Contract risk management involves reviewing a contract to determine the risk a company assumes in entering into a specific agreement.
Companies can mitigate the risks that threaten their profitability and survival in a number of ways. One of the best known is contracting insurance. Another of the most common ways to approach 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 writing.
Seeking expert assistance can help a company properly analyze risks during contract negotiations.
The opposite of contract risk management would be entering into contracts without considering a possible unfortunate event. In that case, companies would agree to make a deal with a supplier or contractor and simply fill out a standard contract. It might just be a matter of changing names and dates. Instead, however, companies may be performing risk analysis for each specific deal and then amending contracts to address risks such as partner bankruptcy or business abandonment.
During the contract risk management process and before entering into contracts, companies should ask a number of questions to assess risk. Do they include what exactly 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 doesn’t have to be a matter of getting ahead of the partner or supplier. One of the keys to this kind 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 should end up with a deal that is fair to all parties involved.
Another end result of contract risk management is that companies can determine that changing the contract will not be enough to mitigate the unfortunate event. The partners may not agree to have a responsibility transferred to them, 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 the risk management of the contract.
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 assistance with contract risk management from external experts, such as their insurance agents or brokers, or from external legal advisors, for example.