The purpose of contract risk management is to minimize potential losses through effective and efficient methods. Contractual risks represent a major “blind spot” for many companies, as they do not see it coming until there is an issue with their contracts or clients.
When parties enter a contract, it is not just the terms and conditions which they need to be aware of. There are other risks involved as well including exposure for legal action in case something goes wrong with their part.
Today’s corporate governance and regulatory environment demands that management demonstrate adequate controls over all functions which impact financial reporting including contractual relationships. More efficient contract processes can be an important way for companies to make their business better.
Contract Risk Management Benefits
Here are some key benefits deriving from better contract risk management:
· There will be a consistent appreciation and understanding of the contractual liabilities throughout the company
· Corrective actions and process improvements will be identified
· With the validation of controls across the contract portfolio, there is enhanced corporate governance
· With detection of overpayments to suppliers as well as underpayments from contractual arrangements, there results tangible, direct cost savings and other revenues
· Addressing risk and insurance with a proactive response
· The entire organization sharing greater awareness of contract risks
· Both insurance procurement and optimum insurance program are aided
· Both decision-making on risk transfer and risk financing options are aided
Contract Risk Management Examples
Understanding The Risks Inherent In Contracts
You should always carefully review the contract before signing it, because an unqualified contractor could expose your organization to financial risks. Here are four things to consider:
· Who pays when something goes wrong?
· What happens when contractors are hurt on your property?
· Be cautious of Hold Harmless and Indemnity clauses
· Seek legal guidance for any doubts
Designing Risk Solutions Covering Financial, Insurance, And Internal Controls
Internal controls are the policies and procedures that financial institutions establish to reduce risks and ensure they meet operating objectives. The board of directors has a responsibility for internal control programs. It makes sure these operate effectively by monitoring them regularly or when there is not enough time from day-to-day operations activities.
Implementing Robust Contractual Risk Management Processes
The task of contract risk management is an essential step for any business to take before entering into a long-term agreement. This process forces the parties involved in negotiations or contracts with one another to estimate their legal exposure. It makes them consider how much could go wrong if something does happen and what would be lost as the result. The time invested should also factor into this estimation since it will require more work on behalf of both sides.
Corporations have a lot more contracts to worry about than just exchanging goods. A company will sign multiple legally binding agreements to document all the intricate details related to business exchanges. This is due in part because they are entering into so many of these kinds of transactions constantly. They need something that can be enforced by law like an enforceable contract instead of just relying on personal responsibility or mutual agreement between parties.