Businesses face added risk when contracting other firms. Here is how to identify and manage the risk associated with contractors.
Risk management is the science of reducing risks in business, either for a specific project or for a company’s operations overall. All businesses face risks, but these risks translate directly to cost. That makes it important to predict, control and eliminate risk wherever possible—both internally and with contractors.
The most obvious risks are those of liability. If your company makes a legal blunder, fails to deliver on a contract, or is involved in an accident or security breach, you may be liable for substantial damages. Thus, much of risk management focuses on ensuring worker safety and best practices across your operation.
But other risks can be just as serious. Some companies may face changes in management, PR smears, labor strikes or the effects of adverse political decisions. All of these can affect the bottom line, but can often be predicted or mitigated. And disasters, such as storms and fires, are a risk every company should be prepared for.
Special Risks with Contractors
When your company contracts other firms for any kind of service, you take on additional risk. This added risk comes in several forms:
- Liability. To the degree that a contractor represents your business, the mistakes they make (in terms of safety, discrimination, or bad judgment) become your own.
- Deliverability. Is your contractor going to live up to expectations and deliver everything you need, on time and in good order? If not, your own performance for your customers will suffer.
- Reputation. What is this contractor’s reputation and how do they conduct their own business? If a contractor brings a bad reputation with them, it will reflect on your business.
Managing Risk with Contractors
While these risks are significant, they too can be controlled. One of the keys to mitigating contractor risk is to come up with thorough requirements in terms of performance, best practices and responsibility—including safety standards. These should be created before the RFP is ever sent out. Base your decision on these standards and then hold your contractors responsible.
Frequently, risk management is handled through a consultant that offers contractor screening. They will work with you to establish your requirements, locate qualified contractors and ensure compatibility.