When a contract comes into existence, it automatically creates benefits and risks for contracting parties as it consists of many elements like consideration, offer, and acceptance, intention, legal purpose, etc.
Contract risk can occur in any phase from creation to execution of the contract, say when creating a contract there can be communication gaps leading to false commitments, the inefficiency of the person creating or executing the contract can result in missing deadlines or important events, non-standard language, or outdated terms can create more confusion among contracting parties and even within the organization. Contract risk is a challenge for any organization if not handled properly, it can cause organizations huge financial losses and penalties.
How to mitigate the risk from your contracts
- When planning for contract management and risk it is extremely important to assign the right person, right job. Classify the basics like what clauses a particular type of contract should contain and then be consistent with the format, identify who should manage contract clause language, etc. if a template needs modification who should approve the changes.
- Introduce contract auditing, contract review process which should focus on details language, clauses, proper terms. Put automation in process for alerts to payments, expiration, liabilities, expenses, and other important events.
- Production or operation teams should be briefed properly to avoid any confusion in meeting contract timelines and deliverables.
Implementing an effective contract management system can save your company from huge losses and penalties, as contracts contain risk and it is important to manage them and protect the business interest.