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5 common business contract risks and how to avoid them

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Types of Contract Risk

Contracts are legally binding agreements between two or more concerned parties that move through a set lifecycle. Many businesses have to deal with a mountain full of contracts on a daily basis and at times some contracts can fall through the cracks. All contracts have a form of risk associated with them but there are some contracts whose risk level is higher than most. 
Is your business ready for the worst-case scenario type of risks associated with contracts?
Let’s go through the common risks with contracts and how you can avoid or mitigate them.

Creation Risk

  • Contracts that are poorly constructed are results of poor processes that would include unsuitable initiation procedures and inefficient workflows. This can be caused by disorganized manual processes which leads to gaps in communication and negotiations. Inefficient signature procedures can also cause the contract creation risk because it may involve having the wrong people or wrong departments sign or approve of the contract.

To avoid this, create and develop an automated process to address the contract creation procedures. Streamline and simplify your process including the communication and negotiation factors needed for the creation of the contract.

Terms Risk

  • This is the risk that exists within contracts that have old our outdated terms. This risk can cause delays that are based on understanding what these outdated terms mean and can even cause deliveries to be stopped or contracts to lapse. The worst-case scenario for this kind of risk lapses in safety terms. These poor terms in any contract can have a long-lasting effect and or impact on any business or company. 

You should have a contract management system in place within your business or organization. It should have balance and check-in procedures that are as close to bulletproof counter-checking on all possible sides. It should also have a data management tool that is centralized within the company to make sure that critical key dates are given the proper care and attention by people who need to know them. 
Your business or company should also put in place a pre-qualification process as part of your risk management tools. This procedure can provide your business with information about whether your suppliers, partners, and staff have the proper certificates and credentials to complete the assigned job. 

Execution Risk

  • There is a need to fulfill every obligation within the set terms in any contract because it is legally binding. The events within the contract should be accurately documented and met, and all payments that are set within the agreed terms must match and must be paid within the provided set of time. Missing deadlines, deliverable, or obligated tasks may result in penalties. This is a common failure for administrative systems if it is not streamlined and centralized. Bankruptcy can result in this failure and can even cause a domino effect for the other businesses included in the supply chain. Lastly, failure to deliver on the contract terms agreed by all concerned parties can face financial or reputational ruin as well as face expensive litigations as a consequence of this failure.

For your business to avoid or mitigate this risk your business should make sure that it has a centralized date management tool for it to manage critical dates. The system and processes should provide alerts via email or phone to all major decision-makers and concerned departments or individuals, so, that you never miss a delivery, deadline, or point of decision. The creation of efficient communication avenues can reduce the risk of different departments disconnecting from their participation in internal or external contracts. 

Financial Risk

  • Mismanagement of contracts can cause delays which would lead to your business being unable to recognize revenue. There is also a possible threat of contract litigation due to the mismanagement which would cause your business penalty payments, late payments, or overpayments. 

To avoid financial loss due to penalties, overpayments, or late payments the proper management of the contracts must be solidified as well as the proper procedures for counter-checking by more than one entity within your business to secure all loose ends. The creation of alerts will also help in reducing the mismanagement of contracts within your organization. So, having the proper procedures and efficient communication systems can greatly reduce the contract risks to your business.

Inconsistency Risk

  • The inconsistent treatment of contracts of administrative management systems within your business or organization can cause budget blowouts. The difference between how contract management teams or individuals treat their counter-departments, similar contracts, or different projects may cause a deterioration in relationships. When documents are disorganized and misfiled, the systems and processes are chaotic, and people tend to leave that company. The audits and records become too numerous to manage, the decline in relationships between you, your staff, and your supplier can cause frustration and ruin your reputation and the reputation of the organization as a whole. 

Your administrative and contract management systems should have only one single data-entry input process. This will improve the consistency and efficiency of data and management as a whole. This will help build the integrity of your business processes, compliance procedures, and risk management tools. You should also create a system that will make data mining for information efficient for any concerned individual, team, or department by having a document management system that is keyword-searchable.

The creation or implementation of a contract management system ensures that all contracts that go in and out of your business is optimized and its one of the first steps your business needs to take to lower its risks because the management of all types of risks for contracts is vital for any business or organization. A good system for contract management is one of the most powerful assets and tools your business can use to reduce the potential risks your business may expect.   

 Shivendra helps construction companies and contractors win more projects and grow profitably. Regarded as a master of practical implementation, Shivendra has guided organizations such as Downer and Siemens as well as smaller contractors to achieve double-digit improvements to their bottom line. Underpinning his extensive industry experience are qualifications in engineering and a Ph.D. focused on rapid cost improvement techniques. He is the author of two books, The Competitive Contractor and From Paper to Profit, host of the Competetive Contractor podcast, and the founder of Shivendra & Co and The Constructors Network. You can find more about Shivendra & Co on