As owner or CEO of your company, are you responsible for approving every contract before it’s signed? Does this lead to a logjam of unsigned contracts in your in box? Use a Delegation of Authority Policy to streamline your company’s contract approval process and to manage the authority you might give other employees to create contract obligations that are binding on your company.
Delegation of Authority for Contract Approvals
Follow these tips when adopting and implementing a Delegation of Authority Policy giving contract approval authority to your employees:
Identify High-Risk Areas
Some contracts carry enough risk that approval should be reserved to the CEO or other C-suite executives. These vary by business but might include exclusivity commitments, confidentiality agreements, and contracts with significant capital expenditure requirements.
Organize Authority by Departments/Divisions
Typical areas include Finance, Sales, Purchasing, Logistics, HR, and IT. We have found this to be a user-friendly approach, but there is nothing special about the policy’s format. Do what makes the most sense for your business.
Delegate Authority Based on Dollar Commitment, Contract Length and Nature of the Contract
Authority levels should be driven by employee expertise and established by title or functional/operational responsibility rather than by named employee. This authority needs to be consistent with the authorities established by the company’s governing documents, such as an LLC Operating Agreement.
Educate Employees and Distribute the Delegation of Authority Policy Company-Wide
Talk to employees about the accountability that comes with their authority. Your legal team can help employees spot issues of potential concern or that are high-risk where senior management or legal counsel should be consulted before approval.
Revisit the Delegation of Authority Policy after six months and from time to time after that to evaluate how it’s been working internally and to consider feedback from employees. Have operational efficiencies been achieved? Is there an opportunity for further improvement? Do any special arrangements or circumstances
There are many benefits of delegating authority within an organization. When implemented correctly, a Delegation of Authority Policy is a tool that should improve a company’s contract administration efforts without sacrificing contract integrity or placing undue risk on the company. While a Delegation of Authority Policy expands the group of authorized employees who may create legal obligations for the company, the employees with this new-found authority will likely feel more empowered, engaged and valued by the company.
Tracking Key Dates
Having a Delegation of Authority Policy that governs a company’s contract approval process is important for a growing business. Since the life of a contract is just beginning when it’s signed, though, a company should also have processes in place for managing contracts throughout their life cycle.
A crucial responsibility in the area of contracts administration is tracking key contract dates. These key dates will vary but often include renewal dates, contract expiration dates, and dates for delivering or receiving deliverables. It’s important to customize your contracts administration process so that it effectively monitors the key dates of your organization’s contracts and notifies appropriate personnel of those dates and required activities.
The process for tracking key dates might be manual using a spreadsheet or automated using contract management software. Many factors, including the size of the company, the volume of contracts, and the number of individuals involved in the contract management process, will determine the approach that best suits the company.
The expiration of a certificate of insurance is a not-so-obvious example of an important date that a company should track. For example, if your company rents office space, your lease almost certainly requires that the company maintains minimum insurance coverages and provides proof of insurance to the landlord each year by delivering a certificate of insurance. If the company fails to provide the required proof of insurance, it will be in breach of its lease. Calendaring contract deliverables and their due dates will help your company avoid the
potentially serious consequences of breaching a contract because something slipped through the cracks.
Using Executive Summaries
There’s no better way to verify the company’s contractual obligations than reading the actual signed contract itself. But wouldn’t it be helpful to have a summary of the contract’s key terms on hand for quick reference down the road? An executive summary is the perfect tool for highlighting important contract terms that you might need to reference quickly in the future. Consider building this ready reference into your company’s contract management process.
Here are a few executive summary drafting pointers:
- Include background about the transaction. Is this a new contract or a renewal or amendment of an existing contract?
- Use bullet points to convey the main concepts and commercial objectives of the contract.
- Note legally significant and non-standard clauses.
- Identify key dates, milestones and deliverables.
- List exhibits and schedules and summarize those terms as well.
Keep in mind that an executive contract summary is just that – a summary. While it is a helpful tool in contracts administration, the executive summary shouldn’t be relied on when making legal, tactical or strategic decisions about a contract or the commercial relationship it memorializes.
Every company, regardless of size, enters into contracts in one form or another and it’s important to have policies and procedures in place to manage these important business assets and the contractual obligations they impose. If you’re not sure how to begin developing your contracts administration process, start by adopting a Delegation of Authority Policy and a system for tracking key contract dates and deliverables, and rest easier knowing that someone is minding that part of the store.