Most businesses dread contract audits. But it doesn’t have to be that way. Discover our contract audit best practices and tips in this Juro deep dive.
Contract audits are critical within a scaling business, but they’re often dreaded. It’s not surprising, either. Contract audits demand a lot of attention and for long periods of time.
When legal teams aren’t trying to dig out relevant contracts from thousands of other files, they’re trying to crawl through legal jargon to find key clauses. It’s fair to say that auditing large volumes of contracts is nothing short of a nightmare for most legal counsel.
But we’re in 2022, so why settle for an inefficient and extremely manual contract auditing process?
This post explains everything you need to know about contract audits to improve the process from start to finish. It also explores how implementing a contract tool like Juro could transform your contract auditing process, making it quicker and easier to audit contracts at scale.
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What is a contract audit? | Types of contract audit | Purpose of a contract audit | When should you perform a contract audit? | How to prepare for a contract audit | Pain points | Audit contracts in Juro | FAQs
What is a contract audit?
A contract audit is an assessment of how successfully a company’s contracts have been performed and honored by the contract parties. It’s designed to identify any problems or risks associated with the quality, compliance or fulfillment of one or more contracts.
Contract audits are typically used for quality assurance purposes, and they can vary in scope and detail depending on the desired objectives. In fact, depending on the nature of the contract audit, everything from the contents of a contract to the processes, policies and systems used to manage contracts can be evaluated against best practice.
But what are the different types of contract audits for growing businesses, and how can you make the contract audit process more efficient in 2022? Let’s find out.
Different types of contract audits
The purpose, nature, and scope of a contract audit can vary depending on the strategic priorities of a business and the circumstances of the audit. However, there are three common types of contract audits that are most commonplace in organizations. These are:
🧑⚖️ Contract compliance audits
A contract compliance audit investigates and reviews how contract objectives and terms are being honored by the contract’s parties, and whether each party has fulfilled its obligations effectively. Contract compliance audits can also be used to review an organization’s compliance with certain regulations, like data protection and information security laws, among other things.
📚 Terms audits
Term audits, also known as clause audits, involve evaluating the collection of terms and clauses used within contracts and identifying any incorrect or outdated terms. This helps legal and business teams identify where contract terms need to be updated in line with the regulatory and economic environment, as well as your business strategy.
🏦 Cost audits
Cost audits are conducted with the purpose of reviewing and evaluating the pricing and cost information available within contracts. They are commonly conducted to ensure that your organization is being charged correctly and that you’re not overcharging or underdelivering to your clients.
What is the purpose of a contract audit?
There are multiple purposes of a contract audit, and auditing your contracts periodically can bring numerous benefits. They empower your business to:
💰 Manage and evaluate your costs
One of the biggest advantages of regular contract audits is that they ensure that your business isn’t overpaying the amounts agreed and that the costs are fully verified. This can also be useful for forecasting and can help legal to support finance and other commercial teams to control costs more effectively.
Even minor errors can result in inaccurate billing, so it’s important to identify these mistakes as early as possible to optimize your financial performance.
This assessment will also enable you to identify any opportunities to negotiate better rates in the event of renewal, as it gives you the opportunity to manage and evaluate your costs on a case-by-case basis.
👑 Improve the quality of contracts
Contract audits provide a wealth of actionable data that can enable your business to make more informed decisions about contracts, the terms included within them and the processes used.
Not only can it provide guidance on how to improve internal processes and the quality of contracts as a whole, but it can also help to identify individual opportunities to upsell or reduce expenditure in ways that align with the company’s strategy.
You can also use it as an opportunity to flag any clauses that need updating either in terms of the wider regulatory scope or according to the direction your business is moving in.
⏰ Make your processes more efficient
Contract audits often expose friction points within a contract workflow and identify areas that could be made more efficient as a result.
For instance, if certain contracts have had a longer turnaround time, or certain clauses persistently hold up the signing of contracts, you can use a contract audit to decide where to focus your time to improve this process.
More often than not, contract audits will expose mistakes and ineffective processes, so it can be a perfect opportunity to assess whether your business could be growing quickly enough to need a contract management tool to support on your contracting process.
⛰️ Identify risks early on
Proactive contract audits are an effective way to identify problem areas and risk before it escalates further.
For instance, spotting billing inaccuracies early can prevent unexpected costs from building up over time and having a lasting impact on revenue. Likewise, identifying that the objectives of a contract haven’t been fulfilled early on can prevent this non-compliance from escalating into potential legal action later down the line.
🤝 Improve trust
Contract compliance audits are also beneficial since they provide transparency and enable you to build trust with your customers.
If these contract audits are carried out collaboratively with the businesses you work with, you can use them to improve the relationship you have with them and provide assurance that your contracts are correct, up-to-date, and subject to consistent review.
When should you perform a contract audit?
Since contract audits are extremely time-consuming, businesses tend to put them off. But when should your business perform a contract audit, and how frequently should they be undertaken? Well, there are some specific instances where contract audits are particularly common, including:
For large capital expenditure
When the business is seeking to expand into new markets
In the event of a merger or acquisition
In preparation for a new funding round
When terminating or beginning a vendor relationship
Where errors or mistakes have been flagged regarding contract performance
Contract audits can be performed proactively as a preventative measure or a health check, or reactively to respond to nagging concerns.
It’s wise to frequently conduct small contract audits on a microscale (e.g per contract) but it’s also important to conduct larger, more comprehensive audits of the entire contract portfolio periodically.
How to prepare for a contract audit
📝 Outline your scope and timing
Before conducting a contract audit, it’s important to define the scope of what you’re actually going to audit.
You need to decide on how many contracts you want to audit, and which category of contracts you’d like to audit. You’ll also need to decide whether you want to audit contracts in their entirety or just look at specific areas of a business contract.
Depending on the scope you decide and the resources required, you will then need to decide on when it’s best to start the audit. This can vary depending on your business priorities and other ongoing projects, as contract audits can be extremely time-consuming - particularly when conducted manually.
👥 Involve the relevant parties
It’s rare for contract audits to only affect legal teams. Like contracts, most contract audits involve a variety of stakeholders, and all of these need to be briefed accordingly about their roles and responsibilities throughout the process.
For instance, if your business is concerned about overruns and leakages, you may want to involve the financial department. Likewise, if you’re evaluating a specific subset of contracts, you’ll want to invite the individuals that worked on those contracts to get involved. Doing this ensures that your contract audits are well-informed.
Often, involving the relevant parties also means collaborating with the businesses you’ve contracted with. When doing this, it’s vital to develop trust and be transparent about your aims and objectives, as businesses can become hostile when they feel that you’re attempting to apportion blame for mistakes or criticize the delivery of their services.
✅ Set the audit objectives
Why are you conducting the contract audit? What is it that you’re looking to achieve? It’s important to understand what the objectives of your audit are and how you can align with these throughout the auditing process.
For example, you might be looking to identify areas of non-compliance or to pick up on any billing inaccuracies that might accumulate over time and become costly. You might even have a broader objective of finding a more efficient way to manage your contracts.
Whatever your reason for conducting the audit, it’s important to define these objectives and discuss them with any stakeholders so that they can focus on them.
🗂️ Organise files and make them accessible
The first problem you’ll probably encounter when beginning a contract audit is locating the relevant contracts and gaining access to them.
Whether they’re stored in a platform like Box or Google Drive, or printed out and filed in storage cabinets, it can be a challenge to find and organize these contracts in preparation for a fast and efficient audit.
It’s wise to try and sort your files in advance of the contract audit, which can be done with ease using contract management software with a smart contract repository.
For example, a contract automation tool like Juro allows users to query and search contract data in seconds, with the ability to filter contracts by different values, like contract value, status and owner, among other things.
🖥️ Consider using legal software
Contract audits can be a hefty task. From sourcing specific contracts to manually trawling through pages of paper to identify specific sections and clauses. If you’re doing this at scale, it may be worth implementing legal software, like a contract management system with a robust repository that enables you to search and store your contracts with ease.
If you’re not sure whether your business is ready for legal software yet, then read on. We’re about to dive into the pain points of contract audits and how contract automation software like Juro can help.
Why are manual contract audits painful?
But why are contract audits typically so painful for legal teams and other contract stakeholders? Here are a few of the most common pain points encountered when performing a contract audit manually:
📍Locating your contracts
For a start, it can be a nightmare trying to find and organize the contracts you’re required to review. For some businesses contracts will be scattered across email, PDF and saved on multiple shared drives, depending on the contract owner.
With no information about when the contract was signed, who the parties to the contract are, and what the value is at first glance, contract auditors are required to crawl through pages and pages of documents just to find the relevant agreements.
This task is much worse for businesses that still rely on the traditional method of contract storage: physical documents and filing cabinets.
The process of sorting through hundreds, if not thousands of documents is not only a mundane administrative task, but also consumes a lot of time unnecessarily.
⏳ Reading and reviewing all contracts manually
Even once you’ve organized your portfolio of contracts in preparation for an audit, you then need to decide who’s going to review them, and what for.
As lawyers will know too well, auditing each individual contract to find specific details can be incredibly time-consuming, and so it’s often a responsibility outsourced to a law firm or pushed onto paralegals.
Some businesses will even pay large sums of money for the contract to be reviewed when with the right contract tool, the task could’ve been completed much more easily and affordably in-house.
If the audit involves large volumes of contracts, which it often will in fast-growth businesses, contract audits can quickly become a dreaded task and one that consumes a lot of in-house resources.
📊 Extracting and documenting contract data
Then there’s the problem of where you decide to store the audit findings securely. It’s common for manual contract audits to rely on Excel spreadsheets to manage contract data, and we have a free contract repository template to help businesses do just that.
However, Excel isn’t designed to manage contract data, and it still requires a great deal of manual data entry, which can be very demanding. There’s also the problem that since Excel sheets are static files, the data can’t easily be transferred into other platforms, unlike some more sophisticated contract repositories.
Audit your contracts with Juro
Fortunately, Juro’s contract automation software provides a far more intelligent way to create, search and audit large volumes of contracts.
🗃️ Single source of truth for contracts
With Juro, all of your company’s contracts are stored securely in one organized workspace, making it easy to find all of the relevant contracts in one place, with one system of record. This eliminates the need for contract auditors to search through various shared drives for specific contracts, and it prevents any problems and errors relating to version control.
🔎 Powerful search functionality
Juro’s contract repository is also searchable, and Juro users can use the powerful search function to run reports based on fields and tags, query specific contracts and filter contracts by certain values. This makes it far more efficient to identify contracts of interest and add these to one folder ready for review.
🔨 Contracts built on structured data
With Juro, there’s also no need to rely on and pay for an AI contract review, which can become expensive. Unlike contracts that are created as Word documents and saved as PDFs, contracts built in Juro are built on structured data, meaning that they’re easy to organize and sort without needing to leave the platform. This means that contract data can be retrieved quickly and easily.
💡 Query contract data in seconds
With a manual contract audit, there’s also the danger that you’ll not be able to flag outstanding obligations and ensure contract performance as a result. When creating a contract in Juro, this isn’t a problem. Juro users can input important information like each party’s obligations, due dates and other contract values into smartfields, which are built as metadata.
⏰ Automatically set reminders
This means that not only can you set up and filter table views to surface contract obligations and find import contract data, but you can also set up important reminders for specific obligations to ensure compliance later down the line.
Contract audits become quick and simple with Juro’s contract automation software, making them less of a chore for businesses that need to keep track of their contract performance, compliance and terms.
Frequently asked questions 🤔
Who is responsible for contract audits?
Who is responsible for conducting contract audits will depend on the nature of the audit and the size of the business. However, it’s common for legal teams to conduct these audits and collaborate with relevant departments.
What’s the difference between a contract review and a contract audit?
There are numerous differences between contract audits and contract reviews.
Firstly, a contract audit is an assessment of a signed contract, whereas a contract review is an assessment that occurs both pre-signature and post-signature for contracts.
Secondly, the purposes of contract reviews and contract audits are different. The purpose of a contract audit is to ensure that contract terms are being fulfilled sufficiently. By comparison, the purpose of a contract review is to determine whether the terms of an agreement are advantageous and can be agreed to during a negotiation.
It’s also more common for contract reviews to happen on a single contract basis. Contract audits, however, usually involve the review of a whole portfolio of contracts.
What is an audit clause?
An audit clause is a clause inserted into a contract that gives one party the right and permission to review the other party’s contracts and records for the purpose of an audit. Before conducting a contract compliance audit, it’s important to check whether an audit clause is included in the relevant contracts, as you may need to seek permission if not.
Where can I find out more about contract audits?
Here are a few different contract audit resources that might prove useful:
Audit contracts in Juro
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