Contract Risks

How to Avoid Top 4 Types of Contract Risks 

What are Contract Risks?

In contracts, contract risks refer to the possibility of losing money when the buyer fails to fulfill his or her obligations. This does not include if the buyer fails to pay. Fixed-price contracts pose the greatest threat to sellers, while cost-type contracts pose the least threat. Here are the top four risks in contracts and how to avoid them:

Access and Visibility Rights 

There are a number of factors that can hinder the creation of a contract, especially visibility. Nevertheless, this goes beyond simply creating. An effective contract lifecycle depends on having the right visibility into each step. No matter what stage a company is in, companies without the appropriate access will have a harder time managing their contracts as a whole. In the case of contract renewals, it is easier for the legal team to find, review, and approve contracts quickly. Cutting out the legal team completely would clearly result in contract risks. In exponentially growing businesses, visibility is crucial in every part of their life cycle. 

Process Inefficiencies

Inconsistency between a company's documents and processes can create a great deal of contract risks. Several examples include unpredictable pricing, rogue spend, compliance issues, etc. To avoid these inconsistencies, successful business organizations have defined processes and workflows. Additionally, elements such as templates and legal visibility are just the first steps in solidifying processes. To reinforce efficient processes, an organization must have effective communication across the organization and a well-planned, written strategy. Practical contract management involves identifying and mitigating any contract risks that may arise. Contract lifecycle management platforms can help reduce risk and simplify contracts by ensuring contracts are optimized.

Insufficient Speed 

Contract creation can take weeks or even months. The legal team also spends a great deal of time creating templates or honing proper language. This leads to a process that should take a fraction of the time that it actually takes. Creating, negotiating, and approving contracts shouldn't be stalled by slow operations. Sales teams should pay special attention to the time-to-signature. Insufficient contract processing shouldn't result in missed goals. A contract lifecycle management platform is one of the easiest ways to reduce this contract risk. You no longer need to dig through old emails or folders to find contracts when they are stored in one easily-searchable location. For similar use cases, a template library makes it unnecessary for users to create new documents from scratch. As a bonus, employees no longer have to waste valuable time emailing back and forth when viewing the contract because they can easily access it.

Contract and Compliance Risk 

It can be challenging for companies to navigate regulations, requirements, and rules, as well as changing business processes and expectations. The risks associated with internal and supplier contracts should be assessed, analyzed, and eliminated in any enterprise business, but especially in a global enterprise. It is possible for noncompliance to result in costly fines or breaches of contract that can harm relationships and damage trust. Compliance goes beyond adhering to legal requirements. The purpose is to maintain or increase savings, establish a good reputation, and ensure a well-regarded brand. To maintain compliance, contracts must be reviewed and approved by the necessary parties. Additionally, it is imperative to develop a strategy to comply with new regulations as they change. Contract risk should be assessed and mitigated using analytics and technology. It is still possible for laws and rules to change even with fully automated systems. For companies to adhere to the correct local and global regulations, it is imperative that all teams, especially Legal, keep up with current regulations. Clearing processes and ensuring everyone understands what is expected of them are the benefits of setting up compliance ownership.

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