Contract Renewal: Best Practices and Tips
Contract renewal clauses exist in virtually every agreement. They are an important element, meaning that businesses should take care to ensure that their renewal process is optimized. Once you adopt an efficient procedure utilizing contract management software, you will save time, increase revenue, and boost your business relationships.
What is contract renewal?
One of the most crucial provisions in any agreement is the contract period and its renewal. You should start thinking about the contract renewal procedure before a deal is close to its expiration. During this time, you and the counterparty have the chance to review your legal arrangement and can either use the current terms or renegotiate the contract. This involves confirming if the products or services provided are still necessary, the prices set are fair, and the goals still align with both parties.
Contracts that typically require renewals
The renewal stage of an agreement allows the stakeholders to address issues with the previous terms and renegotiate more beneficial ones. Renewal clauses are typically in most agreements but they’re more beneficial in some than others.
Here are some of the agreements that require renewals:
- Promissory notes
- Insurance policies
- Non-disclosure agreements
- Master services agreements
- Vendor agreements
The difference between renewal and extension of a contract
In the most basic terms, renewing a contract refers to using a new agreement that replaces the previous one to continue a business partnership. On the other hand, a contract extension is an add-on agreement that extends the existing contract for an additional period.
When to extend an agreement
Extending a contract is beneficial for arrangements that govern a term-limited project that requires more time to be finished. It’s helpful in this scenario because instead of renegotiating an entirely new agreement, the parties can create a separate extension agreement that incorporates the previous terms and extends them for an extended period.
When to renew an agreement
In contrast, contract renewals are better suited when the parties want to continue their partnership but need to adjust some of the terms of their agreement. This is useful for indefinite business relationships because it allows them to alter the arrangement as their needs and goals change over time.
The legality of auto renewal contracts
Automatic contract renewal provisions usually state that an arrangement will renew on a certain date unless one of the parties provides notice to terminate the agreement. Auto renewals are governed by section 5 of the FTC Act, which regulates deceptive business practices. In most instances, these regulations are intended to protect consumers.
For an auto renewal clause to be legally valid, businesses must:
- Disclose the terms of the offer in a clear manner and avoid vague language
- Make sure the consumer can read and locate the disclosure easily
- Disclose the terms of the agreement prior to receiving payment from the customer
- Get the customers affirmative consent to the agreement
- Do not impede on promised cancellation procedures by making them difficult to fulfill
Contract renewal process: best practices
Renewals can be a great opportunity to gain revenue, if leveraged correctly. This means that you must ensure that understand how to renew a contract proactively. When you implement optimal practices for your renewal process, your business relations will prosper and you can cash in on the renewal opportunity.
Here are some tips for getting the most out of your renewals:
- Track deadlines and avoid putting off contract review
- Communicate and build a strong relationship with your business partner
- Consider the current goals and needs of your business
- Make a note of the performance of the agreement
- Weigh the pros and cons of continuing the business partnership
- Take advantage of contract lifecycle automation
The benefits of using contract renewal management software
The best way to get the most out of your renewals is by implementing CMS. This software automates the entire process and gives you valuable insights into the performance of each agreement. Since it tracks agreements for the entire duration, using it makes it easier to determine if an agreement is worth renewing.
Here’s why your business needs to implement contract lifecycle management software for renewals:
Less paperwork and friction
Want to get rid of that dreaded stack of papers on your desk that’s accumulated over the years? When you switch to a digital renewal process, you won’t have to worry about keeping track of various physical documents anymore. Plus, since the redlining process can be done on the platform, you can keep track of document versions and changes, making the whole renewal procedure much easier.
Renewing current agreements means that your company will save the time and resources drained from the negotiation process. The negotiation process can be optimized even more when you take advantage of automation tools. These tools allow you to negotiate remotely without meeting the other party to hash out agreement terms.
Effective oversight of obligations
Confirming that all of your partners are compliant and holding up their end of the agreement is time consuming when you have to manually hunt through all of your documents. A smart management process automates this process, giving you oversight of all of your contract obligations from critical deadlines to compliance.
Maximize business relations
The most successful companies are the ones that recognize the importance of forming solid partnerships. Renewing existing agreements with your current business partners allows you to improve the pre-existing relationship easily.
Being proactive with your renewals by utilizing CLM software shows your partners that your company is efficient and will make them more inclined to uphold their end of the deal.
Easier revenue capture and forecasting
Having a solid understanding of your financial situation is crucial for every company. Revenue forecasting is important as it helps you strategize to grow your business. However, this is difficult to estimate manually. CMS conducts the process for you by taking the previous years earnings and using that to predict the next years growth. That way, you can renew agreements as you see fit.
Using CMS to manage the contract renewal process with ease
Many companies still manage their renewals manually or only utilize partial automation. This results in a time-consuming and labor-intensive task where errors can easily arise. Utilizing an automated platform streamlines this process, gives you the time and resources to focus on creating lucrative deals and providing a better partner experience.
Some of the most beneficial automation features for renewing a contract include:
- Automated deadline notifications
- Advanced oversight into agreement performance
- Simple communication and collaboration
- Customized template library
- Organization of agreements on a single repository