Contract Analysis Explained: A Step-by-Guide for 2025

July 10, 2025

5 min read

Contract analysis has become a key part of legal and procurement work. It helps teams find risks, track deadlines, and follow rules.

A clear contract summary gives teams the details they need to make faster decisions and avoid mistakes.

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Quick Read

Summary generated by AI, reviewed for accuracy.

Want more value from your contracts? Contract analysis boosts decision-making, ensures compliance, and improves performance.

With AI tools like CLM 365, teams review contracts faster and more accurately—making contract management simple, smart, and efficient.

As companies grow and rules become harder to follow, there is a bigger need for tools that can review and manage contracts quickly.

In fact, as per a report by World Commerce and Contracting, 48% of organizations investing in their CLM processes are doing so for better contract visibility.

Whether you are a legal professional, procurement manager, or operations leader, mastering contract analysis can unlock enormous value.

In this blog, we’ll explore

What contract analysis is
The difference between contract review and analysis
How contract analysis works
Why it’s essential for modern businesses

What Is Contract Analysis?

Contract analysis is the process of reviewing contracts to find key terms, check for compliance, and identify risks. It helps teams understand the purpose of each contract and ensures it supports business goals. This process also helps avoid future issues and improves contract performance.

A strong legal document analysis provides clear insights that guide decision-making, support legal and business needs, and improve overall results. It involves reviewing contracts for.

Payment terms
Indemnification clauses
Termination rights
Confidentiality obligations
Risk exposure
Renewal timelines

With the support of contract review, teams can streamline this process, making it more accurate and less time-consuming.

Importance of Contract Analysis

In any organization, contracts are not just legal documents they are the foundation of relationships, responsibilities, revenue, and contract risk. As companies grow and work with more vendors, clients, partners, and employees, the number and complexity of contracts also grow. This makes contract analysis a critical part of business operations, not just a legal formality.

1. Supports Informed Business Decisions

Contracts hold important details that shape business plans and actions. If contracts are not reviewed, leaders may miss key points and make wrong decisions. This brings clear and structured information.

It helps leaders understand terms, deadlines, and duties written in each contract.

This allows them to make better choices and avoid mistakes. This process ensures decisions are guided by clear data rather than assumptions.

2. Strengthens Organizational Governance

Every contract has rules, tasks, and expectations. If these are not clear, a business can face legal issues, delays, or damage to its name. It helps the team understand what they have agreed to.

It ensures that each department knows its role and follows the terms. This builds trust and keeps the business in control.

It is important for strong teamwork and good governance.

3. Enables Strategic Risk Control

In modern businesses, risk doesn’t just come from outside it often exists inside the contracts they sign. Hidden clauses, unclear terms, or silent auto-renewals can become serious threats if ignored.

Legal document analysis is important because it allows organizations to detect and control internal risk at the source, through better understanding of contractual obligations.

4. Essential for Compliance and Accountability

Regulatory frameworks often require companies to fulfil obligations that are written into contracts.

The agreement analysis plays an important role in ensuring that companies stay compliant, by identifying clauses tied to legal standards and internal policies.

Without it, businesses risk violating terms they weren’t even aware of.

5. Establishes Contractual Discipline

In many companies, contracts are stored in different places without order. This causes missed deadlines, unclear roles, and weak teamwork. It brings clear structure to the process.

It makes sure all terms are checked, understood, and handled the same way across all teams. This ensures accuracy and keeps all teams aligned throughout the process.

Also Read: What Is Contract Repository System

6. Bridges Legal and Business Teams

Legal teams often speak in terms of clauses and compliance, while business units focus on performance and timelines.

The process acts as the bridge between both worlds, turning legal text into business language.

It ensures that everyone from legal to operations to finance understands the contracts they rely on, using the same information base.

7. Foundational for Long-Term Contract Strategy

Companies that want to handle contracts better must first understand the agreements they already have.

This is the first step to improve how they manage deals, renewals, and vendors. It gives a clear view of current terms and helps teams make smart changes.

It helps drive long-term strategy and improves contract outcomes with clear and reliable data.

How Contract Analysis Works?

Modern legal document analysis combines manual review and AI technology to extract key information, reduce risk, and improve decision-making. Here’s a simple step-by-step explanation of how the process works:

1. Collecting Contracts

The first step is to gather all the contracts in one place. These could be vendor agreements, employee contracts, NDAs, or service-level agreements. Keeping them organized in a central system is important before starting any analysis.

2. Digitizing and Uploading Documents

If contracts are in paper format, they are scanned and converted into digital files. Then, they are uploaded to a contract management or analysis tool that supports AI-based features.

3. AI Scans and Reads the Contract

Once uploaded, AI tools automatically scan the entire contract. The system uses natural language processing to read and understand each sentence and clause, just like a human would but faster.

4. Identifying and Extracting Clauses

AI then identifies and extracts important clauses such as:

Payment terms
Termination conditions
Confidentiality clauses
Renewal periods
Indemnity and liability sections

This makes it easy to locate key information without reading the whole contract manually.

5. Highlighting Risks and Non-standard Terms

AI highlights unusual or risky clauses, such as auto-renewals, vague obligations, or missing terms. It compares them against pre-approved templates or industry standards and alerts the user if anything looks risky.

6. Tagging and Categorizing Data

Extracted data is then tagged and categorized, so you can sort contracts by vendor, value, renewal date, or type of clause. This helps in quick searching and reporting later.

7. Generating Summaries

Many platforms now use AI contract summary features to generate short summaries of long contracts. These summaries include all the critical points and save hours of reading time.

8. Reporting and Insights

Finally, the system generates reports or dashboards showing patterns, risks, and important dates. These insights enable legal, finance, and procurement teams to manage their duties with clarity and control.

Difference Between Contract Analysis and Review

Understanding the difference between contract analysis and contract review process is essential for business leaders, legal teams, and procurement managers. Here is a short table that explains the difference between the two process.

Aspect	Contract Analysis	Contract Review
Purpose	To extract data, track performance, and gain strategic insights	To check contracts for accuracy, legality, and compliance before signing
Scope	Summarizes many contracts together	Focuses on one contract at a time
Focus Areas	Risks, renewal dates, common terms, trends	Mistakes, missing parts, legal wording
When Used	Before and after signing; used regularly	Mostly before signing a contract
Output	Reports, summaries, and alerts	A clean and approved version of the contract
Value to Business	Helps reduce risk, improve deals, and track contract performance	Makes sure the contract is legally correct

Challenges Faced During the Process

It has many benefits but also some challenges. These challenges can make the process slow and less effective. Understanding them helps teams work better and manage contracts with more care.

1) Relying on Manual Processes

Manual review takes a lot of time. Teams check each contract word by word. This can be slow and tiring. It is easy to miss key terms or make mistakes. It is also hard to track changes by hand. As contracts increase, this method becomes harder to manage.

2) Unstructured Data

Contracts come in many formats. Some are scanned files. Others are PDFs or text documents. There is no fixed structure. It is hard to find important details fast. Teams spend more time searching. This slows down work and can lead to wrong choices. It is also hard to compare contracts or find risks.

3) Complex Legal Language

Most contracts use legal words that are hard to read. Non-legal teams may not understand what each clause means. This can cause confusion and lead to wrong steps.

Teams may miss key tasks or break rules. Contract analysis turns complex terms into clear and actionable insights.

4) Manual and Time-Consuming Tasks

Without a reliable contract management tools, teams must read each contract by hand. This consumes a lot of time and effort. It gets harder when there are many contracts.

Work slows down and teams lose focus on other tasks. Manual work also increases the chance of mistakes.

5) Lack of Standardization

Different teams may use different formats. This leads to misunderstandings and delays in the review process. It is hard to compare terms or find key points. A standard format helps teams work faster and avoid errors.

6) Identifying Hidden Risks

Some risks are not easy to see. They may be in auto-renewal terms or unclear words. Manual checks may miss them. These risks can cause problems later. Smart tools help find and flag such risks early.

7) Limited Use of Technology

Many teams still use folders or basic tools to store contracts. They do not use smart systems. This slows down work and hides useful details.

Without automated contract summary software, teams miss chances to work better and faster. Right tools help improve contract analysis.

Best Practices to Implement During Contract Analysing

When analysis is done well it helps reduce risk improve compliance and support better decisions. To get good results every time companies need to follow clear steps. Below are key practices to follow when reviewing contracts.

1. Centralize Contract Storage
Many businesses still keep contracts in different places like emails drives cabinets or with other teams. This scattered storage causes confusion missed deadlines and lack of control.
Keeping all contracts in one secure place helps avoid these issues. It gives legal procurement and finance teams easy access to the latest versions. It also makes review faster and helps during audits.

2. Use Standardized Contract Templates
When every department creates contracts in different formats or languages, it becomes harder to compare terms or analyse clauses across agreements. Inconsistent formatting also increases the chances of missing key details during the contract review stage.
By using standardized clause library, businesses can enforce consistency, ensure legal accuracy, and streamline clause extraction and comparison. This step makes future analysis easier and more accurate.

3. Leverage AI-Powered Tools for Analysis
Manual contract review takes time and often leads to mistakes. Tools like CLM 365 use AI to summarize many pages in seconds. They highlight key terms duties dates and any unusual points. This helps teams work faster and with more accuracy.
Using contract analytics tools allows organizations to:

Automatically extract critical clauses
Flag missing or non-standard language
Generate a quick contract summary
Identify risky terms or silent auto-renewals
Track contract performance and compliance metrics

Adopting AI does not replace legal teams, it empowers them with more accurate, real-time data to make better decisions.

4. Define Key Clauses to Monitor
Not all contract terms are equally important. Some are simple while others can impact business or cause legal risk. It is important to find and focus on the terms that need more attention. This helps avoid problems and improves analysis.
Focus on high-impact clauses such as

Payment and pricing terms
Termination rights and notice periods
Confidentiality and non-disclosure clauses
Liability, indemnity, and dispute resolution
Renewal and auto-renewal conditions

This helps the team stay focused during the analysis process and reduces the risk of overlooking important terms.

5. Establish a Clear Review Workflow
Analysing contracts often involves teams such as legal, finance, operations, HR, and procurement working together. Without a clear process teams may face delays or confusion. To avoid this set a step-by-step plan. This plan should show who reviews what and when. Each team should know their role and what to check.
A clear workflow helps speed up review and avoids mistakes. Who reviews what

At which stage of the process
What tools or templates are used
How feedback is tracked and approved

A clear workflow improves collaboration, accountability, and turnaround time.

6. Categorize Contracts by Risk and Priority
Some contracts have more risk than others. A long vendor deal with high value needs more review than a simple NDA. To save time and effort sort contracts by type risk and value. This helps teams focus on what matters most and work better.

Type (e.g., vendor, employment, partnership)
Value and length
Risk exposure (e.g., data handling, liabilities)

This make sure that high-risk contracts get the attention they need during the analysis process, while lower-risk documents are handled more efficiently.

7. Maintain Strong Version Control
As contracts go through review and negotiation, multiple versions are created. Without proper version control, teams may refer to outdated or incorrect copies, increasing the risk of errors.
Using contract management software with built-in version tracking ensures:

Everyone works from the latest document
All edits and approvals are recorded
There’s a clear history of what changed and why

This is essential for both contract review and long-term contract lifecycle management process compliance.

8. Conduct Regular Contract Audits
Contracts should not be reviewed only once and forgotten. Over time, business needs, regulations, or relationships may change, and the terms in a contract may become outdated or non-compliant.
Perform regular contract audits to

Check for expired or soon-to-expire agreements
Identify contracts with missed obligations
Flag outdated legal or regulatory clauses
Find renegotiation opportunities

Periodic analysis keeps your contract portfolio healthy and aligned with current business goals.

How CLM 365 During Contract Analysis?

CLM 365 makes contract analysis easy by providing a central platform to store track and review contracts using AI tools. It is built on the Microsoft environment and offers strong security for your contract workflow. CLM 365 integrates with SharePoint MS Teams Outlook Azure Power BI and MS Word. Its simple interface helps users adopt the product quickly and with ease.

Conclusion

Contracts are the core of every organization, governing relationships, responsibilities, and revenue. Without proper contract analysis, companies risk missed deadlines, hidden liabilities, and non-compliance with legal or regulatory standards.

By adopting a structured, AI-powered contract analysis process, businesses gain control. If you’re looking for a smart, scalable way to manage and analyse contracts, CLM 365 is the solution you need. From automated contract summaries to real-time risk detection. Try it now with a 14-day free trial. No credit card needed.

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Frequently Asked Questions

What types of contracts can be analysed?

Users can analyse vendor contracts, employment contracts, NDAs, partnership deals, and more.

Who typically oversees the contract analysis process?

Legal, finance, procurement, and operations teams often work together to analyse contracts.

What clauses are usually analysed in a contract?

Common clauses include payment rules renewal dates confidentiality terms limits of liability and how the contract can be ended. These clauses often have a big impact on business.

How does AI help in contract analysis?

AI can read contracts find key terms and point out risky language. It also creates summaries so teams can understand the contract faster and take action when needed.

How often should contracts be analysed?

Contracts should be reviewed at key stages such as before signing, during renewals, and during audits. They should also be analysed when business needs change or when new risks appear. Regular reviews help ensure the terms still match current goals and reduce the chance of missed duties or legal issues.