Contract compliance is changing the way we think about contract management. Before tackling the strategy, it’s best to answer the question: What is meant by contract compliance?
What is contract compliance?
Contract compliance refers to the state of acting in accordance with predefined rules and guidelines that have been agreed upon as per terms and conditions of the contract. In many countries across the globe, contract compliance focuses on the observance of equal opportunity regulations and policies. In other words, there should be equal employment opportunities regardless of religion, age, disability, gender or national origin.
It is a form of managing your contract while seeking to ensure that contract holders, government agencies and grant recipients are sticking to the government standards of equal opportunity employment regardless of disability.
The government gives out specific regulations concerning the way industries perform their activities. These rules and regulations may pertain to equal employment opportunities for everyone, or standards in which listing a company should be followed or even the minimum number of employees living with disabilities in a company. The act of managing such contracts is what we call contract compliance.
An example in the US, there is a Contract Compliance officer. The officer’s main duties involve investigating complaints and recommending methods of ensuring compliance dealing with equal employment opportunities, being a go-between for minority groups and private and public organizations in order to promote objectives for equal opportunity, giving advice to department managers for implementation procedures on equal opportunities, being present in human rights meetings, preparing and distributing instructions to various department managers, keeping an eye on development in contracts and reviewing them, etc.
History of contract compliance
The office of Federal Contract Compliance Programs was formed in 1978. President Jimmy Carter ordered it through a consolidation of responsibilities of Affirmative Action at each of the federal agencies. The agency’s origin traces back to World War 2 when President Franklin D. Roosevelt signed Executive order 8802, which prevented against race discrimination by government contractors. President Dwight D. Eisenhower in 1953, created the President’s committee with Executive order 10479 on government contracts. This was a follow-up to President Harry S. Truman’s Executive order 10308 in 1951 that established the anti-discrimination. President Kennedy created the President’s committee on equal employment in 1961 by issuing Executive Order 10925. This was a call for affirmative action by the people ensuring that people are hired and treated in a specific way regardless of creed, race, color or country of origin.
President Lyndon B. Johnson signed EO 11246 in September 1965 which transferred responsibility for coordinating and overseeing the Federal Contract Compliance from the Committee of the President to Labor Secretary who put up the OFCC- Office of Federal Contract Compliance. President Lyndon then added discrimination according to sex to the OFCCP mandate. The name changed from OFCC to OFCCP in 1975 by Gerald Ford. The new inclusion was the addition of laws that prohibited discrimination against veterans and disabled persons.
In the recent past, the agency has developed regulations for new applicants and record keeping that cover internet applicants.
Contract Compliance Administration
Each government level has a responsibility to administer its own contract compliance. Both the federal and state governments are involved in contract compliance heavily. Cities and towns and other local governments use contract compliance to ensure that there is a strict adherence to fairness within their communities and follow the guidelines that have been established by higher levels of government.
Do you need contract compliance?
Contract compliance is necessary because it provides a guideline that ensures all the terms and conditions in a contract are met. It is also important to look closer at the liabilities that have gone unrecorded, overpayments or under-reported revenue. If one of the items is overlooked, it could have a negative impact on the margin. A contract compliance audit usually begins with a chance to review and pinpoint the areas with the highest risk. If you have in place a dedicated contract compliance program, then a recovery of 2-4 percent will be achieved judging from history and it can go as high as 20 percent.
Contract compliance management can support various phases and aspects of contract management. In theory, it raises efficiency and reduces risks, which makes it an important area of business performance. Although compliance monitoring is necessary, there are processes that allow insight to opportunities or the need for chance. Best practice comes in two forms: making sure that noncompliance has controls, and making sure that the compliance definitions are monitored, and any important changes are made for changing the market or business conditions.
You may be responsible for a few things at a strategic level:
• Making sure that the process of contract management is one of integrity.
• Ensuring that all the contract terms align with approved practices and corporate policies.
• Monitoring compliance, creating and overseeing the availability of standard contract templates.
On a level that involves a transaction, it may include:
• Reviewing and approving proposed variations from policy, standard process or terms.
• Contract and obligation performance monitoring ensuring compliance with specified terms.
Both levels may include:
• Identifying compliance exposures or variations, including frequencies.
• Relevant compliance data input to control systems.
• Change initiatives and management reporting
• Changes in compliance policies, rules or terms that reflect changing market conditions, trends or opportunities.
There is a noticeable shift in the school of thought around contract management in complex relationships. The shift is taking place from compliance management to a governance perspective. The focus is on developing a governance model where the Parties have an interest in managing what could be highly complex contract arrangements in a flexible, collaborative, aligned and credible way.
Nobel laureate Oliver Williamson wrote in 1979 that the integrity of a transaction is within a framework of the governance structure. Because contracts are so different and complex, he added, the structures of governance will vary depending on the type of transaction.
There are four components in collaborative governance:
1. A structure for relationship management- it’s how different parties work towards day to day operational and strategic decisions.
2. A transformation and performance management process that has been designed to track the performance of the partnership.
3. A plan for exit management as a mechanism that encourages organizations to make proactive and ethical changes for the benefit of all parties.
4. Compliance with special regulations and concerns, which are inclusive of the more traditional contract compliance components.
Benefits of contract compliance
Contract compliance is important for a number of reasons:
• Standardized procedures and processes
The standardized processes help to decrease independent unorthodox buying while the spend leverage increases. The overall effect is that the buys become less expensive and much more valuable. The business, in turn, gets to capture a greater percentage of negotiated savings.
• Visibility of spend
A contract compliance management lets you know if you are buying from the right suppliers at the right times in the right quantity. It is the most valuable advantage of the system and assists a company in standardizing consistent terms and conditions in contracts. In addition, it also facilitates easier contract identification with suppliers who are in high-risk areas brought about by political unrest, natural disasters or economic uncertainty. This is very important and affects the development of the right risk management strategies.
• Better compliance
Compliance management is improved by more than half with a contract management system set in place.
• A good base to analyze spend and performance
Because the contract conditions and negotiated fees are in one centralized location, it’s much easier comparing purchases against contracted buys. With this in place, policy and regulation violations are caught and immediately dealt with, ensuring that the total spend is known and accessible to be leveraged in sourcing projects.
• Reduces expenses
Contract management provides a one-of-a-kind analysis of your organization such as:
1. Contracts that are expense related with contingent terms or pricing
2. Contracts are all listed in order of the annual spending rate
3. Contracts that are expense related and have provisions for auto-renewal
Contract managers are equipped with techniques that help reduce a company’s expenses. They are best placed to alert the company to options of purchasing that will help to reduce prices.
• Reduction of maverick spending
With a system set in place, a buyer can determine the existence of a contract, who the suppliers are and what the prices are.
• Evergreen contract elimination
If you do not have a contract management system that automatically alerts the contract buyer coming up for automatic renewal, it is possible for many auto-renewing contracts to go unnoticed and renew automatically, which locks the buyer in for another buying circle. A system put in place alerts the buyer weeks or months prior, depending on how long the sourcing cycle will take for that service and act appropriately.
• Rebate management.
Should you adopt Contract Compliance?
Racial equality and the end of workplace discrimination is where the general idea of contract compliance gained its roots today and is where many of the more socially-oriented business details stem from still. Chick-Fil-A saw a backlash a few years ago for this when places of business learned about its stance on sexual orientation in the United States. A better example is Apple, who consistently audits its vendor sites for different reasons. Sometimes, it is to make sure that its workers are keeping customer’s privacy secure. Other times, it is to make sure that production sites are upholding company environmental values. Regardless of the reason, these actions mimic the guidelines set in place by the Office of Federal Contract Compliance. Today, the influence from this implementation has spread to businesses worldwide.
So, with the history of contract compliance out of the way, an important question remains. Is contract compliance necessary for all businesses? The answer technically is no. However, it is very important for businesses to consider contract compliance for many reasons.
First of all, having no contract compliance plan will severely limit your business opportunities. For one, it almost completely cuts out all chances of obtaining a contract with any United States government entity. While contractors and businesses can still put in a bid to work with government entities or buildings, they are required to have or be in the process of instating an affirmative action plan. This could exclude schools and universities, public places like parks, and government buildings from any future site of contract.
Since many businesses plan on working with government-owned buildings, it is best to act in full accordance with the law. Any seedy back-routes to gaining a contract with a government entity may cost a vendor both time and money.
Benefits of Contract Compliance
Since it is not necessarily mandatory to implement contract compliance, it is best to outline the many benefits to having it. It can be said conclusively that contract compliance is much more beneficial than no contract compliance.
Implementing contract compliance and staying consistent with compliance audits, are one of the best ways to maintain professional rapport between the business and the contractor. Because the business has its own set of values, its customers expect to see those values in all aspects of the business.
Most of the time, clients will not be able to discern that the big university and the coffee shop in it are two different entities, and therefore it is important to that coffee shop to uphold the values and the image of the business it vends from.
Keeping in step with contract compliance also saves all parties money in the long run. Usually, companies have reasons for laying out certain rules that must be followed. Often, these reasons are related to money.
Tracking rebates just got easier with contract management systems. All savings that are negotiated are captured. In the end having a contract compliance strategy is important. Whether you are a vendor or a company hiring people you need to have a strategy in place. If you are looking for more information about contract compliance please don’t hesitate to contact us at FIT Procurement.