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Sources of Contract Risk

No one can remain in business without making contracts. Yet entering a contract can be risky because it creates obligations. It also means relying on the other party to do (or refrain from doing) something, which in itself can give rise to many kinds of risk. This is a special concern when dealing with a supply chain, where one's own performance is dependent on the performance of others up and down the chain.

According to the ISo Risk Management Vocabulary (ISo Guide 73:2009), a risk source is an element that alone or in combination has the intrinsic potential to give rise to risk. Contracts themselves can be seen as sources of risk, but also as risk management tools. To find the true sources of contract risk and ways to respond to them, we need to look deeper than the mere making of contracts.

In this chapter, we look beyond contract wording to find the real sources of contract risk. We begin by exploring people's perceptions and choices and how they are (or are not) reflected in contracts. After introducing the contracting puzzle, we discuss the communication failures that easily occur when people from different functions and professions work together. in the sections that follow, we cover the reasons why some contract risks are unnoticed and unmanaged. Many of them do not show up on the risk registers, matrices, or logs commonly used in project management and organizational risk assessments.

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