Benefits Of Contract Risk Management

2 min

In our everyday lives, we are always entering into some type of basic contract, whether we choose to recognise it or not. Something as simple as buying a coffee from the local barista demonstrates the most basic workings of a contract. I.e. The basic exchange between two parties both sharing something in common, along with specific responsibilities and rights under non-written rules with basic provisions and low stakes.

In contrast to the above basic analogy, we have contract management plans. Systems which are put in place which aim to reduce risk between two parties as they enter into a contract together. Ultimately, contract management plans help both parties, including the customer, by making the entire process easier to understand.

As many companies engage in multiple complex arrangements at once, it’s crucial to have a system in place that’s legally binding and provides comprehensive management of the entire contract lifecycle. This is where Contract Lifecycle Management (CLM) comes in. If you’re wondering, ‘What is contract lifecycle management (CLM)?’ it’s a process that manages the creation, execution, and analysis of contracts to maximize operational and financial performance.

Contracts tend to always follow a similar structure. They contain basic clauses which are negotiated with both parties, based on conditions suiting the needs of everyone. Before anyone commits, both parties need to look at potential danger, which is covered under the contract risk management plan.

Implications Of Contract Risk Management

In contract risk management, both parties need to step back from negotiation to work out how legally vulnerable they are. This is more intensive on business operations and also time.

Both parties need to review the potential effects of the contract on their own terms with either the client, opponents or the wider market in general.

Businesses who utilise risk management during the negotiation stage are generally more effective. They are able to spot potential legal dangers, either minimizing them or removing them completely.

There are a couple of requirements needed during implementation also. All documentation relating to expected dangers needs to be gathered. Both parties need to be aware of public dangers linked to certain types of contract before they are signed. And both parties also need to calculate an appropriate financial outcome of any suspected risks.

Reasons To Use A Contract Risk Management Plan

There are lots of reasons to use a contract risk management plan over manual processes:

  • Allows you to change the contract template, making it easier to lower risk as it happens
  • Reduces chance of mistakes occurring through better procedures and methods
  • Establishes better understanding of contractual obligations for both parties
  • Helps save money lost through overpayment, delayed payment, litigation and labour
  • Can save time rather than a manual process not using software
  • ‘Parallel process’ allows legal risk linked to certain exemptions to be reviewed
  • Enables parties to make decisions about preventable risks relating to finance
  • Ensures contracts have sufficient scrutiny and approval before being signed
  • Flags up risks before contracts are signed
  • Vulnerabilities in a contract can be checked over other contracts, allowing suitable action

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