Importance of an Effective Contract Review

The Interagency Guidance of Third Party Risk Management states that an effective third-party risk management life cycle consists of planning, due diligence and third-party selection, contract negotiation, ongoing monitoring, and termination phase.

One of the most critical aspects of the third-party life cycle is the contract negotiation phase. It is essential to evaluate a vendor’s contract with other parties, including sub-contractors, which might transfer or bring additional risk to the financial institution. A vendor contract, sometimes referred to as a vendor agreement, is a legal document that outlines the terms of an exchange of goods or services for payment between the two parties.  Through this agreement both parties understand their responsibilities and obligations during the transaction.

The primary object of a vendor contract is to ensure that all parties involved are aware of what is expected in terms of deliverables, payment, and other relevant details. In the event of non-compliance, the vendor contract also specifies the consequences. Negotiating vendor contracts at the outset of any vendor partnership assists financial institutions in better managing their risks. Vendor contracts usually contain legal provisions, often in a specific order.

Strunk’s Vendor Manager Software allows you to score individual contracts based on the presence and quality of key provisions. Strunk’s vendor contract review enables financial institutions to identify gaps in their contracts and manage the vendor’s risk appropriately.