Contractor Risk Management: 5 Types of Risks You Can Mitigate

Industry Information | Risk Management | May 5, 2020

We are at a time in society where social media, lawsuits, and preventable errors can cripple an organization almost overnight. The ability to share information, accurately or not, at a rapid speed is unlike that of any other generation before. This is why contractor risk management is more important than ever.

For any risk-focused organization, there are at least five notable risks that can be significantly reduced with the implementation of a Contractor Compliance Program.

What is a Contractor Compliance Program?

A Contractor Compliance Program governs the extent to which a contractor is operating per the terms of their contract with a Customer.

Such a program may include background screening (with a drug test and motor vehicle report check), insurance management (tracking and monitoring), license and credential tracking, Tax Identification Number (TIN) matching, and badging. PlusOne Solutions works closely with our Customers and their contractor networks to ensure the networks are meeting those requirements, and most importantly, remaining in compliance with those requirements for an extended period.

While each program can be tailored to meet the unique needs of that organization, a comprehensive contractor risk management program will address the following risks:

Reputational Risk – risk that an unhappy customer, product failure, negative press, or lawsuit can adversely impact a company’s brand reputation.

As noted, social media has amplified the speed and scope of reputational risk. Just one negative tweet, poor experience, or bad review can decrease your customer following and cause revenue to plummet. While no program or contract can completely prevent issues from arising, the ability for the Customer to respond effectively to situations, demonstrate due diligence has been followed, and ensure proper programs and protocols are in place are key to limiting the extent of reputational risk.

Financial Risk – risk that a company will not be able to meet its financial obligations.

These situations are likely due to the inability to meet requirements, service contracts, or put the necessary protections in place – legally – to protect the financial viability of the organization. The general retaliation for many of the risks listed here is the litigation and financial penalties that can completely drain an organization. Tight contractual language, clear requirements, and limitations on liability can all help reduce the financial exposure of an organization in the case of an unplanned event or realized risk.

Operational Risk – the prospect of loss resulting from inadequate or failed procedures, systems, or policies.

This can be the result of employee/contractor errors, poor equipment or systems failures, fraud, or other criminal activity. While background screening cannot guarantee these incidents won’t happen, being able to explain the process and protect the organization against individuals who may not be well suited to the role they will hold is a straightforward way to reduce operational risk. Verifying the appropriate licenses, certifications and even the business status of contractors are additional means to address operational risk.

Legal Risk – the risk of financial or reputational loss that can result from lack of awareness or misunderstanding of, ambiguity in, or reckless indifference to, the way law and regulation apply to a business, its relationships, processes, products, and services.

When engaging in a contractual relationship and deciding to utilize a contractor network for delivering services, the contractual structure, requirements, and expectations of that relationship need to be documented and those terms agreed to. Whether the issue is to reduce the occurrence of a wage and hourly penalty through a joint employment claim, guarding against an unlicensed contractor working at a consumer site, or not following the proper consumer reporting act requirements for background screening, there are regulations and practices that a proper Contractor Compliance Program will address. Working with a partner that can help guide you through these requirements allows you to mitigate the legal risks of a contractor network.

Competitive Risk – the chance that competitive forces will prevent you from achieving a goal.

It is often associated with the risk of declining business revenue or margins due to the actions of a competitor who may be following a more robust Contractor Compliance Program than you are. If others in your industry are maintaining higher standards, thinking more strategically, demanding compliance with certain requirements, or protecting themselves and your organization is not, you are exposing yourself to the less attractive contractors and partners that others are not allowing in their networks. The result is lower quality work, higher operational and reputational risks, and ultimately greater chances that your organization will be dealing with the outcome of a lack of a comprehensive program.

How does your company reduce these risks?

Operating a business inherently involves risks, that is just a reality, but being able to understand, plan for, and mitigate those risks is what will set the stronger organizations apart from their competition. Contractor risk management is something your organization needs.

People understand that mistakes happen but what they will not understand, or forgive, is that there was no plan or effort in place to reduce the risks. We often work with our Customers and legal counsel in situations and it comes down to a simple question, “What did you do to reduce the risk(s)?” If the answer is nothing, or very little, then it is time for you to consider putting a Contractor Compliance Program in place today.

Contents are provided for information purposes only and should not be construed as legal advice. Users are reminded to seek legal counsel with respect to their obligations and use of PlusOne Solutions services.

About PlusOne Solutions

PlusOne Solutions has been an industry leader in the risk management field by specializing in compliance programs that meet the complex challenges of geographically dispersed contractors, vendors, and employee networks. PlusOne Solutions protects companies from possible financial, legal, and reputational risks associated with contractor and vendor relationships while creating safer work environments.