What is Contract Risk Management? (2024)

Contracts are the foundation of commerce, outlining rights, responsibilities, and expectations between parties. However, even the most well-intentioned agreements carry inherent risks.

What is Contract Risk?

Contract risk refers to any unforeseen issue that could negatively impact the performance or outcome of a contract. The causes of contract non-compliance have some common themes, including:

Contract Performance Issues:

A party fails to meet their obligations outlined in the contract, leading to delays, financial losses, or incomplete work.

Unclear or Ambiguous Language:

Vague or ambiguously worded clauses can lead to disagreements and disputes about the contract's interpretation and its enforceability.

Hidden Obligations:

Hidden contractual obligations create contract risk because they can lead to unexpected costs, delays, or legal issues if not discovered before signing.

Missed Revenue:

Contract risks like poor performance or ambiguous clauses can snowball into missed revenue. Delays in projects due to unmet obligations or disputes over unclear terms can leave customers frustrated and deals unsigned, ultimately impacting your bottom line.

Changes in Circ*mstances:

Unexpected events, like regulatory shifts, economic downturns, or a supply chain crunch due to a pandemic or geopolitical conflicts, can make fulfilling contractual obligations difficult or impossible.

Regulatory Noncompliance

Regulatory noncompliance, even when unintentionally done, poses a serious contract risk because it can trigger hefty fines, disrupt project timelines through forced stoppages, and even invalidate the entire agreement.

Third-Party Issues:

The actions or inactions of parties outside the contract can disrupt its execution.

Contract risks are a reality of doing business, but they don't have to be a source of worry. With a solid understanding of potential risks and a proactive approach to risk management, you can navigate contracting with greater certainty and minimize the chances of encountering unforeseen issues.

Contract Risk Management

Identify and manage risk throughout the contract management lifecycle. Contract lifecycle management (CLM) technology can help to standardize and streamline risk identification across your organization. A configurable risk model helpstrack risks across different categories, such as financial, contractual, performance, and third parties. For procurement, companies use their contracts to examine their sourcing strategy to ensure they are not overly dependent on a single supplier.

On the sell-side, enforce “know your buyer” best practices to stay in compliance with international law. Look up and leverage internal data as well as external data, from sources such as D&B and Thomson Reuters, to determine risk scores, ensure proactive risk monitoring and increase visibility for stakeholders.

From procurement to sales, contracts touch every aspect of your business—and therefore can create risk from anywhere in the organization. And things are getting even more dicey with recent global disruptions that have put a strain on commercial relationships.

Yet, for many companies, identifying their most significant contract risks can be a challenge—let alone managing them. That’s why we’re sharing a WCC Report highlighting the top contract risks we’ve encountered while implementing our industry-leadingcontract management solution, including:

• Hidden obligations
• Missed revenue
• Regulatory noncompliance

Chat with an Icertis specialist to start your journey to better enterprise risk management through organization-wide contract intelligence. Or see a demo of Icertis Contract Intelligence to learn more.

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Next Steps

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