What is Contract Risk Management?

Contracts are the foundation of commerce, outlining rights, responsibilities, and expectations between parties. However, even the most well-intentioned agreements carry inherent risks.

What is Contract Risk?

Contract risk refers to any unforeseen issue that could negatively impact the performance or outcome of a contract. This may include loss of opportunity, legal exposure if things go wrong, and potential business impact the contract will have on the involved parties.

The causes of contract non-compliance have some common themes, including:

1. Contract Performance Issues: 

A party fails to meet their obligations outlined in the contract, leading to delays, financial losses, or incomplete work.

2. Unclear or Ambiguous Language:

Vague or ambiguously worded clauses can lead to disagreements and disputes about the contract's interpretation and its enforceability.

3. Hidden Obligations:

Hidden contractual obligations create contract risk because they can lead to unexpected costs, delays, or legal issues if not discovered before signing.

4. Missed Revenue:

Contract risks like poor performance or ambiguous clauses can snowball into missed revenue. Delays in projects due to unmet obligations or disputes over unclear terms can leave customers frustrated and deals unsigned, ultimately impacting your bottom line.

5. Changes in Circumstances:

Unexpected events, like regulatory shifts, economic downturns, or a supply chain crunch due to a force majeure event, can make fulfilling contractual obligations difficult or impossible. 

6. Regulatory Noncompliance

Regulatory noncompliance, even when unintentionally done, poses a serious contract risk because it can trigger hefty fines, disrupt project timelines through forced stoppages, and even invalidate the entire agreement.

7. Third-Party Issues:

The actions or inactions of parties outside the contract can disrupt its execution.

Contract risks are a reality of doing business, but they don't have to be a source of worry. With a solid understanding of potential risks and a proactive approach to risk management, you can navigate contracting with greater certainty and minimize the chances of encountering unforeseen issues.

What is Contract Risk Management?

Contract risk management is the process of identifying, assessing, and mitigating potential risks associated with contractual agreements to protect an organization from financial, legal, and operational liabilities. It involves analyzing contract terms, monitoring compliance, and addressing factors such as ambiguous clauses, regulatory violations, or supplier performance issues that could pose risks.

Effective contract risk management enhances transparency, strengthens supplier relationships, and minimizes the likelihood of costly disruptions or penalties. From procurement to sales, contracts touch every aspect of your business—and therefore can create risk from anywhere in the organization. This is where contract lifecycle management comes in. 

Contract Lifecycle Management Technology for Risk Management

Contract lifecycle management (CLM) technology can help to standardize and streamline risk identification across your organization. Contract management software helps companies standardize legal language by providing templates and clause libraries with pre-approved, consistent wording that aligns with organizational policies and regulatory requirements. A configurable risk model helps track risks across different categories, such as financial, contractual, performance, and third parties. 

For Sales Teams

On the sell-side, enforce “know your buyer” best practices to stay in compliance with international law. Look up and leverage internal data as well as external data, from sources such as D&B and Thomson Reuters, to determine risk scores, ensure proactive risk monitoring and increase visibility for stakeholders.

For Procurement Teams

For procurement, companies use their contracts to examine their sourcing strategy to ensure they are not overly dependent on a single supplier. And things are getting even more dicey with recent global supply chain disruptions that have put a strain on commercial relationships. 

Identifying Top Contract Risks Within Your Company

Yet, for many companies, identifying their most significant contract risks can be a challenge—let alone managing them. That’s why we’re sharing a WCC Report highlighting the top contract risks we’ve encountered while implementing our industry-leading contract management solution, including:

• Hidden obligations
• Missed revenue
• Regulatory noncompliance

Chat with an Icertis specialist to start your journey to better enterprise risk management through organization-wide contract intelligence. Or see a demo of Icertis Contract Intelligence to learn more.

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