Leveraging AI to Mitigate Common Procurement Contract Risks

Cost-Reimbursable

Fixed Price

Time and Materials 

These agreements are sometimes called "cost-plus" contracts. Contractors are reimbursed for the expenses they incur in the course of the work. Cost-reimbursable contracts are often used when the overall financial cost of the project is difficult to predict. Risk is inherent here, as the buyer may see prices escalate to a point where the work is no longer feasible.  

Fixed-price contracts are among the simplest procurement agreements because they are based on a specified budget and time frame. This type of agreement is very transactional and can be ideal for short-term, one-time contracts. They frequently favor the buyer because expectations are enumerated clearly. However, the seller could face issues related to ambiguities or poor budget planning that must be addressed. 

Time and materials contracts combine components of cost-reimbursed and fixed-price contracts. The vendor will receive reimbursement for the materials they purchase, as well as a fixed rate for labor. These contracts require extensive communication and can lead to issues with over-inflated expenses or time spent on a project. They must be carefully and closely managed and regularly audited. 

Insufficient needs analysis

A department in a hurry to put a contract to bed may make mistakes in assessing needs related to deadlines, budget, inventory, and more. Ambiguous requirements may also make it challenging to understand the potential scope of a project. 

Bad vendor vetting 

While predicting all future vendor behavior is impossible, companies can note and prepare for red flags in the early contract stages. For instance, companies commonly make the error of choosing a vendor strictly based on price point, as reduced costs could result in subpar materials, missed deadlines, and inflated invoices. In the worst cases, a company may become a victim of fraud or get entangled in ethical issues. 

Poor contract management 

Problems can also arise from the administrative side of contract management. Companies may fail to track necessary paperwork or follow proper negotiation procedures. Multiple copies of the same contract—with slightly different terms—may be in the hands of various parties. This kind of issue results from a lack of organization and unclear communications. 

Compliance 

Compliance issues apply to governmental or heavily regulated agreements. These entities have specific benchmarks for management that require review. Failure to meet these standards could result in fines, penalties, and contract cancellation.  

Analyze

Revise

During analysis, the AI employs a sample set of documents and other organization-specific information to read through a contract. The AI will compare contract sections to the company's preferred positions and policies. Based on this assessment, the AI will then flag potential areas of concern. 

After targeting specific areas of concern, the AI will return revision suggestions. For example, it may note that a contract is missing a clause that would protect the company in the event of occurrences out of their control, like natural disasters. Then, the AI would recommend an appropriate clause to cover that issue. 

Negotiate

Manage

Many corporate legal departments use negotiation playbooks for contract standardization. The best AI solutions incorporate a Digital AI Playbook into the review. With the help of a digital playbook, attorneys can target necessary areas for negotiation and accelerate the approval process. 

Digitizing contracts helps eliminate issues with redundancy since the digital platform holds the most recent version. This can also allow organizations to add these contracts to a management database that will help them track deadlines and monitor terms. 

Text Extraction

Fully Automated Authoring and Redlining

Extraction software reviews documents and extracts common sections. That information then guides future agreements and may contribute to establishing a management database. This technology works well for bulk contract management, though it may be of little use in negotiating agreements and is used primarily in mining data from legacy, post-signature agreements.. 

These solutions review contracts, redline terms of concern, and offer suggestions for improvement. The technology is more akin to an actual attorney review. As a result, a fully automated solution can act as a negotiation aid and help attorneys focus their attention on key provisions that will lead to preferred negotiating positions and mitigation on contracting risk.