The "contract - Single size": The dangers of bad contract management

A poor design of the contract management process generates significant operational and reputational risks, which can be avoided when considering the contract as a management tool and not as a mere form.

It is natural and frequent for companies to seek to standardize their contracting, seeking to make them more efficient and "predictable" in duration and scope, in order to be coordinated with the operation of the rest of the company.

In general, this standardization is to set a model of the most common contracts, which sometimes goes to the point of limiting the changes to the text to specific points of the same (price, time, etc.), changes that are to be determined mainly by the business or operational area of the company and that leave the rest of the contract without being able to be modified, such as an administrative form.

Now and despite the care placed in the design of the model, it will clearly not be enough to cover all the particularities and contingencies that will present the relationships in the future, and with the same uncertainty with which a person faces a "one-size-fits-all" shirt as well as face the form to very diverse contractual relationships, which, by complexity, urgency, routine or disproportion, are going to unload seams, blow buttons, or even step on sleeves that are dragged by an unjustified excess of fabric, since never one of those shirt has served the entire universe of people offered.

The main problem with this management model is that the contract does not reflect the specific objectives and needs that the parties need to meet, so that the risks of this relationship will not be well defined or regulated. The consequence of this is not only the increased risk of conflict, but also the loss of efficiency, opportunity, quality and prestige for both companies involved.

Indeed, misstated obligations generate differences in expectations as one party will consider that there is a breach against the other that refuses to act, as it considers that what is requested is for additional services, outside the contract. Poverty in the definition of the duties of the parties makes coordination between them difficult, putting at risk the delivery of results in a timely and appropriate manner. The differences in negotiating power tend to force unbalanced and unreal contractual conditions, which increase the likelihood of failures and delays, without prejudice to the future efforts of counterparties to protect themselves from these dangers by increasing prices.

The fines and penalties considered in the contract to deal with these conflicts are also not a good remedy, as the collection of a guarantee does not compensate for the wear of the conflict or for the delays or shortcomings in the services or goods contracted. In turn, these arrears can affect the company's performance in the face of its customers, with the contractual and reputational risk involved.

How, then, can we be able to make it more and more effective? Fluidity with functionality? The response to this is to recognize that, while the standardization of contracts is possible, this is only to the extent that the contract is understood as a risk management tool and not an administrative process, since only then will it be used to identify possible contingencies, to stop them with mitigation measures and to facilitate the correct execution of the contract, as the secret of success has always been in the clothes as it is carried.