The Ultimate Contract Review Checklist 

Your company’s financial success is built on a foundation of strong and well-crafted contracts. One seemingly insignificant oversight during contract review could have serious and negative consequences, such as financial losses, strained relationships with key vendors, or even legal action. Add in the demands of managing the budget, staying on top of compliance requirements, and monitoring cash flow, and you have the recipe for an overwhelmed and stressed finance team. 

That’s why one of the best ways to protect your company’s interests and reduce the stress of managing your contracts is to have a solid contract review checklist in your financial toolbox.

In this article, you’ll learn about the key components of contract review, why it’s so important, and what can result if it’s not done properly. Using this guide, you’ll be able to help identify potential risks and make informed decisions for your organization.

What is contract review and why is it important?

Contract review is the deliberate, careful evaluation of every clause, term, and condition in your contracts. For finance teams, this means analyzing and clarifying payment terms, liability clauses, insurance and compliance requirements. A thorough contract review process helps you identify potential risks, makes sure that financial commitments align with budgets, and confirms that contracts comply with all relevant regulations.

Sloppy contract review leaves your company exposed and vulnerable to liabilities like surprise costs, missed renewal opportunities, and legal complications that impact your bottom line.

Who should review contracts?

Traditionally, legal teams often took the lead during contract reviews, but now in many companies, the finance department shoulders more of the responsibility. CFOs, controllers, and finance managers need to have a keen eye for terms, especially when it comes to payment schedules, financial obligations, and risk allocation.

Though your finance team is playing a bigger role in the contract review process, it’s still important to maintain open, clear lines of communication with your legal team throughout the process. This helps to verify that all the key components of your contracts are fully understood and that terms align with your organization’s financial strategy.

Key considerations for foolproof contract review

1. Define the contract scope and details

• Understand the scope: Make sure you understand the purpose of the contract, what the contract covers, and the responsibilities of all parties. If you’re entering into a vendor agreement, for instance, are they providing a one-time service, or is there an ongoing maintenance requirement? Defining the scope helps prevent any disputes down the line.
  
• Detail-oriented review: Don’t overlook the fine print. Recently a dispute over the interpretation of a “best efforts” clause resulted in a lengthy court battle. The parties disagreed on what constituted “best efforts” because of vague criteria in the contract. The court had to intervene and establish what “best efforts” meant in this context, at significant cost and causing unanticipated delays.

2. Review payment terms and conditions

• Scheduled payments: Assess if the payment schedule is realistic and financially sound. If a contract requires upfront payment for services, does your current cash flow support this? Reviewing scheduled payments makes sure that you align contractual obligations with your financial plans.
  
• Penalties and incentives: Identify penalties for late payments or early payment incentives. Missing these can directly impact cash flow. If a contract imposes penalties for delayed payments, confirm that you can meet the payment deadlines.

3. Analyze term and termination clauses

• Contract duration: Confirm the contract start and end dates, and pay close attention to any conditions that could alter the contract’s term. This is critical information for accurately forecasting expenses and knowing when to renegotiate terms.
  
• Termination rights: Understand under which conditions either party can cancel the contract. For instance, is there a penalty for early termination? Knowing this lets you plan exit strategies if your vendor fails to meet expectations.

4. Evaluate confidentiality and compliance

• Confidentiality agreements: Contracts sometimes include non-disclosure agreements to protect sensitive info. Review these clauses carefully to protect your company’s financial data. For example, if the contract lacks specific restrictions on sharing sensitive information, a vendor might unintentionally disclose financial details, putting your company at risk of data breaches or competitive disadvantages.
  
• Legal compliance: Check that all contract terms comply with relevant regulations. Non-compliance could result in stiff penalties and damage your company’s reputation.
  
  A sobering example of non-compliance happened in May 2023 when Meta Platforms Ireland was fined €1.2 billion ($1.3B USD) by the Irish Data Protection Authority for violating the General Data Protection Regulation (GDPR). Meta transferred personal data to the U.S. using standard contractual clauses that did not comply with GDPR.

5. Assess liabilities and indemnities

• Risk allocation: Know who is responsible for any delays, non-performance, or unforeseen expenses under the terms of the contract. If a vendor fails to meet a delivery deadline, does the contract state that they are financially responsible for production delays or lost revenue? It’s critical that your finance team understands these clauses in order to set aside contingency funds to cover unforeseen setbacks.
  
• Indemnity clauses: Review indemnity provisions to understand how liabilities are distributed. For example, if a contract stipulates that your company pays for third-party claims (e.g., a lawsuit resulting from a vendor’s noncompliance with standards), this could result in insignificant unplanned expenses.
  
  Knowing these details upfront allows you to better assess the overall financial risk of the agreement and decide if additional insurance or contingency funds are needed.

6. Subcontractors and third-party involvement

• Third-party involvement: Review any provisions related to subcontractors or third parties in the contract. For example, if the contract involves outsourcing services like payroll processing, check if it clearly defines the subcontractor’s responsibilities, payment terms, and compliance requirements.
  
  Finance teams need this clarity to manage payment schedules accurately, forecast expenses, and avoid unexpected fees or disputes due to vague terms around third-party performance.
  
• Subcontractor management: Confirm there are clauses that outline how subcontractors are selected, managed, and compensated. This clarity helps avoid unexpected expenses and compliance issues.

7. Clarify dispute resolution methods

• Methods for resolution: Identify how disputes are resolved. Is it through mediation, arbitration, or litigation? For a CFO, these terms are vital as they can have serious financial implications. Research by the American Bar Association indicates that arbitration cases often take around seven months, compared to 23–30 months for litigation.
  
  This can benefit your company financially, but it also limits legal recourse if the outcome is unfavorable. Be sure to weigh the potential trade-offs carefully.
  
• Jurisdiction and venue: Clarify where disputes will be resolved. In Shell International Petroleum Co. Ltd v Coral Oil Co. Ltd (1999), the contract specified English courts, which worked in Shell’s favor due to their efficient and predictable handling of commercial disputes.
  
  This helped Shell avoid a lengthy legal process and unfavorable judgments. Choosing a favorable jurisdiction can save your company significant legal costs and minimize dispute resolutions challenges.

8. Examine Amendments and Modifications

• Flexibility of Terms: Check for any clauses that allow amendments and modifications to the contract. If the vendor’s service fees change, what is the process for updating the contract? Knowing this stops adjustments from becoming nasty financial surprises.

9. Analyze Financial Implications

• Cost-Benefit Analysis: Conduct a cost-benefit analysis to fully understand the contract’s financial impact. For instance, does the vendor offer a discount for early payment, and is this beneficial given your current cash flow?
  
• Budget Alignment: Verify that the contract’s financial obligations align with your company’s budget and forecasts. If the contract includes recurring expenses, make sure they fit within your long-term financial strategy.

10. Outline the Review and Approval Process

• Internal Review: Define the internal steps for contract review, including which departments need to sign off. For example, finance, legal, and procurement teams may all need to approve a vendor agreement before it is finalized.
  
• Escalation Procedures: Establish procedures for escalating issues that arise during the review. If one of the team’s reviewing the contract reveals payment terms that conflict with your company’s policies, who has the authority to negotiate changes?

Conclusion

Applying a comprehensive contract review checklist to your contract lifecycle management process (and leveraging agreement intelligence) can protect your business and help your teams maintain compliance. By focusing on these key considerations — like payment terms, risk allocation, compliance, and financial implications — you can make sure your contracts align with your company’s goals and reduce potential risks.

Share this checklist with your team to strengthen your contract management process and always consult a legal professional for complex contracts.

Disclaimer: The author of this post is not a legal professional. You should always consult with a legal professional for specific guidance on contracts and regulations. This content is meant to provide general information and should not be used as a substitute for legal advice.

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