Four Best Tools for Contract Risk Assessment

A significant part of managing the contracts your firm engages in is assessing the risk of each contract. Manually assessing contract risk is time-consuming and produces variable results. Contract risk assessment tools can do a much better and more consistent job of assessing contract risk, but which tools should you use? 

There are four primary tools you can use for contract risk assessment – or you can employ contract lifecycle management software that combines the best aspects of all these tools into one platform.

Key Takeaways

  • Assessing contract risk is necessary in managing the level of risk in your organization
  • You need to assess the risk of each individual contract, as well as your entire contract portfolio
  • The most effective contract risk assessment tools include the use of contract clause & template libraries, mandatory contract reviews, contract process and obligation tracking, and the use of a risk assessment matrix
  • All of these contract risk assessment tools – and more – are included in contract lifecycle management software 

Why Contract Risk Assessment is Important

All contracts carry some element of risk – and the more contracts your firm enters into, the more risk you assume. Contracts can carry financial risks, legal risks, compliance risks, and operational risks. Any combination of these risks can affect your company’s profits and expose you to adverse legal actions or fines. 

To avoid carrying an undue amount of risk, you need to engage in risk assessment activities. Risk assessment involves:

  • Determining the level of risk involved in each individual contract
  • Assessing your overall risk level for your entire portfolio
  • Determining what types of and how much risk you’re willing to assume, both in individual contracts and for your overall portfolio
  • Ensuring that new contracts adhere to the risk guidelines you’ve set

Most Useful Contract Risk Assessment Tools

There are several tools you can use to assess your level of contract risk. The most effective include the following.

Contract Clause & Template Libraries 

Instead of instigating each new contract from scratch, you should create a collection of contract clauses and templates that are approved by your legal team on which you can base all new contracts. These templates should include or be accompanied by a library of pre-approved contract language, terms, and conditions, clauses, and the like. Pre-approved contract items are designed to ensure that all new contracts adhere to your company’s previously agreed-upon standards.

You can then compare not just new contracts, but also existing ones to the pre-approved templates, language, and clauses. Contracts that include language and terms that aren’t pre-approved should then be flagged as potentially risky. 

Mandatory Contract Reviews

The second thing you can do to assess your company’s contract risk is to conduct mandatory contract reviews. Contracts should be reviewed both pre-award and post-award by appropriate internal and external stakeholders. 

That last bit is important. It’s essential that contracts be reviewed by individuals who have direct involvement with each contract. Involving people who aren’t aware of each contract’s intricacies can result in unnecessary questions and wasted time all around. 

It’s best to establish a core group of individuals, of various disciplines, who can review your contracts to ensure that they meet your internal standards and comply with all governmental and industry regulations. By making this review part of your internal contract workflow, you’ll ensure an ongoing risk assessment and more standardized contracts going forward.

Contract Process and  Obligation Tracking

It’s critical that each stage and phase of a contract follows your business process to ensure internal and external compliance. Contracts that get requested, drafted, approved, executed, and post-award managed outside of your process expose your business to risk. Therefore, as part of your contract risk assessment you need to track contracts throughout your process and document how they follow your business rules.

In addition, as contracts get executed it’s just as critical to track your own and third party obligations and other important dates. One of the biggest risk factors in any legal agreement is a missed obligation that can lead to financial, operational, and legal risks.

Risk Assessment Matrix

Finally, it’s important to develop a map or matrix to assess the risk of each new contract going forward. You need to assess both the probability and the severity of risk, and map them together in a two-dimensional matrix. Assign a value of 0-3 for how probable each given risk is, along with a similar value for the impact that would result if that risk occurred. 

Contracts with a high probability of severe risks should be reevaluated, while those with a low probability or low severity might receive an automatic green light. You’ll need to establish your own thresholds as to what combinations of risk are acceptable, and which trigger reevaluation. When the contract risk has been properly assessed, you can then work toward mitigating that risk.

A risk matrix assessing probability (likelihood) vs. consequence (impact).

How CLM Software Helps Assess Contract Risk

Employing each of these contract risk assessment tools manually can be tedious, time-consuming, and prone to error. A better approach is to employ contract lifecycle management (CLM) software that automatically applies each of these approaches to risk assessment and management. Here are some of the chief benefits of CLM software for contract risk assessment.

Standardizes Contract Language and Clauses

With CLM software, you can easily draft new contracts from predesigned and preapproved clause and template libraries that leverage standardized language and formats. There’s little opportunity for unapproved terms or nonstandard language to enter the process. This ensures against unnecessary risk introduced by nonstandard contract elements. It also makes it faster to draft negotiation-ready legal agreements which helps you finalize business faster. In addition, you can automatically merge important data such as names, dates, values, and more which helps with accuracy and speed.

Ensures Business Process Compliance

Contract management software like Contract Logix’s CLM platform allow you to create and trigger automatic workflows that follow your business rules. This ensures all contracts are automatically requested, drafted, and approved according to your process. This not only increases compliance, but it also drives significant operational efficiency by automating many routine tasks.

Assesses Risk Probability and Severity

CLM software helps you analyze the contents of all contracts using advanced search and reporting capabilities. You can then take those data-driven insights and assign risk scores based on probability and severity, and apply them to your own internal risk assessment matrix. Then, with the click of a mouse, you can run and share real-time reports with your colleagues and management.

Tracks Key Dates and Obligations

CLM software automatically tracks key dates and obligations for all executed contracts, notifying you and others when terms and tasks are due. This minimizes, if not eliminates, the risk of missed deadlines. 

Analyzes Performance of Your Entire Portfolio

Detailed reporting, analysis, and dashboards provide an overall risk assessment for your entire contract portfolio. This information provides insight into the performance of your contracts and processes so that you can benchmark and track CLM KPIs to help determine where changes may need to be made. 

Let Contract Logix Help Assess Your Company’s Contract Risk

Contract Logix offers CLM software solutions that help assess and manage your company’s contract risk. Our CLM software automates the entire contract process from start to finish, provides an analysis of contract performance, and helps reduce your contract risk levels. 

Contact Contract Logix today to learn more about CLM software for contract risk assessment.

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