How Much Do Contracts Cost Your Business?

Sunk cost calculator

We typically think of contracts as money in the door. But contracts can cost money as well. 

To stay profitable, you need to ensure your deals bring in more money than they cost. Keep reading to learn whether your contracts are driving or draining profits.

How You’re ‘Paying’ for Contracts

Client contracts pay the bills. But contracts are also a source of revenue leak — avoidable losses of revenue that could be contained with more efficient processes. 

There are three ways contracts cause unintended revenue leaks:

First, slow deals. This revenue leak occurs when a contract takes longer than necessary to execute. When a contract stalls as you negotiate terms, it delays your start-date with a new client. That’s revenue that should have been in the bank, delayed for weeks, or even months.

Second, bad contract terms. The contract terms you agree to in a deal can add significant financial risk to your business. For instance, you may fail to specify payment terms, creating a loophole for clients to pay lay without penalty.

Your terms can also create unplanned financial obligations. Like an enterprise organization requiring you to purchase business interruption insurance or pay for annual audits. 

Third, time invested in managing contracts. Think about the hours you spend drafting, redlining, and negotiating terms in your contracts. Our research has found that most small businesses sink anywhere from 2.5 to 10 hours reviewing each contract. Another 6% spend 20 or more hours on contract review.

Time typically spent reviewing a contract

Add to that the hours you spend developing and updating contracts, and you could be spending 30 to 40 hours on each contract — even if you lose the deal!

This is a sunk cost that creates revenue leak, adding to the total cost of contracts for your business. 

The question is, do these additional costs impact your profits. And if so, how much?

Introducing, Delino’s Contract Sunk Cost Calculator

To help you manage contract costs, we’ve created a Contract Sunk Cost Calculator. Use it to calculate the real cost of executing and managing contracts for your business.

Simply enter your information into the calculator:

  • The annual salary of the person managing your contracts
  • The number of contracts you manage per week
  • The number of hours you spend per contract
  • The cost of your attorney, if you use one

We’ll tell you how much your contracts are costing, so you have a better idea of how to stop contract revenue leaks.

3 Ways to Minimize Contract Revenue Leaks

To raise your profits, you need to stop as many revenue leaks as possible. When it comes to contract revenue leaks, you have three options:

Option 1: Streamline your contract management process 

Every minute you can shave off your contract management process will help lower your contract costs. But be careful. 

Contract management should remain a high priority — it’s how you drive revenue, after all. So when you streamline your process, don’t reduce your time willy-nilly.

It can take time to carefully review contracts, track due dates and obligations, and effectively manage your contract files. Don’t start speed-reading contracts to save a few minutes.

Option 2: Identify the terms that affect your finances

Identify the contract terms that are most likely to impact your finances. Once you know those terms, pay close attention to them when reviewing your contracts.

One way to do this is to do a quick red flag review before you sit down to redline your contracts. This highlights the terms that you need to pay close attention to. And it allows you to review other terms more quickly, since you already know they have a lower impact on your business.

Note: Avoid skimming contracts — even terms that seem innocuous can contain clauses that add unnecessary risk to your business. A close review will help you spot these terms, so you can negotiate a better deal.

Option 3: Use a smart contract review tool 

The best way to reduce time reviewing your contracts is by using a smart contract review tool like Delino.

It does your red-flag review for you, ranking each term according to its risk level. So you can minimize your time reviewing contracts and still catch terms that put your business at risk.

If you’re serious about stopping revenue leaks, you can’t ignore contract sunk costs. With Delino, you get maximum return on your time reviewing and managing contracts.

Apply to join our beta today.

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DISCLAIMER: Delino is not a lawyer and makes no warranties that its advice will protect your business from lawsuits or damages. Users rely on contract feedback at their own risk. Please consult your attorney for legal advice.