Due to a lack of attention to contract management, your company may face huge financial losses and legal issues. Contracts are frequently used when a company buys or sells goods and services or enters relationships with other individuals or companies for various reasons.

Most companies will benefit from implementing better, more consistent organizational-wide procedures and practices for contract drafting, negotiation, signing, fulfillment, and storage. This article will examine the most common risks and ways to reduce them while increasing contract management efficiency.

Common Risk Types

This section will discuss the most common types of risks you can encounter, enabling you to easily identify these risks.

1. Financial Risk

These are contract risks that are associated with losing money. This risk could result from missing a key contract date, or it could be the result of mistakenly extending the contract term due to an automatic rollover clause. Financial risk could also be contract compensation or termination for claims, warranty issues, missed milestones, or delivery deadlines.

2. Security Risk

Security risks can have some of the most serious and high-profile implications for your organization. In most cases, security breaches in your contract result in legal, brand, and financial problems.

There are security risks associated with storing contracts in unsafe locations when it comes to contract management. It is also unsafe if everyone with contract access can access sensitive contract details above their pay grade. This could lead to a security breach.   It is also unsafe to use email to share sensitive information.

3. Legal Risk

Legal issues arise when there is a contract breach with the possibility of litigation accountability. Dispute, compliance, and regulatory issues are examples of legal risks. Missed compliance requirements and contract obligations such as HIPAA, HITECH, and OSHA could put your company in legal jeopardy. It can also be caused by confidentiality disclosures, intellectual property infringement, a failure to use the proper legal clauses, and other contract issues.

4. Brand Risk

Managing your brand’s reputation is now more important than ever because bad news travels fast, which can impact your brand’s reputation. When the brand’s reputation suffers, it can have an adverse effect on your financial performance.

How To Reduce Contract Risk and Increase Contract Management Effectiveness

With the number of contracts increasing, there are many unknowns associated with creating and managing contracts. Here are seven ways to reduce contract risks and increase contract management effectiveness.

1. Enable Automated Notifications and Alerts

Missing contract conditions or renewals activated by attaining specific milestones come with considerable financial risks.  To stay on top of vital contract milestones, you can set up tasks, calendar reminders, and automated alerts linked to the contract data.

This functionality is a prime example of how an ideal contract management software can help you reduce contract risk. This is because you’re no longer reliant on manually tracking dates, and you can improve compliance by retaining the archived history for auditing purposes.

2. Control Access with Role-Based Security

Establishing role-based permissions allows a user to view or edit certain types of documents or contracts while denying access to other unauthorized users. This feature prevents unauthorized users from viewing or editing contract details, reducing the security risk of sensitive information falling into the wrong hands.

3. Secure Contract Data with Encryption

Encrypting all of your document data is another important step in protecting your contracts from unauthorized access. Using the most current encryption standards, the best contract management software encrypts sensitive information in transit and at rest.

Data stored within the contract management system is referred to as data at rest. At the same time, data sent to or from a contract management system to another application or user is referred to as data in transit.

4. Increase Compliance with Clause and Template Libraries

Non-compliance is one of the major sources of risk, and one of the most prevalent causes of non-compliance is using inappropriate language in a contract. Creating template libraries and clauses via CMS ensures that any user putting together contracts uses the most up-to-date pre-approved language.

This helps reduce the contract risk associated with language that has not been adequately legally verified. You can also use your company’s business rules to determine which templates and clauses to use in specific situations.

5. Retain Contract Version Control

When different parties are redlining the same document, retaining contract version control is a risk factor. It is critical to track changes and allow users to review and redline documents in the contract management system at the same time.

You avoid duplicating, missing, or using incorrect data that can arise from emailing edited documents back and forth. It’s also critical to keep track of and manage addendums, terminations, and contract amendments.

6. Use Automated Workflows

Contract workflows should be documented for every stage of a contract lifecycle based on rules that users involved must follow. This ensures that your processes are followed to reduce contract risk related to missed approvals or steps.

It also aids in providing proof of compliance for auditing purposes. You can remove the need to manually facilitate and track each step in a contract’s lifecycle by creating and triggering workflows in contract management software.

7. Secure Approvals with Electronic Signatures

Electronic signatures are safer than paper signatures and allow documents to be signed more quickly. E-signatures contain a digital record of who, where, and when a document was signed, which helps with authentication and audit trails.

E-signatures reduce contract risks because they prevent contract approval tampering. They also enhance the experience of contract approvers by enabling mobility. Contracts can be signed virtually anywhere and on almost any device.


If your company lacks consistent practices and processes for managing contracts, or if any of the various contract management risks identify potential gaps in your contract management practices, we recommend employing the use of contract management software coupled with safe practices mentioned in this article to easily identify and reduce contract risks while increasing contract management effectiveness.