Contract management is an activity businesses engage in to enhance and improve their business operations. This process often includes using a bid or negotiation process to create a specific business relationship with vendors or suppliers. Some industries—such as construction, manufacturing or electronics—use contracts to improve their market share and the goods or services sold to consumers.
Contract management helps companies lower their business costs, whether they relate to producing goods and services or running ancillary business operations.
Construction and manufacturing companies often contract with companies who supply raw materials for their production process. These contracts allow companies to create a hedge against a future increase in materials costs.
Companies also use contracts to purchase or lease facilities and equipment to ensure they receive the lowest cost possible. The bid process in particular allows companies to receive numerous contracts and select the best one available.
Companies can use contracts to create lasting business relationships. These relationships allow companies to develop revenue streams by consistently purchasing goods or services from a company.
Companies can also use these relationships to find new partners for producing goods and services. For example, construction companies often use subcontractors to complete various processes in construction projects. A subcontractor who builds a good working relationship with a general contractor may become the go-to company for certain processes.
A competitive advantage is the ability to produce or distribute goods and services better than other companies in the business environment. Using contracts can help companies maintain their advantage by limiting the amount of economic resources in the business environment. For example, a construction company that contracts with a supplier to purchase significant amounts of 2-foot by 4-foot pieces of wood may prohibit other companies from using this supplier. Competitors must find another supplier for this size of wood, which can lead to using inferior lumber for construction projects.