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Contract automation

Contract Renewal vs. Contract Extension: What’s the Difference?

Aug 9, 2022
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4
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A new contract that replaces the old one to continue a business partnership is the most basic definition of a contract extension. In contrast, a contract extension is a supplemental agreement that extends the current contract for a specified period of time.

What are contract extensions?

Contract renewals are a common means of extending the term of an existing contractual agreement. The renewal process is usually carried out either actively or passively by both parties to continue the terms of the contract for a new period after the contract expires. 

For companies, contract renewal plays a crucial role, as it not only allows for the continuation of an expiring contractual agreement, but also gives both parties the opportunity to renegotiate their terms for the new contract term.

A company's main goal in contracting is to renew contracts with customers and suppliers in order to maintain the relationship. This means that they must be able to convince these parties to continue working together. Consistent and reliable reminder work is required to meet contract renewals and their deadlines. 

What are contract extensions?

A contract extension is an agreement between the original contracting parties to extend the terms of their existing contract for a further period. The period for which the extension is granted is specified in the extension agreement.

The term "extension" may also refer to a new agreement concluded by the same parties as part of the original contract, replacing or supplementing the original contract. This type of extension is called a "supplementary agreement".

Extensions are typically used when a party wishes to continue to provide services under the terms of the original contract after its expiration date. For example, one entity may enter into a contract with another entity to provide services for a specified number of years. After the original contract expires, both entities may agree to extend the contract for an additional year. In this case, the original contract remains valid, but the parties may agree to change some of its terms and conditions

What is the difference between contract renewals and contract extensions?

Contract extensions and renewals are similar in that they result in the continuation of a relationship between you and the other party. The main difference, however, is that a contract extension extends the term of the contract based on the existing contract, while a contract renewal replaces the existing contract with a new one.

A contract renewal is essentially a contract extension without a change in the terms of the contract. It can be used when there is no change in the nature or scope of the services provided by the other party. For example, if your company has been providing accounting services for years, it makes sense to renew the current contract rather than replace it with a new one. However, if you change the nature of the services you provide, you will need to opt for a contract renewal rather than a contract extension.

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How to manage your contract renewals and extensions 

The key to managing your contract extensions and renewals is to set up a system that not only keeps track of your deadlines and expiration dates, but also ensures a streamlined negotiation process along the way. 

This system should also not add clutter and complication to your existing contract process. You want to avoid losing track of all your contract management just because you need 10 different tools to keep it alive. Below are some of the key points to consider when setting up the best system to manage your renewals and extensions: 

Create a contract book with selected clauses and conditions at hand

One of the most common mistakes is that companies are not well enough prepared at the beginning of the negotiation process. Identifying which products a customer currently has a contract for and which new products need to be offered to replace the current product portfolio is work enough. 

Drafting a new contract with new clauses requires further input from the legal department, compliance department and management, which further increases the time required. It is therefore not surprising that creating contract templates that are aligned with the new product portfolio and contract renewals saves a lot of time. 

Regular review of key parameters

The late extension of contracts puts undue pressure on sales and legal teams, who often have to draft new contracts overnight, leaving little room for maneuver in negotiations. Under this pretext, concessions are made or must be made to close a deal before dawn. To avoid this scenario, companies would be well advised to keep an eye on deadlines and key parameters in order to identify deadlines or outdated portfolios before it is too late. 

Keep track of your deadlines in a standardized way

A systematic approach to keeping track of all contract renewal and extension dates doesn't have to be too advanced to begin with. 

The very first step you can take is to have a basic system that reminds the contract manager when existing contracts expire. This can be as simple as using an email service like Gmail or Outlook. Many companies also prefer to record their deadlines and due dates in a spreadsheet that also stores all contract documents.

Once you have your reminders set up, you should think about how you want to manage the renewal process. You can send a reminder before each deadline, but if you don't get enough responses from customers, this could result in missed deadlines. 

Another option is to use a special software solution that allows you to automate the entire process. With such solutions, you can create templates that contain all the information your customer needs to fill in. Once the form is filled out, the software will automatically send emails to everyone involved.

Streamline your processes 

Ideally, contract renewals or extensions, as described above, must be managed through an established process. Those that boast of having an established process should at least be able to designate people responsible for deadline management, as well as other individuals and teams responsible for the actual contract renewal process.

As more and more contracts will join the contract renewal queue over time, the learning organization can further streamline the process. The use of specialized software applications, such as those offered by top.legal, can often lead to great success in improving contract processes with little effort. 

Conclusion

What is your current process for monitoring all contract renewal dates? Do you have a set of basic steps established that you always try to follow to set up reminders? Or are you overwhelmed by the volume of contracts with their important information? Are your teams having to spend too much time on impractical and inefficient processes that could have been used elsewhere?

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