Contract Risk Management: Types of Risks and Free Checklist

From improving outcomes and making efficient use of resources to avoiding wasted time fixing avoidable errors, contract risk management is just as important as creating the contract itself. 

In this post, we'll cover the key to successful contract management, how to assess risks and use a comprehensive checklist to ensure your organisation is ready for any risk that might come your way.

What is Contract Risk Management?

Although contracts are created to reduce risks, they do come with their own risks.

Contract risk management involves the assessment and mitigation of potential risks that may arise in a contract. It is a crucial process that aims to resolve or minimise these risks effectively.

These risks can occur when an organisation becomes financially or legally vulnerable due to the handling or contents of a contract.

Why is Contract Risk Management Important

The government spends £49 billion each year on contracts with third-party suppliers, often on life-changing goods and services for the public. To ensure this money is spent wisely and efficiently, risks must be minimised to avoid waste and inefficient spending that will ultimately impact the taxpayer and service users.

In the public sector, risk management also ensures compliance with legal and regulatory requirements, as well as adherence to quality standards.

There are many different types of contract risk, but we have compiled them into four different types to help you identify what risks could potentially occur and how to minimise them. 

Types of Contract Risk

Financial Risks

Contract termination, missing a deadline or voiding terms may all have serious financial risks for your organisation, including large payouts or fees associated with failing to meet certain terms of the contract.

Legal Risks

Different types of contracts must be compliant with many different laws and regulations. Ensure you have a full understanding of all public sector laws and regulations, such as the upcoming Procurement Bill, so that your contract remains compliant. Failure to do so can lead to legal issues for yourself and your organisation.

Security Risks

Different types of clients may require different levels of confidentiality. Making a private contract public, revealing your supplier’s information or putting them at risk can all have serious repercussions for your organisation as one that is reputable, accountable and safe.

Brand Risks

As mentioned in the editing stage of standardised contracts, contracts that contain spelling and grammar mistakes or incorrect information all reflect negatively on your organisation. Ensure all contracts are of a high-quality standard to avoid brand risks.

Contract Risk Assessment Checklist

Ensure your risk management is successful and as low-risk as possible with this comprehensive risk assessment checklist.

This checklist should cover various aspects, such as understanding contractual obligations, evaluating schedules, considering location-specific risks, assessing the reliability of contract partners and ensuring compliance with mandatory provisions and regulatory requirements. By following these steps, your organisation can effectively identify and mitigate contract risk.

Obligations

• What are the obligations you must follow under the contract?
• How can you deliver on these obligations?
• How much time and money will be involved in meeting these obligations?
• Are there any “grey areas” where your obligations are not clearly defined?

Schedule

• Financial risks associated with committing to a schedule
• The risks of missing contracted delivery dates

Evaluate Location-Specific Obligations and Risks

Important when dealing with contracts on an international level, but also worth keeping in my mind when dealing with suppliers on a local level in the public sector. For example, local councils may have different processes and methods to each other when it comes to contract management.

Assess The Contract Partner

Doing business with some new suppliers, customers, partners or other third parties can be riskier than others. It’s important to properly assess the other organisation’s reliability, policies, principles and stability. With detected public sector fraud rising from £310m in 2019/20 to £525m in 2020/21 it's important you protect your contracts, and in turn your organisation from fraud.

Here’s how you can further protect yourself against public sector fraud.

Determine Mandatory Provisions

Your organisation should have a list of terms and conditions that need to be included in all your contracts. These mandatory provisions may include:

• Payment terms
• Limitation of liability
• Damage waiver
• Non-disclosure

Ensure Regulatory Compliance

Ensure your contracts comply with all applicable government and industry regulations. Failure to comply puts you at risk of fines and other penalties. You should familiarise yourself with all contract laws and regulations related to your contract. Depending on your contract, this may include regulations such as the Public Contracts Regulations 2015, the Concessions Contracts Regulations 2016 and Defence and the Security Public Contracts Regulations 2011.

Following a checklist is a proactive approach to contract risk management and will help protect public funds, enhance the organisational reputation and ensure the successful delivery of goods and services to the public.

Looking For More Insights for Effective Contract Management?

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