Ten Steps to Assessing Contract Risk – Part 2

No organization can operate without a measure of risk; it’s an inherent part of doing business. That doesn’t mean that we simply hope for the best when it comes to entering into business contracts.

At FTI, we know that thorough risk assessment is critical to successful business contracts. In an earlier blog we covered the first five risk assessment tips. Below we walk through five more tips for contract risk mitigation.

#6. Verify Mandatory Provisions

Every company has mandatory provisions that must be reviewed to ensure they are included, or negotiated, in each new contract we engage in; it’s imperative to a successful partnership for all parties. These provisions significantly increase compliance and go a long way to help mitigate risk.

Some mandatory provisions may include the following:

• Payment terms.
• Limitation of liability.
• Mutual waiver for consequential, incidental, punitive or unlimited damages.
• Non-disclosure terms.
• Non-compete language.

#7. Consider Optional Provisions

Once the contract contains the mandatory provisions, we can look at other optional provisions we would like to see included. Including these optional provisions may mitigate the risk; not having them may or may not significantly increase the risk.

Some optional provisions may include the following:

• Extended warranty periods.
• Insurance supplements.
• Labor language.
• Change order/directive language.
• Offsetting of funds.

#8. Look for Risky Provisions

When assessing contract risk, it is essential to thoroughly review for any provisions that carry a high degree of risk. These high-risk provisions may include the following:

• Tight schedules.
• Complex deliverables.
• Deliverables highly dependent on outside factors, such as deliverables from other parties.

Also, look for any terms that, if not met, can result in a breach of contract or hefty penalties.

#9. Ensure Regulatory Compliance

Contracts must comply with all applicable government and industry regulations. Failure to comply puts us at risk of substantial fines and other penalties. Also, consider the risk of whether delivering on a contractual obligation might result in non-compliance. We must have a complete history of all activities associated with the contract to serve as an audit trail if there is a need to provide evidence of compliance. This is also very helpful when working through disputes about the contract. Tools like electronic signatures, document comparison and real-time messaging help keep track of everything required to execute the contract and ensure the most recent, updated contract is on file.

#10. Track All Changes

Finally, track all changes. A contract might start with relatively low risk, but after negotiations, additions and redlining, the contract may end up with a higher degree of risk. It is important to track all changes and amendments made to the contract and assess and minimize any new risks introduced during the negotiation process.

By paying attention to the risks identified, we can increase the chance of financially successful work and lower the risk of being sued, fined or suffering operational difficulties. Working through risk assessment checklists will help you identify, mitigate and manage the risks your organization faces.