Contract Risk Assessment Checklist for Legal Ops Success

When Contracts Are Signed and Forgotten

Businesses often sign contracts and then forget that they exist. This leads to a lack of understanding of the obligations that have been agreed upon. Renewals are missed, price changes are ignored, and the financial implications build up over time.

This is where a contract risk assessment checklist comes in.

The risk assessment that a contract poses does not remain constant after a contract has been executed. Markets change, laws change, suppliers change hands, and technology changes. What may have been a fair assessment at the time may become unfair over time.

This gradual change is known as contract drift.

Contract drift is a situation where the real world changes, but the contract governance process remains stagnant. Over time, the contract moves further away from the business’s strategic and financial interests.

Instead of dealing with the aftermath of a problem, a company’s legal team can create a system that monitors the contracts proactively using a contract risk assessment checklist.

Key Takeaways

• A structured contract risk assessment checklist is an essential tool for risk management during the contract lifecycle.
• A contract is subject to “contract drift,” especially when there are changes in laws, markets, and business.
• The review of all clause interactions, financial triggers, and operational dependencies is essential for identifying risks.
• The use of Microsoft 365, including SharePoint, Teams, and Power Automate, is helpful for proactive contract management.

Contract Execution Begins with Operational Integrity

The review of a contract is usually concentrated on obligations and deliverables. However, operational risks are usually embedded in interdependencies.

A vendor’s obligation is rarely standalone. It is usually dependent on other things. Let’s take an example of a marketing services contract. The marketing company might commit to delivering a marketing campaign within ten days.

However, it might be assumed within the contract that the company would receive internal assets within three days. If the assets are not received within three days, it would be impossible for the marketing company to deliver within ten days.

Now the organization is in breach.

A good contract risk assessment checklist should also show a clear understanding of the operation’s dependencies. Legal teams should understand who depends on whom to successfully complete their obligations.

This includes understanding the dependencies between internal teams, external teams, regulators, and technology platforms. When these dependencies become visible, any potential delays or breaches become more predictable.

Another risk that is often overlooked is the risk associated with vague wording in executed contracts. Phrases such as “best reasonable efforts,” “commercially reasonable timelines,” or “mutual cooperation” are often used during the negotiation phase.

However, these vague clauses often cause conflict during the performance phase of the contract. Each side may have a different interpretation of these clauses when financial or business pressure is applied.

This is where a good legal team conducts what we call a “grey area audit.” A grey area audit involves reviewing these vague clauses and understanding their expectations before any conflict arises.

The intention is not to renegotiate the contract; rather, it’s to understand the interpretation within the organization’s teams.

The Hidden Risks of Conflicting Contract Clauses

Contracts do not fail due to one single clause. It is due to how different clauses interact with one another. This is what is known as clause collision.

A good example of this is a liability cap. This is meant to restrict risk. However, there is also an indemnity clause. This indemnity clause might be so broad. It might negate the liability cap.

On paper, the cap is still there. However, in practice, it might be almost useless. A good contract risk assessment checklist must be able to assess how different clauses interact with one another. This is to ensure that the original risk control is still effective.

The next area of review is what most legal teams term threshold blindness. In one contract, a clause might appear to be insignificant. An example of this is if a vendor asks for longer payment terms and a bit of an exemption on reporting.

While individually, these appear to be negotiable concessions.

The real risk occurs when the same clause proliferates across dozens or hundreds of vendor contracts. Suddenly, a concession that was previously acceptable now poses a systemic risk to the entire vendor ecosystem.

This scenario is common in decentralized procurement environments where different departments negotiate their respective contracts without visibility into the overall patterns.

Why Contract Profitability Needs Continuous Monitoring

Risk to financials often manifests in small details within a contract.

These financial details seldom arise during any negotiation discussions. Instead, they quietly undermine profitability during the execution phase. Many organizations are experiencing what experts refer to as contract leakage.

Contract leakage manifests when changes to pricing structures or escalation clauses are overlooked. Over time, these small financial changes translate to huge financial losses.

A comprehensive contract risk assessment checklist should also include a review of the business triggers that have been inserted within the contract. These may include price escalation clauses based on inflation indexes.

They can also require CPI-related adjustments, volume discounts, or usage-based pricing limits. Failure to monitor these contract clauses means that companies are not leveraging their opportunity to maintain their profit.

Maintenance and support contracts can also have other hidden costs. The service provider can increase the cost of maintenance periodically or at renewal, increasing overall spending.

Another financial risk for companies is in auto-renewal clauses.

Contracts are renewed automatically unless notice is provided within a specific period. This period varies from thirty to one hundred twenty days before expiration. Failure to notice within this period means that companies are locked into another contract term.

How to Monitor Regulatory Changes Affecting Contracts

The environment is constantly evolving, but contracts are static. Once a contract is executed, it does not change. This is a major risk for companies.

A contract executed two years ago can suddenly require new regulations. The rules for privacy, cybersecurity, and AI are evolving.

For example, the EU’s General Data Protection Regulation (GDPR) revolutionized data processing requirements for many international contracts. Therefore, a dynamic contract risk assessment checklist should also include a periodic review of changes in the rules.

Another area that is often overlooked with respect to contract compliance is what seasoned contract managers refer to as ghost obligations.

Ghost obligations refer to obligations that are included in the contract but are often overlooked in day-to-day operations. Ghost obligations may include reporting requirements, audit requirements, or compliance requirements.

Ghost obligations are often overlooked because they are often non-routine. However, during audit times, detailed audit trails may be a necessity.

Why Every Contract Needs an Exit Strategy

Business contracts should always have a strategic component that supports business strategy. Long-term business contracts may have strategic risks that are hidden. Vendor relationships that were flexible may have evolved over time to become vendor lock-ins.

If a significant service depends on a vendor, changing vendors can be difficult and costly. This can affect the negotiation position and operational risk over time.

A well-developed contract risk assessment checklist should also consider whether the vendor relationship still supports business priorities. This includes evaluating technology, service, and cost-effectiveness.

If a vendor relationship no longer supports business priorities, a well-thought-out exit plan must be developed.

Contract termination can be a significant operational risk, especially if not well managed. Data ownership, intellectual property rights, and confidential information must be well managed during a vendor offboarding process.

Contractual agreements should be in place regarding the return, deletion, or termination of vendor access to data, which can be a significant risk during a vendor offboarding process.

Microsoft Teams can be an efficient tool in this process.

Teams can be used for a dedicated collaboration folder for the vendor contract offboarding process, where all deliverables, information, and vendor offboarding plans are readily available for the concerned departments.

From Checklist to Governance System

A contract risk assessment checklist should not be considered a one-time process. It should be reviewed quarterly for high-value and high-risk contracts. It should be reviewed annually for less risky contracts. The point is to be consistent.

Organizations that implement a periodic process of reassessment reap a tremendous reward. Risks are identified sooner. Leaks in revenue are minimized. Vendor relationships stay in sync with organizational objectives.

Most importantly, an organization’s legal team moves from a position of being seen as a supporting function to becoming a strategic partner.

This is where Microsoft 365 comes in. It is an ideal platform for implementing a contract risk assessment process. SharePoint, Microsoft Teams, and Power Automate are probably already integrated into an organization. These tools have tremendous potential for delivering an effective contract risk assessment process.

The challenge with these tools is managing complex contract risk assessment manually.

Dock 365 Contract Management Software is developed on top of Microsoft 365. It extends the capabilities of SharePoint and Teams with advanced contract management capabilities tailored for legal teams and procurement teams.

With Dock 365, organizations can store contracts in one place, automate contract approval processes, track obligations, and monitor key dates. Legal teams have complete visibility into contract performance for the entire organization.

Instead of being reactive to contract risks, teams can now manage their contracts with confidence and clarity. If you’re tired of being reactive with your contract management processes, it’s time to consider a better approach.

Schedule a demo with Dock 365 and learn how a Microsoft 365-based CLM platform can revolutionize your contract risk management processes.

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