What’s the Purpose of A Contract?

Topics: Contract Management Software

Written by Lindsey Paulk

So, what’s the point of a contract anyway? And why are they so crucial to business success? We’ll take a look at several reasons that make the case for contracts.

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Contracts are signed and executed on a daily basis all over the world. In the context of business contracts, these legal agreements serve a foundational role in constructing new business partnerships and in capitalizing upon existing working relationships. Contracts are most commonly known for their ability to close transactions and secure deals. In addition, contracts are used on a massive global scale, supporting a variety of business objectives when appropriately managed.

Before we can understand the purpose of a contract, let’s first discuss what a contract is.

What’s A Contract?

Contracts are legal agreements formed between parties of two or more. After a contract is signed, parties are legally obligated to deliver upon contract terms, obligations, and other implications per the contract at hand.

Learn about the essential requirements of a contract by clicking here.

The Purpose of a Contract

The fundamental goal of every contract is to build business relationships and define the legal implications and obligations that each contracted party must deliver upon.

The majority of contracts are created and agreed upon between businesses and organizations rather than individual people. And while people will oftentimes sign contracts for reasons like accepting job offers, signing a lease, selling a piece of property, etc., businesses are the ones who sign off on contracts in a massive scale with vendors, clients, suppliers, and other parties. Contracts truly serve as the cornerstone of any business relationship.

The Importance of Contracts

Contracts exist to fulfill a variety of essential business functions, meaning they are some of the most important documents any business and organization could maintain. When a contract is signed, the contract is then able to perform a variety of activities. We will discuss eight of the main roles of contracts below.

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8 Main Purposes of Contracts

1. Contacts document obligations, rights, and responsibilities

Contracts exist to maintain obligations, rights, and responsibilities outlined in written agreements signed by contracted parties.

A proper contract will express the duties that each party is obligated to deliver as well as how these duties should be performed and against what criteria the performance will be measured. In this manner, contracts are key piece of written documentation that parties can refer to glean insights on exactly what is expected of them (and what they can expect from their counterparty) during the contract term.

By leveraging contracts in this way, businesses leverage key risk mitigation strategies by standardizing the who and the what of their agreements. With this key information, they can then make more well-informed, data-driven decisions regarding their business agreements moving forward.

2. Contracts legally enforce private agreements

At the core of any contract is the intent to legal bind the agreement made between two or more parties.

Unlike less formal agreements, contracts are promises made with legal enforceability. When a contract’s terms are breached resulting in losses for another party, then the contract can be taken to court. Businesses of all sizes, from small family-owned businesses to massive enterprise-level organizations can gain legal support from contracts in the case that the counterparty commits some sort of wrongdoing. Contracts empower business owners to take their case to course if contract terms are violated. The contract will also detail where (which jurisdiction) you can resolve the agreement and how to go about doing so.

3. Contracts create official business relationships between parties

Prior to the contract lifecycle, parties seeking to enter into a contractual relationship must mutually agree to work with one another in a manner that will benefit both of them.

Contracts officiate business relationships, define how the relationship will be monitored and maintained via obligation fulfillment, pricing, and the duration of a given contract term.

Businesses and organizations that experience rapid growth and that wish to continue to scale will need to exercise caution when entering into these business partnerships. It’s crucial for each party to respect on another and the promises made by gaining clarity on expectations of the relationship and how each party will hold the other accountable.

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4. Contracts help to secure payment for a provided product or service

One key purpose of contracts is ensuring that each party pays the other appropriately according to the pricing structure and payment timeline as outlined in the written agreement. For example, when X company offers to provide a service to a client, there will be an accompanying cost for the service. Within a contract, the cost will be discussed in detail with an associating pricing structure. Some additional financial details contained in contracts include the following:

- the amount of money due

- payment frequency

- desired payment method

- late payment fees

- auto-renewal dates

Contracts protect businesses by guaranteeing the right to payment on exact dates.

5. Contracts can support an increase of revenue

Most businesses and organization leverage contracts to produce higher rates of revenue in two key ways:

#1: Through negotiation of contract terms

Negotiating is a skill. And by honing this skill, you can create new contract news that work in your favor. For example, you might increase the price of a certain product or service, which can support you in increasing your revenue. Negotiating your contracts is a fundamental way to capitalize upon your deals.

#2: Through increasing the efficiency of contract processes

Contracts are built to legally bind parties into a given agreement that produces revenue. When bottlenecks present themselves, they cause strain in attain rapid agreements that could result in more revenue, faster.

In the scenario that your legal department blocks a contract due to lack of time, then your business might miss a value opportunity to close a deal. This barrier can easily be fixed by leveraging contract management software that allows for the self-service of contracts. However, many businesses today still employ a manual approach to the contract lifecycle that only leads to inefficiencies and lost revenue.

We recommend optimizing the contract lifecycle as much as possible for your team and your clients, vendors, and suppliers. With a streamlined contract lifecycle management strategy, you can cut down on missed opportunities for revenue while saving valuable time.

6. Contracts increase the quality of business relationships

Contracts are essential for preventing disputes that result from poorly communicated expectations within an agreement. Contracts help place each party on the same page so they can come to more favorable agreements while producing abundantly clear expectations for one another. In addition, a contract will define the terms that the parties have agreed upon, meaning each party can review the terms to gain clarification. Businesses want to create working relationships and agreements that result in a win-win, and contracts supports businesses in doing just that.

In any effective contract lifecycle, there will be opportunities for parties to communicate, suggest, and modify a contract’s terms, which can result in minimized disagreements moving forward.

7. Contracts ensure a confidential agreement

A fundamental role of the modern-day contract is to ensure that every agreement is kept confidential. Contracts provide parties the right to maintain confidentiality throughout the duration of the agreement. Contract additionally give each party the ability to hold certain rights and make requests that are in the best interest of your business. Its fairly common for contractual parties to be privy to sensitive data or private information of their counterparty. A contract can support parties in ensuring the counterparty keeps sensitive information confidential via non-disclosure and confidentiality clauses.

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8. Contracts formalize collaboration

When appropriately managed, contract can support collaboration between departments. In the context of business, contracts are hardly approved by only one department or person. Instead, contracts are the result of several reviews and approvals by multiple stakeholders and departments. So, it goes without saying that contract review can be a lengthy and complex phase within the contract lifecycle. Contracts provide a framework for departments to communicate and collaborate on business objectives and how to go about achieving them.

Conclusion

Ready to extract more value from every contract at hand in 2022? Then look no further than the Dock 365 Contract Management System. Out contract solution is built on your Office 365 infrastructure and SharePoint for maximized cost-efficiency, user-friendliness, and collaborative capabilities. Our comprehensive, end-to-end approach to the contract lifecycle will ensure that nothing slips between the cracks for your organization. Manage contract more productively than ever this year with Dock 365.

Learn more about our Dock 365 Contract Management System here.

Learn more about Contract Lifecyle Management (CLM) Software here.

For more information, we would like to welcome you to schedule a free demo with us today.

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