What Are Contractual Risks

The ability to look at a contract from the perspective of the contract provider can provide useful information about where and how risks may be hidden or camouflaged. When entering into a contract with new partners, it is important that you research and examine their reputation, policies, ethics and principles. What is the history of your contracts? Are they fulfilling their contractual obligations or is there a trail of lawsuits against them? What is their financial health? Managing contracts can be complicated and risky. But what makes a contract risky? How can you assess these risks and ultimately mitigate them? There are contractual risks associated with every contract entered into by a company. Nevertheless, there are tools that can help you manage contracts, identify and assess risks to protect the integrity of your business. Checking if any of these risks are present can be tedious without the proper technological support. Organizations often enter into agreements with independent contractors or suppliers, but sometimes the risks inherent in such agreements are not well understood. Service providers such as carpenters and electricians often provide organizations with important contract terms in the form of estimates, work orders, and maintenance contracts. One of the most well-known contractual risks is breach of contract. As we have discussed in previous articles, this happens when a party does not fulfill what it promised in the contract. Contracts allow you to take advantage of business opportunities and establish the framework for profitable business relationships. However, there are contractual risks associated with every contract your company enters into. In many cases, the risks of your contract are closely linked and often have a domino effect.

Brand risk can trigger financial risk, or security risk can trigger legal risk. A good example of this is the Facebook and Cambridge Analytica scandal, in which 87 million Facebook users had private information stolen. This breach of security and compliance resulted in a $130 billion drop in Facebook`s market capitalization. In addition, it dealt a blow to the company`s brand, as 40% of users said they would take a break from the social media app. Publishing the existence of the contract summary and granting full access to it can be of great help in improving both the understanding of its operation and the recognition of its risks. Any deficit in the contract management support ecosystem can be a source of risk. An example of such deficits and their potential risks may be: people who work with contracts or under their conditions should really understand this. People who do not understand it, unless they understand it by nature, have learned it through observation or bitter experience, or have been counseled and have actually heard what has been said. A common example of contractual risk is value leakage. This is usually due to poor contracting processes and can result in the actual value of an order being lower than originally intended. Management Consultant John E. Miller published a document on contract risk, listing the steps companies should take when faced with contract risk: All companies involve taking risks to some extent.

With that in mind, there are steps that can be taken to mitigate these risks and ensure you get the most out of any business. Before you can manage your company`s contractual risks, you need to determine where they exist in your contract and contracting process. Identify high-risk contracts, specific compliance risks, geographic compliance risks, and any contract management processes that put your business at risk. Assess your contractual obligations and your ability to meet them. Are there obligations that can be tedious to fulfill? How much does it cost to fulfill the obligation? Are there unclear obligations? Contracts in all their forms are embedded in virtually every part of the university`s operations and represent an important and integral support mechanism for advancing Harvard`s mission. They come in many styles, but primarily in the form of consulting contracts, licenses, letters of intent, real estate leases, equipment or asset leases, purchase orders, partnership agreements, research grant applications, and related award and/or subcontracting agreements. They are used to organize the provision of daily consumables, basic services, and the provision of specialized services in areas such as publishing, architecture/engineering and design, financial consulting, cloud-based IT infrastructure and applications, and research data analytics. Given the diversity of these activities, it is the responsibility of all those involved in the negotiation and execution of contracts to understand the risks involved and to apply prudent control strategies to mitigate them. Legal contractual risks arise when a contract does not comply with legal requirements or is broken in any way. In most cases, this type of contractual risk can result in legal action or a threat. Financial risks, often classified as credit, liquidity, asset-backed risk, and equity risk, are contractual risks associated with losing money, whether it affects your income or profits. From a contract management perspective, this could be due to missing an important contract date – such as an extension – and losing business or accidentally extending the contract term due to an automatic rollover clause.

Another example would be contract termination or compensation related to missed delivery dates, milestones, claims, or warranty issues. The occurrence of risks faced by the other party can be extremely difficult to manage, and the consequences can be long-term. However, if the other party does not manage the risks assigned to it, the responsibility for managing them may lie with the contract provider, as the occurrence of the risk usually affects both parties. Ironclad`s contract management software has contract risk management tools that help you proactively manage and mitigate your organization`s contractual risks. Risk is a part of almost every contract, but you can take steps to reduce your risk and avoid lost revenue and other negative outcomes. A typical contract reviewer will recognize fairly quickly and should immediately inform management that a contract is complex, that expertise is needed to uncover hidden risks, and that there could be significant avoidable risk if that expertise is not obtained. However, the impact of such an event on the parties may be a little more predictable. Contracts are, or should be, designed to prevent, minimize or virtually address known and potential risks that may adversely affect their intended purpose. It takes an experienced person with good judgment and fluency, both oral and legal, to scrutinize a contract, determine the key elements necessary to enable contract performance and risk identification, and narrow these elements into plain language suitable for public use.

Maybe the responsibility doesn`t end there. Perhaps blame continues higher up the organizational hierarchy, depending on what actually happened or could have happened. Beware of hold-unity and indemnity clauses included in many model contracts. These clauses are also known as waivers or releases. In these clauses, one party agrees not to hold the other party legally liable for any particular act, condition or omission. When considering these provisions, please take into account the responsibility assumed by your organization and the type of responsibility you apologize for by the Contracting Party. The other party`s promises should be as complete as your organization`s promises in the contract. Please ensure that all contracts containing these provisions are reviewed by legal counsel. While a contractor can provide a valuable service to your organization, it could face significant risks and financial losses if the contract is not properly reviewed. The following information will help you mitigate the risks associated with entering into such agreements.

In general, a contract should clearly state the obligations that apply to each party, individually or jointly, to minimize disputes over who should do what and when, and to mitigate the risks of non-compliance that could affect the outcome of the contract in any way.