# Due diligence

Source: https://contracko.com/glossary/due-diligence

# Due diligence

Investigating a supplier or counterparty's financial, legal and operational standing before contracting.

## Definition

Due diligence is the systematic investigation of a counterparty's solvency, compliance, ownership and performance record before entering or extending a relationship. In procurement it reduces continuity, fraud and sanctions risk; in M&A it informs price and warranties. The depth scales with deal value and risk.

## Example

> Before awarding a critical supply contract, the buyer reviews the supplier's financial statements, certifications and sanctions screening.

## Why this is a business risk

Skipping or superficially conducting due diligence exposes the organisation to counterparty insolvency, sanctions violations, fraud and supply-chain disruption. A supplier that fails within months of contract award, or that turns out to be on a sanctions list, creates financial loss and potential regulatory liability for the buyer, both of which are far more costly than the diligence itself.

## How to manage it

- Scale due diligence depth to contract value and strategic importance: a critical single-source supplier warrants more scrutiny than a routine purchase.
- Always run sanctions screening and check beneficial ownership for contracts above your policy threshold.
- Request financial statements and references, and verify certifications independently rather than relying solely on supplier declarations.
- Document findings and the decision rationale so the process can be evidenced if a problem arises later.
- Refresh diligence periodically for critical suppliers, not only at the start of the relationship.

### How Contracko helps

After due diligence is complete, Contracko stores the resulting contract alongside its warranty, compliance and termination provisions in a searchable repository. Expiry and milestone reminders ensure that periodic refresh obligations built into the contract, such as annual certification renewal or re-screening requirements, are not overlooked.

## Relevant for

[Financial Services](https://contracko.com/industries/financial-services)[Manufacturing](https://contracko.com/industries/manufacturing)[Healthcare](https://contracko.com/industries/healthcare)[Government & Public Sector](https://contracko.com/industries/government)

## Related clauses

- [Warranties Clause](https://contracko.com/clause-library/warranties)
- [Compliance Clause](https://contracko.com/clause-library/compliance)

## Related terms

- [Supplier evaluation](https://contracko.com/glossary/supplier-evaluation)
- [Counterparty](https://contracko.com/glossary/counterparty)
- [Material adverse change (MAC)](https://contracko.com/glossary/material-adverse-change)
- [Tendering](https://contracko.com/glossary/tendering)

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## Frequently asked questions

Common questions about this term.

- **Q:** What does supplier due diligence typically cover?
  **A:** Financial health, legal and beneficial ownership, certifications and references, sanctions and anti-corruption screening, and operational capacity to deliver reliably.

- **Q:** Is due diligence a one-off exercise?
  **A:** For critical or long-term suppliers it is periodically refreshed, since financial standing, ownership and compliance status can change materially over time.

- **Q:** What is beneficial ownership and why does it matter?
  **A:** Beneficial ownership identifies the natural persons who ultimately own or control a legal entity. It matters because sanctions, conflict-of-interest and anti-corruption rules attach to individuals, not just legal names on a contract.

- **Q:** At what contract value should full due diligence be mandatory?
  **A:** There is no universal figure; organisations set their own thresholds in procurement policy, but a tiered approach, with deeper diligence at higher values or higher risk, is standard practice.

- **Q:** Can you rely on the supplier's own certifications during due diligence?
  **A:** Self-declared certifications should be verified independently where possible. For high-stakes contracts, asking for originals or checking directly with the issuing body reduces the risk of relying on outdated or fabricated documents.

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