6 potential risk areas in contracts

6 potential risk areas in contracts

6 potential risk areas in contracts : –  Contract risk in procurement is like any other risk in life. It means identifying potential threats or adverse actions that can occur to prevent you achieving your goals. Managing the risks first entails identifying them and secondly, having a plan to contain or prevent them.

The main 6 potential contract risk areas are:

  • Financial risks
  1. Employee/third-party fraud and corruption leading to a loss of cash or income
  2. Authority limit risk may lead to bad deals and escalating costs and non-compliance to contract creating “maverick” spend
  3. Inventory and obsolescence risk through bad planning
  4. Automatic renewal of contract risk
  • Information technology risks
  1. Data security, access, and privacy of information
  2. Unauthorized access to information which can be mis-used and have consequences for both parties
  • Regulatory and legal risks
  1. Non-compliance can lead to fines and costly litigation
  2. Supplier failure or liquidation
  3. Outsourcing of work to third parties is high risk and needs to be managed tightly
  • Environmental, health and safety risks
  1. Breaches of laws and regulations
  2. Exposure to subcontractor non-compliance
  3. Employee and contractor health and safety risks
  • Reputational risk
  1. Customer complaints and public exposure through supplier behavior and failure to supply
  2. Non-compliance to minority or SME guidelines
  • Commercial terms and conditions
  1. Poor or missing clauses relating to non-disclosure of information, indemnities, payment terms, warranties and intellectual property ownership cause losses and disputes

A large proportion of organizations need to improve their management of procurement contract risks and the preferred process for managing their exposure is to:

  • Identify all the risks in the contract
  • Prepare a risk register and itemize the real risks
  1. Define seriousness of each risk
  2. Rank them by likelihood of them happening
  3. What action to take in the event it happens
  4. Who must respond in the event it happens
  • Plan how you would monitor the listed risks
  • Work out how you can minimize or transfer the risks

To be able to manage procurement contract risks effectively, these fundamentals must be in place:

  • A clear strategy and organization structure
  • Procurement policy and processes
  • Skilled and trained employees
  • Information systems and tools

However, even with the fundamentals in place, there is room for things to go wrong. Some risks can be transferred to the supplier and some financial risks can be insured against, both at a cost.