 10 years.
What is the solution for this issue?
- Entering into a contract need to be restricted to as few person as possible.
- All contracts must have a unique no.
- Contract template should contain sunset clauses. i.e. contract should expire after a certain period in entirety.
- Contracts can be bifurcated into permanent categories and periodical class and so clauses should be drafted.
- All signed contracts should come to a Central Inventory. Scanned images should be made available to users for their needs.
- Use of Contract Management Software to be explored.
Organization which are not entering into contracts into volume can have a similar strategy according to their needs. Instead of having a software, they may want to use a manual register.