The process of approving a contract can often morph into a complex beast, especially when multiple parties are involved and oversight is lacking. This can lead to a tangled mess of versions, miscommunication nightmares, and delays that stretch on forever. Let’s face it, securing a contract is a crucial step in closing the deal, and a poorly managed approval process can leave all involved teams feeling like they’re stuck in quicksand.

This is exactly why we created this comprehensive guide: to equip you with the knowledge you need to navigate the contract approval process with confidence. We’ll break down the different stages involved, explain why a smooth approval process is essential, and provide valuable insights into what an effective system looks like. We’ll also provide some actionable tips to streamline your workflow and ensure your contracts get signed, sealed and delivered efficiently.

What Is a Contract Approval Process? 

In a nutshell, the contract approval process is where a drafted agreement gets the green light from all the necessary parties. This includes various departments within your organization or any other key stakeholders involved.

Here’s a breakdown of a typical process:

  • Drafting the blueprint. The journey to approved contracts begins with the creation of a draft. Often, the legal department or a designated contract professional are the ones preparing the legal document, outlining the agreed-upon terms. This includes scope of work, pricing, payment terms, confidentiality and termination clauses.
  • Internal review and approval chain. The drafted contract goes through a series of internal reviews and approvals within the organization.
  • Identifying the key players. It’s important to pinpoint who’s who in this process. This includes the person who initiated the contract, the department head who needs to sign off, the legal department for their expert review, and finally, the individuals with the authority to officially sign the final contract.
  • Legal and departmental review. The company’s legal representative (e.g., legal department or outside counsel) legal department examines the contract to ensure it aligns with all the relevant laws and regulations. Other departments that might be impacted, like finance or procurement, may also take a look to make sure everything fits within their areas.
  • Revisions and refinements. Feedback and edits are proposed along the way, and the contract is revised accordingly through an iterative process.
  • Final sign-off. Once everyone is happy with the polished contract, a designated approver, like a department head or an executive, gives the final thumbs up.

Why the approval process matters 

An effective contract approval process is crucial for a number of reasons.  Think of it as a multi-layered safeguard for your organization.

  • Reduced risks. A thorough review process helps identify and mitigate potential risks associated with the contract. This can include financial headaches (unforeseen costs, unclear payment terms), legal issues (poorly defined clauses), and operational roadblocks (unrealistic deadlines, inadequate resource allocation). By catching these risks early in the process, the organization can negotiate better terms, adjust the project scope, or even walk away from a risky agreement.
  • Legal compliance. Contracts are legally binding documents. The approval process ensures the agreement complies with all relevant laws and regulations. The legal representative plays a critical role in reviewing the contract to identify any potential legal issues and ensure the organization’s interests are protected.
  • Improved transparency and communication:  A defined approval process promotes a transparent contracting process. Different departments involved (legal, finance, procurement) have a chance to review the contract and raise any concerns. This fosters clear communication and collaboration between departments, leading to a more informed decision about the agreement.
  • Better decision-making.  By involving relevant stakeholders in the review process, the organization benefits from a wider range of expertise. Legal, financial and operational considerations are all assessed, leading to a more comprehensive evaluation of the contract and ultimately, better decision-making about whether to enter into the agreement.

What is an approval step?

Each approval process is made up of several approval steps, which are essentially the backbone of a well-defined contract approval process. An approval step acts as a checkpoint where designated individuals, i.e. legal department, department heads, etc., review the contract to ensure it aligns with the organization’s needs and complies with regulations.

During each step, reviewers take a close look at different aspects like legal risks, budget alignment and project scope. They can then give it a green light, request revisions to tighten things up, or ask for additional information to clarify any gray areas. The contract then progresses through these steps sequentially, one by one, until everyone involved feels confident and ready to move forward. This iterative process, going back and forth as needed, helps reduce risks, improve decision-making, and ultimately leads to building stronger contracts for your organization.

What does a good contract approval process looks like

A good contract approval workflow strikes a balance between efficiency and thoroughness. Here are some key elements that contribute to a well-oiled system:

  • Transparency throughout. Clear communication is key. Everyone involved, from legal and finance to department heads, should be kept informed about the contract’s status. This includes updates on changes made, outstanding issues, and overall progress throughout the review and approval stages.
  • Clear and documented guidelines. Having a clear roadmap is crucial. Establish documented guidelines that outline the entire contract lifecycle, from review and negotiation procedures to the final approval process. These guidelines should be readily accessible to all stakeholders and clearly define roles and responsibilities for each department (legal, procurement, finance, business units).
  • Proactive risk management. Don’t wait for surprises. Integrate risk assessment into the process. Identify potential legal, financial, and reputational risks associated with the contract.  Consider factors like contract terms, indemnifications, warranties, and liability limitations during the assessment. The legal department or external counsel can be involved in high-risk scenarios.
  • Stay in sync. Keep everyone on the same page. Implement a centralized and searchable contract repository. This allows stakeholders to access the latest version of the contract, track changes made during revisions, and ensure everyone is working with the most up-to-date information.
  • Embrace automation. Technology is your friend. Explore workflow automation tools to streamline the approval process, and especially look into AI-powered contract review tools that can significantly reduce the time and effort required for reviews and approvals, boosting overall efficiency.
  • Continuous monitoring and improvement. The best processes evolve. Regularly monitor your contract approval process to identify areas for improvement. Gather feedback from stakeholders, pinpoint bottlenecks, and make adjustments to ensure the system remains efficient and effective in protecting your organization’s interests.

How to streamline your contract approval process

Manual contract approvals can be a time consuming and error prone process, but by leveraging AI automation you can achieve a smoother, faster, and more reliable experience. Here are five steps to get you there.

1. Consider these common roadblocks

Before diving into automation, identify the roadblocks slowing down your current process. Is it version control chaos? Do approvals get lost in the shuffle, missing deadlines? Or maybe high-value contracts are slipping through the cracks without proper scrutiny? Understanding these pain points helps you understand what your AI assistant needs to tackle.

2. Embrace AI-powered contract automation platform

Look for contract software that automates the approval workflow. Some basic tools might not offer this functionality, but advanced contract automation software can streamline the entire process.

3. Empower your team with a clear playbook

Once you’ve identified the roadblocks, formalize the solutions in a centralized, accessible playbook. This serves as a clear roadmap for everyone involved in the contract approval process.

4. Assign clear roles and responsibilities

When assigning responsibilities within the AI-powered workflow, be specific. Define exactly when and from whom approvals are required. Every team member should be crystal clear on the process and their role in upholding the established rules.

5. Tailor your automated workflow

With the right AI-enabled platform in place, customize it to your specific needs. Set up automated notifications, permissions and conditional logic. This ensures the platform adapts to your unique approval process. Don’t worry, many AI-powered solutions offer onboarding and customer support to guide you through this customization phase.