Contract Compliance Is Critical For Small Business

A legal claim arising from noncompliance that might only be a nuisance to a large company can be a much larger threat to an SMB. Getting tied up in litigation, legal costs and time in court is a nightmare to small business owners. Noncompliance can bankrupt or close the company.

A carefully drafted contract can help your small business be compliant since it will set out exactly what the parties can and can’t do, as well as identify the laws, regulations and guidelines they may face if they fail to do what is required. Compliant contracts identify the rights, responsibilities and obligations of the parties in an inclusive legal enforceable agreement.

By setting forth these duties, owners can protect their most precious commodity – their business – and build the foundation for closing deals, getting paid, increasing revenue, and adhering to the law. There’s simply less to worry about with compliant contracts.

Contract compliance measures how well your business follows both internal and external criteria. Every contract an SMB enters into has a set of criteria that must be followed. Complying with the contract means meeting those criteria, whether they are set internally (ex. what the parties are willing to pay) or externally (ex. what regulators will allow you to charge). By way of example, think how much some pricing has changed since COVID and how that has impacted contract compliance. The number of criteria depends upon the nature and complexity of the contract.

The essential steps in contract compliance sound easy enough. First, draft a contract that incorporates the necessary compliance criteria. Second, have a process that allows you to measure the contract’s compliance from execution through renewal and termination. Third, develop a strategy that allows you the flexibility to modify the contract if the compliance landscape changes.

How does an SMB keep track of all potential contract obligations? Large companies have the benefit of formidable contract repositories with multiple examples that speed the creation of new compliant contracts. Unfortunately, small businesses generally lack contract templates and playbooks to aid in compliance.

Likewise, SMBs typically don’t have the contract management processes that allow them to efficiently track (and fix) compliance issues as they arise. Effective contract management means auditing compliance, applying metrics, and having regulatory alerts. Unfortunately, this type of administration is something smaller companies only wish they had.

Small and medium-sized businesses may not have an individual or team tasked with contract compliance. Even where SMBs have contract managers, those “managers” may not have a compliance role or even have experience in compliance. You don’t want to bet the business on resources that don’t have the requisite foundation in compliance.

So are your SMB’s contracts compliant? Is that a guess? A small business can’t be “kind of” compliant. It needs to know exactly what internal and external criteria are required for each contract, what changes are and may be anticipated, and how to modify those contracts without errors. Anything less puts your SMB in serious peril.

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