According to the American Bar Association, contracts, which are legal agreements between two or more parties, are often complex and challenging to read. Due to their complexity, they can involve elements of risk, but many options are available to mitigate these threats. Explore contract risk management in more detail to help your business. If you have questions about contract review and risk management, consider contacting a San Francisco attorney from Von Rock Law by calling (866) 720-0195 to schedule a consultation today.
Understanding Contract Risk Management
Contract risk management refers to the assessment of risks within contracts. These typically include opportunity loss, the legal implications when relationships break down, and the contract’s impact on the parties involved. When done effectively, this process evaluates the combined risk across a business’s complete portfolio of contracts.
Why Is It Important to Manage Contract Risks?
Contracts are important business assets that help clarify and manage new business agreements and relationships. When companies expand, their processes become more complex, and they have an increasing number of active contracts that require effective management.
As contracts vary between businesses and industries, they require different approaches to manage them well. By identifying the risks and minimizing their impact, companies can protect themselves and maximize their returns.
What Are Some Contract Risks?
Examples of the types of contract risks businesses may encounter include:
- Security risks: When unauthorized parties gain access to confidential information within a contract through theft, loss of the contract, or improper sharing of the information in the contract.
- Financial risks: When a third party becomes bankrupt, one party in the contract misses important renewal dates, or an automatic renewal takes place without one or more of the parties completing a cost analysis beforehand.
- Regulatory risks: When businesses ignore state or federal legislation, fail to prepare for regulatory changes, or do not update their documents in line with those legal changes.
- Brand risks: When risks impact a company’s customer and public perception, mitigating brand risks helps prevent significant negative effects on a business’s reputation, which reduces the chances of a company incurring major financial losses.
While contracts cannot account for every risk, effective contract design and management involves anticipating potential risks, considering previous experiences, and drafting contracts to reduce or prevent the impact of those potential threats.
How Do You Identify a Risk in a Contract?
To mitigate contract risks, it is necessary to identify them. Follow these steps to identify risks in contracts:
- Determine the high-risk contracts. Businesses may do this by considering the contract’s financial terms, privacy requirements, value, clauses, and contract age.
- Consider how the business manages its contracts. This step involves looking at the company’s timeframes, workflows, and processes concerning contract approval, negotiation, and creation. Additionally, this entails assessing how the business manages and stores its current contracts.
- Think about regulatory compliance. Consider the industry-specific and local regulatory compliance risks to manage for each contract.
- Establish a risk-identifying team. This step helps companies maximize the number of possible risks that they can determine. This might involve collaboration between the business’s legal, finance, sales, operations, and IT teams.
Many business owners work with knowledgeable attorneys to identify the potential risks in their contracts. A California contract review and risk management attorney at Von Rock Law may be able to help with contract risk management.
Tips for Assessing Contract Risks
Consider the following tips for assessing contract risks:
- Think about risk probabilities and consequences
- Consider risk thresholds
Think About Risk Probabilities and Consequences
After identifying a contract’s risks, it is necessary for companies to assess their impact on the organizations and score them according to their risk level. The primary factors to think about here involve risk probabilities and consequences.
Determine the chances that these risks will occur and their potential impact. Also determine how these probabilities and consequences may change as time progresses. Next, score each probability and consequence to develop a methodology for assessing risks.
Consider Risk Thresholds
After scoring the contract risks, create risk thresholds for the business. Risks are inevitable in almost any contract, so it is crucial for companies to identify the amount of risk they can accept. This enables organizations to determine the contracts that fall within their risk threshold and whether accepting certain contracts is worthwhile.
How Do You Mitigate a Risk in a Contract?
Follow these steps to mitigate contract risks:
- Set alerts to prevent missed obligations and milestones. If a company forgets about an automated contract renewal or other milestones, the error can have a significant financial impact on the business. To prevent these problems, consider establishing an automated system for sending alerts about important obligations.
- Control contract access. Establish a system for only allowing certain individuals access to a company’s contracts. Doing this stops unauthorized staff members from viewing and potentially altering the contents of a contract.
- Encrypt contract data. This step prevents unauthorized access to a company’s private information from external sources.
- Use contract and clause templates. The use of templates prevents staff from adding the incorrect language in an agreement.
- Track contract changes. When several parties edit a contract, there is a risk that the company might use the wrong version. Businesses may mitigate this by clearly labelling the contract versions and sharing this information with everyone involved in the contract creation process.
- Enforce organizational processes. This step ensures that everyone involved in the contract creation process will follow all the required steps. Additionally, it helps demonstrate evidence of compliance if an audit occurs.
- Use electronic signatures. These help companies sign agreements more quickly and have better security than their paper counterparts. Electronic signatures mitigate risk by reducing the chances of misplacing a paper contract and preventing tampering.
Contact a California Lawyer for Contract Review and Risk Management Today
According to the National Library of Medicine, contracts include uncertainties that contracting parties cannot control completely, but they can manage them. A seasoned attorney who specializes in producing risk management solutions for contracts may be able to help manage these threats. To learn more about contract risk management, consider contacting a California contract review and risk management lawyer from Von Rock Law by calling (866) 720-0195 to schedule a consultation today.
