Vendor Risk Management Guidelines

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By Travelers Risk Control
3 minutes
facility worker managing risk inspecting ceiling

Businesses rely on third-party service providers to manage many aspects of their facilities and operations. However, if the janitors, security officers, electricians, project managers, food vendors, and other service providers you hire are not qualified and reputable, or you do not have written contracts with them addressing the risks involved, you could be held accountable for losses they cause, and end up footing the bill. 

Contractors Mean Business — Big Business

Depending on the size and needs of your company, the list of services you contract for can be extensive. Facilities management, in particular, is big business. According to a 2010 report from the International Facilities Management Association, of all companies surveyed:

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

Contractors Can Also Mean Big Business Risk

When you hire a service provider, you expect quality service at a certain price. But who pays when something goes wrong? Who is ultimately responsible when the landscaper’s mower discharges a rock that strikes a pedestrian? Or, when the roofer’s welding equipment causes 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 your contractors.

Have a Disciplined Approach to Procuring Services

Selecting the right contractors and service providers is a key step to managing risk. Each individual or company you hire should meet the specifications required for the job and, in some cases, be licensed to complete the work. In addition, before any work begins, it is helpful to do the following:

  • Ask for references and conduct a background check.
  • Confirm that all necessary licenses and certifications are current.
  • Obtain all terms of the contract in writing.
  • Require the contractor to carry appropriate and current insurance coverage, and request and review copies of all applicable documentation. 

Implement a Risk Transfer Program to Help Protect your Business Interest

A service provider’s reputation, quality of work, longevity in business and financial status can say a lot. Build strong relationships with dependable, reputable service providers when you find them — it could mean they will have a vested interest in ‘doing the right thing.’ Even so, it is best not to rely solely on a contractor’s handshake or word.

In the event of a loss on your premises from a contractor, their employee or their operations, your company could be held responsible and financially liable. The risk of this may be greater if you do not have written agreements in place. A formal risk transfer program is an effective way to confirm that a service provider has agreed to take responsibility and accept the financial liabilities that could arise from their service or work activity. You can help safeguard your company by selecting qualified providers and having written contracts to transfer risk.

Risk Transfer Tools

The development and implementation of a formal contractual risk management program can help you to manage associated risks. It is a best practice to consult with legal counsel regarding risk transfer tools and how they may apply to your particular arrangements with a service provider. Some topics commonly encountered in discussions of risk transfer include:

  • Indemnification and defense agreement. A signed written contract that includes indemnification and defense clauses may help you protect your company’s interests if a claim is made against it due to a service provider’s work. It is a best practice to have indemnification and defense terms reviewed by legal counsel.
  • Insurance specifications. Insurance specifications detailing such things as types of coverage, limits, and other insurance arrangements, can help you to organize insurance requirements with the service provider.  Your insurance agent may help you 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. The certificate may be reviewed to confirm that it matches the requirements of your written contract before work is started.

Are your Facility Service Providers Decreasing or Increasing your Business Risk?

Never stop asking if your service providers are reducing or adding to your risk of doing business. Selecting the right provider for the job and using risk transfer contracts and agreements may help you mitigate the risks associated with outsourced services. It also may help your company save potential time, money and hassle should damage or injury occur under the watch of a third-party provider.

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