Vendor Risk Management Guidelines

Are your facility service providers helping reduce your business risk—or increasing it?

Choosing the right vendors and using proper risk transfer agreements can help protect your company from costly claims or disruptions. Taking a proactive approach not only safeguards your business but can also save valuable time, money, and resources if an issue arises.

Many businesses rely on third-party services to manage different aspects of their office building and daily operations. However, if these contractors—janitors, security officers, electricians, project managers, food vendors, etc.—are not qualified and/or reputable, or you do not have written contracts with them addressing the risks involved, you could be held accountable and end up footing the bill for losses they cause.

Contractors are big business

Depending on your company’s size and needs, the services you contract out can be extensive. Facilities management, in particular, can be one of the
largest contracts a business employs. According to a 2010 report from the International Facilities

Management Association, of all companies surveyed:

90% used contracted services.
75% contracted one or two specialized services.
15% contracted full-service vendors to provide multiple services.

Contractors can also be big business risk

When you hire contractors, you expect quality service at a certain price. But who pays if something goes wrong? Who is responsible when the landscaper’s mower discharges a rock that hits a pedestrian? Or, when the roofer’s welding equipment starts a fire? Without written contracts addressing the risks involved in the services provided, you may ultimately be responsible for property damage or bodily injury caused by a vendor.

Procure services through a disciplined approach

Selecting the right vendors is a key step to managing risk. Each individual or company you hire should meet specific qualifications and, in some cases, be licensed to complete the job. Additionally, before any work begins, it is helpful to do the following:

Obtain references and conduct a background check.
Confirm necessary licenses and certifications are current.
Procure terms of the contract in writing.
Where necessary, require contractors to provide documentation of appropriate and current insurance coverage.

protect your business by Implementing a risk transfer program

A vendor’s reputation, work quality, business longevity, and financial status says a lot. Building strong relationships with dependable, reputable service providers may give them a vested interest in “doing the right thing” when working with your business. Even so, it is best not to rely solely on a handshake agreement.

Your company could be held responsible and financially liable in the event of a loss on your premises from a contractor, their employee, or their operations. This risk may be greater if you do not have written agreements in place. A formal risk transfer program is an effective way to ensure a service provider agrees to take responsibility and accepts the financial liabilities that could arise from their service or work activity.

Risk transfer tools

The development and implementation of a formal contractual risk management program can help manage associated risks. Consult with legal
counsel regarding risk transfer tools and how those tools may apply to your particular arrangements with a vendor.

Some common topics in risk transfer include:

Indemnification and defense agreement: A signed written contract that includes indemnification and defense clauses may help protect your company if a claim is made against it due to a service provider’s work. Have legal counsel review indemnification and defense terms.
Insurance specifications: Insurance specifications detailing types of coverage, limits, and other insurance arrangements, can help organize insurance requirements with vendors. Your insurance agent may be able help with specific details.
Certificate of insurance: Obtaining Certificates of Insurance from contractors performing work on your premises before work begins can help you keep track of the insurance obligations agreed to by the contractor.