What is a Contract Risk Assessment Checklist?
A contract risk assessment checklist is a document used by businesses to identify potential risks before or after agreeing upon a contract. This checklist typically helps businesses evaluate the scope of the contract, examine the proposed terms, review risks associated with location-specific obligations, and assess the risk of specific work tasks and other related contracts.
Importance
Performing a contract risk assessment helps organizations make informed decisions on whether to enter into a business contract by first identifying possible risks they may face. This includes discussing priorities, understanding the organization’s goals, and weighing what measures to consider or modify in the contract to minimize risk to one or all parties involved.
Assessing contract risks can be a lengthy process for this reason. But with a checklist, you can streamline it more effectively. Using a contract risk assessment checklist ensures that important points are not missed and helps identify problems beforehand, allowing for proactive actions to be taken.
With a dedicated contract risk assessment checklist, you can do the following more efficiently:
- Ensure that all areas of potential risk are thoroughly and consistently evaluated based on set standards, leaving no critical aspects overlooked
- Provide a structured and systematic approach to assessing risks, guiding contract managers through a series of essential steps to identify, evaluate, and mitigate risks effectively
- Develop strategies to mitigate or manage identified risks, enabling proactive measures to be taken to minimize the impact of potential issues
- Implement a monitoring and review process to track how risks are being managed over time, ensuring that risk mitigation efforts remain effective throughout the contract lifecycle
How Do You Assess Contract Risks?
Each professional, organization, and industry has its own way of evaluating contract risks. However, they all follow this general framework to assess risks in their contracts and other business processes:
- The contract risk assessment procedure starts with evaluating the reputation, financial stability, and legal compliance history of all parties involved in the contract. This will determine the likelihood of obligation fulfillment and identify potential risks.
- After identifying the possible risks, the organization will determine the potential impact on your business by doing the following:
- Analyzing contract terms
- Spotting missing clauses
- Noting unclear clauses
- Once risks are identified, they must be assessed for their probability, impact, and consequences, and control measures. This can be done with help from a contract risk assessment checklist.
- Those involved in the contract can negotiate better terms, implement controls, or create contingency plans based on the identified risks with help from relevant stakeholders like the legal, finance, and operations teams.
- After all risks have been discussed, the organization should monitor how the contract is implemented and set up a risk management structure with reporting, performance tracking, and communication plans in place.
What to Include in a Contract Risk Assessment Checklist
A checklist can be a great tool in assessing contract risks, especially if you use a digital one that can be accessed anytime and anywhere. It also helps to create a template for your contract risk assessment checklist to ensure all checks are standardized.
A typical contract risk assessment checklist will have fields for the following:
- Date of risk assessment
- Names of people involved in the risk assessment
- A section for examining the following types of risk:
- Financial risks such as:
- Budgeting
- Calculation of rates
- Accounting for possible losses
- Regulatory risks such as:
- Noncompliance with legal and safety regulations
- Possible unfair wages
- Lacking documentation for tasks
- Performance risks such as:
- Unclear scope and limitations
- Unclear or unrealistic expectations
- Security risks such as:
- Data privacy concerns and data breaches
- Unauthorized access to different resources
- Possible data breaches
- Financial risks such as:
- Additional notes and recommendations
- Signature of the person who conducted or led the contract risk assessment
Here is a contract risk assessment checklist example for your reference:
FAQs about Contract Risk Assessment Checklists
A great way to mitigate and control risk in contract management is by using a Contract Lifecycle Management (CLM) platform. The right CLM platform can provide you with tools for the task, including contract risk assessment checklist templates suited to your needs. With this, you can better review contracts and the status of partners regularly to ensure that contractual obligations are being met.
A contract review checklist helps in performing general evaluations of all contracts. On the other hand, a contract risk assessment checklist is a type of contract review checklist that focuses on identifying, addressing, and mitigating risks.
In an organization, the contract risk assessment checklist is typically managed by the contract management team or the legal department. These teams are responsible for identifying, assessing, and mitigating potential risks associated with contracts.
Depending on the organization’s structures, the employers themselves may also manage the contract risk assessment checklist. In some cases, the partnerships team may also be involved.
