How Entrepreneurs Can Identify High-Risk Contracts

Entrepreneurs can identify high-risk contracts by:

Evaluating Contract Types

Certain contract types, such as master service agreements (MSAs) or statements of work (SOWs), may have a higher exposure to risk. Reviewing the contract type can help identify potential issues.

Assessing Contract Value

Contracts with high Rand or other values or those that make up a significant portion of revenue are riskier if they fail. Analysing contract value is important for prioritising which agreements to review.

Examining Financial Terms

Unfavourable financial terms, such as one-sided indemnification provisions, can expose the business to significant liability. Carefully reviewing these clauses is crucial.

Considering Contract Age

Older contracts may contain outdated terms or lack important provisions. Regularly reviewing existing agreements, especially those that have been in place for years, helps identify potential risks.

Identifying Risky Clauses

Certain contract clauses, such as those related to intellectual property, data privacy, or termination, can be high-risk depending on the business. Pinpointing these clauses allows entrepreneurs to focus their review.

Establishing Benchmarks and KPIs

Developing metrics to track contract performance, such as time in each stage of the lifecycle or number of missed milestones, can highlight areas of risk in the contracting process.

By evaluating these factors, entrepreneurs can prioritise which contracts to review and focus their risk assessment efforts. Centralising all agreements in a secure repository and making the data searchable is key to enabling this analysis.

Citations:
[1] https://www.contractlogix.com/contract-management/how-to-identify-risk-in-your-contracts/ [2] https://www.informa.com.au/insight/a-comprehensive-guide-to-contract-risk-management/ [3] https://harperjames.co.uk/article/contract-risk-profile/
[4] https://www.entrepreneur.com/business-news/5-ways-contracts-are-an-entrepreneurs-best-friend/326645

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