Individuals and organizations are exposed to risk when they sign a contract. Contract risk management defines the routine practice of minimizing personal or organizational risk when entering a contract. Vague language, omissions, outdated conditions, and poorly negotiated terms can represent significant blind spots for companies, whether they’re contracting with suppliers, subcontractors, customers, clients, partners, or third-party service providers.

Risk mitigation should be addressed throughout the contract review and negotiation processes—from developing and negotiating mutually favorable terms to managing contract execution and conflict resolution. When a project goes awry, there is no substitute for a clear path toward resolution embedded into the contract.

The Basics of Contract Risk Management

Certain contract provisions can lead to increased risk. By identifying the most expensive areas of liability, skilled contract negotiators protect companies from unreasonable risk. The traditional approach to contract risk management involves the following evaluations:

• Scope of service - Companies must objectively assess if they have the resources to execute the promised services. They must also review the job description to determine whether gray areas exist that require additional clarification. 
    
• Performance schedule - Ascertain whether the suggested timeline or term is appropriate. Are there foreseeable delays? Does the contract provide for damages if timeframe expectations are unmet?
  
  
• Pricing and payment terms - The desired pricing structure and acceptable modes of payment must be clearly stated. Additional fees, warranties, charges, or penalties should be included as well. 
  
  
• Project location and security - What are data residency requirements? Can data security be guaranteed? What information can third parties access? What is the protocol for a security breach? 
  
  
• Mandatory provisions - Certain industries may require explicitly stated standards of care, limitation of liability, waiver of consequential damages, or mutual indemnification. Companies often include additional contractual terms they deem necessary to execute a successful project or partnership. Enumerating these terms in the company’s playbook can serve as a review template by providing guardrails for future negotiations.
  
• Favorable terms - Shrewd negotiators will know which provisions they’d “like to have'' that may not be agreeable to the other party. For instance, most companies would not like to provide the opportunity to suspend services or terminate the contract in the event of a breach, but the counterparty may not agree to these terms.

Companies that incorporate risk management as part of their contract negotiations save on direct expenses associated with an overpayment, delayed payment, litigation, and labor. 

A contract negotiation platform powered by artificial intelligence (AI) can automate and streamline contract risk management for corporate legal departments, allowing companies to build on their negotiating strengths and improve weak areas.

How Artificial Intelligence Integrates With Contract Risk Management

While contract risk management includes a wide variety of distinct responsibilities, there are two fundamental qualities legal departments seek to optimize: speed and accuracy. Innovative legal departments and procurement teams implement AI-based legal tech solutions to deliver next-level results when analyzing a contract for potential conflicts to meet their need for speed and accuracy. Listed below are several ways that AI can strengthen your contract risk management process:

• Redlining areas of potential risk, such as vague passages or departures.
• Pointing out areas of omission and deviations from contract standards.
• Suggesting intelligent fallback language, auto-revisions, and overrides.
• Assigning categories of risk by high, medium, and low.
• Automating commonly adopted provisions.
• Applying context-sensitive AI playbook integration.
• Improving processes and best practices to avoid human error.
• Offering modifiable playbook standards or contract templates to reduce future risk.
• Identifying areas where senior legal staff should review and negotiate further.
• Addressing problems associated with offshoring or outsourced services.
• Alleviating the need to hire and train lower-level contract reviewers.
• Providing full AI-powered multi-round negotiation support.
• Securing a transparent negotiation audit trail for all parties.

By incorporating best practices and AI Digital Playbook guidance, a contract review and negotiation platform makes risk identification and mitigation faster and easier.