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Contractual Tools To Manage Risk

 

According to the Nonprofit Risk Management Center, a poorly written contract can be even more risky than having no contract at all. Businesses can strategically employ a variety of contractual tools tailored to their specific needs, effectively managing and mitigating contract risks. With the right blend of technological tools and management insight, businesses can foresee these risks and take appropriate action. Different tools may be more effective for certain businesses. To discuss the most appropriate contractual tools for their unique business needs, entrepreneurs and executives should consider a consultation alongside qualified business litigation lawyers in New York. Contact Schwab & Gasparini today to get started. Call (315)422-1333 for their Syracuse office, (518)591-4664 for their Albany office, (914)304-4353 for their White Plains office, or (914)304-4353 for their Hudson Valley office. 

Most Useful Contract Risk Assessment Tools

Whether it's financial, legal, compliance, or operational risks, contracts bear them all. As businesses grow and enter into more contracts, they inadvertently assume more risks. To stay ahead and manage these potential hazards proactively, businesses must harness the power of contractual tools. For a more detailed discussion on some of the most effective contractual tools to manage financial and legal risk, consult with Schwab & Gasparini. 

Risk Assessment Matrix

Among the top tools for contract risk assessment is a risk assessment matrix. It classifies and prioritizes risks based on their potential impact and likelihood of occurrence. By using a risk assessment matrix, companies can spotlight high-risk contracts and form suitable risk mitigation strategies. Such a structured and analytical approach to risk management allows firms to make informed decisions, striking a balance between risk appetite and business objectives.

Contract Process and Obligation Tracking

It's essential for every phase of a contract to adhere to business rules to ensure both internal and external compliance. Deviations, whether in drafting, approval, execution, or post-award management, expose businesses to various risks. Thus, comprehensively tracking contracts throughout their process is a key strategy for risk mitigation. Furthermore, tracking obligations, be it of one's own or third parties, is equally crucial. Failure to monitor and meet these obligations is one of the leading risk factors that can stir up financial, operational, and legal risks.

Mandatory Contract Reviews

Part of an effective toolkit for contract risk assessment is the practice of mandatory contract reviews. Regular oversight of individual contracts helps in maintaining a reality check on the level of risk. It not only aids in early detection of any inconsistency or error, but also helps in sorting them before any escalation. When performed regularly, contract reviews serve as a contractual tool to manage risk, and a safety net, thwarting any looming crisis well in advance. Harvard Business Review states that contract risk is highest when there are multiple future unknowns. Contract reviews can help both parties review and address these evolving variables – thereby limiting risk. 

Contract Clause & Template Libraries

The last tool, but by no means the least, is the use of specific contract clauses and template libraries. These libraries offer pre-vetted and standardized clauses and templates, providing a reliable resource for contract drafting. They reduce the time involved in the creation process and, more importantly, trim the possibility of legal errors. This tool contributes significantly to risk management by imposing consistency and mitigating any chance of risk stemming from erroneous clauses.

The Contract Risk Management Process

The contract risk management process is an essential part of the overall contract management framework. There's a multitude of tasks that intersect between these two processes. Still, the primary focus of contract risk management is reducing risk exposure. Three key areas in this process include Negation, Review, and Auditing.

Negation

Contractual tools to manage risk are valuable, and one of those is negation. The aim is to alleviate the party originally responsible for the risk. Contractual risk transfer can assign financial or other liability associated with risk exposures to one or another party in the contract. This is typically achieved using a blend of indemnification, limitation of liability, and waiver of subrogation clauses. Unless a particular situation warrants the full acceptance of financial repercussions, the recommendation is that contracts should be structured in such a manner that the party creating the risk or best at mitigating its impact takes responsibility.

Review

Apart from tools to manage risk, review is a critical aspect of the contract risk management process. Any contract can inherently carry contract risks, resulting in potential negative outcomes. Hence, making contract reviews mandatory pre- and post-award helps in understanding these risks and is crucial to contract risk management success. A major part of the review should be carried out by parties directly involved in the contract, assessing for industry and organizational compliance. Automated workflows make mandatory contract reviews a standard practice, subsequently reducing contract risks, and creating standardized future contracts.

Auditing

Lastly, auditing is vital within the contract risk management process. Contracts can comprise classified and sensitive information, revealing severe security risks that could impact the financial, legal, and brand aspects of a business. Therefore, audit efforts are necessary to ensure the contract's first line of defense isn't breached. Proper auditing helps mitigate potential security risks. Moreover, operational risks and Brand risks could also be understood and managed effectively through audits, which could otherwise negatively impact corporate reputation and public perception.

Tools for Contract Risk Management

Harnessing the power of contractual tools to manage risk is a strategic move for every business. It's a vital step in the contract management process. Negation, review, and auditing play pivotal roles in this regard. By intelligently transferring risk responsibility through clauses like indemnification and limitations of liability, businesses can significantly reduce their risk exposure. Mandatory contract reviews, both pre- and post-award, offer an effective strategy to identify and manage contract risks. Furthermore, auditing safeguards sensitive information, mitigating security, operational, and brand risks. While every contract carries its own set of risks, these tools provide a comprehensive approach to managing them successfully. The end goal? A more secure, risk-averse, and successful business operation. 

Contact a Qualified Business Litigation Lawyer in New York

The most appropriate contractual tools to manage risk depend on the unique needs and priorities of each business. While an online article can only offer broad, generalized guidance, a consultation with a New York business litigation attorney can provide more targeted legal advice. Contact Schwab & Gasparini today to learn more. Call (315) 422-1333 for their Syracuse office, (518) 591-4664 for their Albany office, (914) 304-4353 for their White Plains office, or (914) 304-4353 for their Hudson Valley office. 

 

Mon May 20 2024, 12:00am