Contract risk management involves reviewing a contract to determine the risk a company is assuming by entering into a specific agreement.
Companies can mitigate the risks that threaten their profitability and survival in several ways. One of the best known is contracting insurance. Another of the most common ways to address and reduce risk is contract risk management. This is the process of trying to identify the risk of entering into agreements with certain suppliers and partners before entering into contracts, and then mitigating those risks through negotiations and contract drafting.
Seeking expert assistance can help a business properly analyze risks during contract negotiations.
The opposite of contract risk management would be entering into contracts without considering a possible unfortunate event. In this case, companies would agree to make a deal with a supplier or contractor and simply complete a standard contract. It may just be a matter of changing names and dates. Instead, however, companies can perform risk analyzes for each specific deal and then modify contracts to address risks such as partner bankruptcy or deal abandonment.
During the contract risk management process and before entering into contracts, companies should ask a series of questions to assess risk. Do they include exactly what can go wrong in the specific trade agreement? What are the chances of these things going wrong? If an unfortunate event occurs, what would the consequences be and how serious would they be? Companies can change the wording of a contract or add clauses to it when performing contract risk management.
Contract risk management does not have to be a matter of getting ahead of the partner or supplier. One of the keys to this type of risk management is simply a matter of clarity. The contract must clearly state which party to the contract is responsible and responsible for what. In the end, contract risk management must end with a deal that is fair to all parties involved.
Another end result of contract risk management is that companies may determine that changing the contract will not be enough to mitigate the unfortunate event. The partners may not agree to a transfer of responsibility, for example, or they may insist that the other companies involved in the contract assume certain risks. In either case, companies may decide that they cannot take the risk. Insurance can then be purchased to supplement contract risk management.
To properly analyze risk and address risk during contract negotiations, it may be important to seek expert help. These could be internal resources such as the corporate board or the risk management department. Companies may also seek help with contract risk management from outside experts, such as their insurance agents or brokers, or from outside legal advisors, for example.