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Contract Risk Management Definition

Risks are inherent in any project. As long as a company is working within acceptable levels of risk, it can develop strategies to prevent and mitigate losses. Contract risk management allows managing contractual risk exposures from an enterprise view. Utilizing software for contract risk management helps an organization derive value from contracts and contracting processes.

Contractual risks are primarily of two types:

  • Liability risks including breach of contract issues, claims, warranty problems, terminations, intellectual property infringement charges, alleged confidentiality disclosures, disputes, and litigation.
  • Business risks including poor relationships, failure to obtain objectives, bad public relations, declining morale, instability, weakening of brand integrity, loss of goodwill, and reduced revenue or profits.

To gain insights into contractual risks, organizations can implement 3 steps in their contract risk management practice which are:

  • Assessment of the situation to better understand potential contract risks

  • Undertaking necessary actions to prevent risks like early termination of revenue contracts and compliance failure

  • Developing measures for tapping into business risk intelligence

Steps of Contract Risk Management

Management consultant, John E. Miller provides a checklist of the steps usually involved in the process of contractual risk management:

  • Identifying commercial contractual risk management issues using an appropriate multi-domain team

  • Evaluating and estimating commercial contractual risk management issues

  • Implementing risk avoidance

  • Engaging in risk reduction

  • Considering risk sharing by subcontracting/outsourcing 

  • Using insurance to control risks

  • Applying risk mitigation by avoidance, elimination, transfer, or bearing the risk (if appropriate)

  • Executing risk neutralization

  • Monitoring and controlling risk

  • Consistently using well-prepared agreements/contractual provisions

Risk management needs to be systematic and ongoing, without focusing only on single transactions. Clauses should be reviewed on a regular basis to evaluate whether the terms are still suitable, especially with long-term partners. The liability and business risks of a contract upon being identified and managed provides the benefits of standardized processes, spend visibility, improved compliance, solid foundation for spend and performance analysis, rebate management, reduced maverick spending, and evergreen contract elimination.

This proves that a contract risk management system is necessary for the proper coordination, development, and implementation of an enterprise’s working.

JCAD CORE, Synergi Life, Optimal Smartstart, ProcessGene GRC Software Suite, MasterControl Risk Analysis, and more are contract risk management software solutions.


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