Your contract closeout process can be simple or complex depending on the contract attributes such as contract type (cost reimbursement, fixed price, etc.), period of performance, type of contracted work, etc. In this post, we’ll introduce our best practice guide and a quick checklist for contract closeouts, which you should observe to effectively minimize your company’s contract management processing times.
What Is A Contract Closeout?
A contract closeout occurs when all points listed below has been accomplished:
- All parties involved have fulfilled all terms of the contract.
- Contract administration actions have been completed.
- All disputes have been settled.
- Final payment has been made.
Why Should Contract Closeouts Not Be Overlooked?
Contract closeouts serve important purposes in a company as part of any well-functioning contract management process.
A timely and proper contract closeout brings about the following benefits:
- Reduces the number of open contract files needing management.
- Mitigates risks of losing funds to excess payments.
- Ensures all invoices are paid.
- Avoid unfavourable and adverse scenarios.
What Does A Contract Closeout Process Flow Look Like?
These are the 7 basic steps in a contract closeout process:
- The contract manager needs to verify that the contract is complete.
- Confirm that the documents required for the closeout have been completed.
- Verify that the contract terms are correct.
- Submit final invoices and initiate final payments. Also remember to collect any overpayments made.
- Identify any excess funds and de-obligate them.
- Retain all essential documents.
- Close the contract file.
Each department has its own role to play in ensuring a smooth contract closeout process. For example, in the Administrative Department, their roles could include:
- Updating contract records to establish completion and outstanding issues (audits, disputes, etc.) resolved.
- Clearing final royalty reports for patents/intellectual property.
- Ensuring that performance evaluations have been completed.
- Ensure the disposition of classified material is completed.
Whereas roles in the Finance Department could include:
- Complete review of contract funds and ensure excess funds are de-obligated.
- Ensure all interim or disallowed costs have been settled.
- Submit final contractor invoices.
- Ensure payment made is equal to the contract amount and all disputes involving monies are resolved.
Closeout Terms You Need To Know
- Cancelled funds: These funds can no longer pay for any obligations.
- Current funds: These funds can be obligated and used for payment.
- Dormant: This means that a contract cannot be closed because of these underlying reasons.
- Excess funds: This refers to funds relating to a specific line item or deliverable that was not performed in the contract.
Concerns And Solutions Relating To Closing Out Contracts
1) Lack of management attention to contract closeouts.
- Establish a separate closeout function within the organization.
- Concentrate on contract closeouts in times when the contract placement workload is lesser.
- Opting for contractor support when in-house resources are limited.
2) Poor management systems in place to monitor contract closeout processes.
- Consider using a management information system such as Contract Hound that allows you to view contract status at a glance.
- Opt for contractor support for data-entry services when in-house resources are limited.
3) Poor coordination among the people involved (contractors, auditors, inspectors, etc.).
- Notify the relevant personnel (Eg: auditors) whenever a cost-reimbursement contract is awarded that requires an incurred cost/indirect cost rate proposal audit. Providing this information ahead of time allows the auditors to program future requirements into their workload projections.
- Specifically state in the audit request any special information that should be included in the audit report makes the report more useful and improves the working relationships between the parties involved.
- Share information (Eg: Lists of prime and subcontractors subject to defective pricing reviews or contracts physically completed but not closed over 3 years) helps the auditors better define the audit backlog, determine audit resources and prioritize contractor locations for audits.
4) Large backlog of unscheduled audits.
- Perform continuous risk assessments to determine contractors that should be audited. This helps to better manage the audit workload.
- Choose to use more fixed price contracts which will help in reducing the requirements for contract audits.
- Encourage contractors to submit their final vouchers in a timely manner helps in avoiding delays in requesting the final closeout audit under cost reimbursement contracts.
5) Lack of a specific dollar threshold for using quick closeout procedures.
- Research on the contractor’s history of incurred costs, billings, and performance are additional factors to consider when establishing thresholds for using quick closeouts.
- Establish a good working relationship with the finance department. Obtain from your finance department a list of contracts where money will be lost if the final settlement does not occur. This helps in targeting attention on the contracts that may be closed through quick closeout procedures.
- Choose to use specific dollar thresholds for quick closeouts when the company’s interests are protected, low risks are involved, and indirect rates can be verified.
How Can You Use a Platform to Improve Your Contract Closeout Processes?
Want to streamline not only your closeout process, but also your whole contract management lifecycle? Using a contract management platform, instead of a shared drive or Excel spreadsheet, could help you prevent mishandling issues and significantly improve your contract management process at scale.
- Receive notifications and reminders on key dates. Employees will no longer need to constantly email reminders back and forth for approvals and signatures as it call all be done through Contract Hound!
- A centralized platform to save all your contracts. All employees regardless of department can now access the latest versions of amended contracts without much hassle. Contract information can also be found and edited easily.
- Know who has access to your contracts. Employees can easily find out who has access to each document and managers can chat with employees within the platform and approve contracts swiftly.
If you’re keen to simplify and shorten your contract management processes while improving the connectivity amongst your employees across departments, you can claim a 14-day free trial of Contract Hound here now.