Risks arise whenever a contract is created. You can safeguard your contracts by developing a risk response plan that identifies the goals, techniques, and challenges associated with your assessment. Once you’ve created your response plan you will also want to identify which risks can be avoided or eliminated, which can be transferred, and which need to be actively managed.
Developing a Risk Response Plan
Your response plan will take into account the prioritization of your known and potential risks in order to inform your risk abatement and mitigation strategy. Implementation of your response plan will involve two steps: retroactive action based on contracts and projects already in place, and proactive action through integration into all future contract lifecycle processes.
You will also want to evaluate the levels of access and authority associated with your contracts. Identify who has the authority to negotiate and sign contracts, who has editing and modification permission, and who can simply view the document. Initiate customized access so that only those with authorization can see, change, or ratify a contract.
There’s no doubt the stakes are high. Without comprehensive knowledge of all the terms and conditions that lurk within your contracts, you leave your organization vulnerable. Only by establishing a risk assessment strategy and scheduling periodic risk assessments can your stay on top of all the liabilities, obligations, and opportunities that lurk within your contracts.
Identifying Your Source
The two main types of protections are indemnification and insurance. Contract Indemnity, also known as hold harmless agreement or indemnity clauses, transfers risk of financial loss from the indemnitee to the Indemnitor. This shifting of economic consequences can provide significant protection to the indemnitee, who can depend upon the Indemnitor for protection in third-party lawsuits or whenever an action or failure to act causes real damage.
Contract insurance, on the other hand, will protect your organization in the vent of exposure to liability or other penalties as a result of a breach of contract or other similar violations. Types of contract insurance include commercial general liability, professional liability, environmental impairment liability, tenant legal liability, property insurance, builders risk insurance, and fidelity bonds.
Protecting Your Assets
As your business grows, so do the number of contracts that must be created, negotiated and managed. In fact, the average Fortune 2000 company may be a party to as many as 40,000 active contracts, each one with its own set of authorities, enforcement, and risks. Unfortunately, ineffective contract management of contracts can cost businesses billions per year in missed opportunities and risk.
The purpose of your contract risk assessment is to protect your assets and your organization. While disorganization, missed milestones, inadvertent violation of terms and a host of other potential risks lurk within any unaccounted for or mismanaged contractual agreement, many protections also exist. Unfortunately, those protections are only effective if they are identified and invoked.
Identify and Mitigate Risk
Contracts can protect your business interests, but they can also present a challenge in terms of compliance and other mitigating factors that can trigger changes in responsibilities, deadlines, and financial obligations. As your archive of contracts grows in complexity and influence, you and your team face a daunting challenge: making sure all opportunities and risks present in each agreement are identified and managed.
For more information on initiating your own contract risk assessment, download our whitepaper, An Introductory Guide to Contract Risk Assessment. In this ebook, you will gain a better understanding of contract risk - what it is, how to manage it, and the tools available to begin a thorough contract risk assessment.