Why Vendor Risk Management for Government Agencies is Critical in 2025
Government agencies are more dependent than ever on third-party vendors—and with dependence comes risk.
by Ashley Poynter
Content Manager
PaymentWorksWhy Vendor Risk Management for Government Agencies is Critical in 2025
Government agencies are more dependent than ever on third-party vendors. Whether it’s IT infrastructure, public works, or defense contracts, vendors play a critical role in keeping government operations running. But with this dependence comes risk—significant risk.
For many agencies, vendor risk management for government begins and ends with selecting a reputable vendor. But that’s just one piece of the puzzle. How vendors are onboarded, how their information is managed, and how payments are processed all create opportunities for fraud, compliance failures, and financial mismanagement.
And here’s the harsh reality: manual processes make these risks worse.
Without automated systems, government agencies rely on outdated, paper-based workflows that make it easier for fraudsters to slip through the cracks. Fake vendors can be onboarded. Payments can be misdirected. Audit trails can be incomplete or nonexistent. And when something goes wrong, it’s often too late to fix.
In 2025, government agencies must rethink how they manage vendor risk. This means moving beyond outdated processes, eliminating manual bottlenecks, and using automation to protect against fraud, financial loss, and compliance failures.
Table of Contents
Understanding Vendor Risk in Government Operations
Regulatory and Compliance Pressures
The Growing Threat of Vendor Fraud in Government Agencies
The Risks of Paper Trails and Missing Audit Records
The Financial Risks of Vendor Payment Fraud
How Government Agencies Can Improve Vendor Risk Management in 2025
Get Ready for Vendor Management Day 2025
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Understanding Vendor Risk in Government Operations
Vendor risk isn’t just about picking the wrong supplier—it’s about how vendors are onboarded, verified, and managed over time. In government agencies, where contracts are often large and complex, the risks multiply.
How outdated processes create risk
Many government agencies still use manual, paper-based onboarding processes:
- Vendors submit forms via email or fax.
- Agency staff manually enter data into procurement systems.
- Payments are processed based on spreadsheets and static records.
As our own Angela Sarno put it at FASBO 2024:
“It starts with a PDF. It’s 2024, and we are still gathering incredibly sensitive information from organizations that you intend to pay perhaps millions of dollars by asking them to what? Fill out a piece of paper or type a piece of paper.”
And Brittney Goad, Disbursement Manager, Stephen F. Austin State University, adds more context:
“One of the things that we got in our emails was vendor onboarding packets. Also, you have to think about who’s receiving these forms, who’s touching these forms, and how many of them are actually completed correctly. Not very many. All you get is your legal name and maybe you get your tax ID number, but… Are they a single member LLC, are they a corporation, are they a partnership? This is stuff I have to know.”
At every step, there’s room for error—and fraud. A single mistyped bank account number can send payments to a bad actor. An outdated W-9 can lead to compliance issues. A missing approval can cause delays that affect entire projects.
The challenge of vendor sprawl
Another issue? Vendor sprawl.
Most government agencies work with thousands of vendors across multiple departments, making oversight difficult. Without a centralized, automated system, agencies struggle to:
- Track vendor compliance over time.
- Detect duplicate or fraudulent vendors.
- Maintain an accurate, up-to-date vendor database.
When vendor data is stored across multiple spreadsheets, email chains, and paper files, risk isn’t just possible—it’s inevitable. In 2025, agencies must shift from a reactive approach to vendor risk management to a proactive, data-driven strategy that identifies risks early and ensures accountability across the entire supply chain.
Regulatory and Compliance Pressures
Government agencies must comply with strict regulations when managing vendors. From federal procurement rules to state-level compliance requirements, failing to follow proper procedures can result in fines, legal action, and reputational damage.
And culture plays a big role in how compliant you’re able to be. Angela reiterates this, saying:
“Your culture is the problem. Your corporate organizational culture around vendor management is the problem. Vendor impersonation, fraud isn’t the problem. Vendors who aren’t compliant isn’t the problem. It’s how you’re actually handling gathering this information.”
In other words, you need to have procedures in place–procedures that people will follow. Better yet, have a way to document exceptions to those processes.
The risk of missing documentation
When agencies rely on manual tracking, it’s easy to lose critical vendor documentation—W-9s, tax forms, insurance certificates, and compliance records.
Brittney emphasizes the tedious nature of manually doing all of this–and the inherent risk:
“Day one at my job, I got all these W9s and I was told to set them up, [and I thought] there has to be a better way because who’s validating this direct deposit information? You have to make sure your legal name is right, you’ve got to make sure that the tax ID or the social security number is right. There’s just so much compliance right there, there was no way for me to validate that.”
This creates huge risks:
- Non-compliance fines for missing required vendor documents.
- Delays in payments and contracts due to incomplete records.
- Audit failures that expose financial mismanagement.
With an automated system, agencies can ensure that vendor documentation is collected, stored, and updated in real-time, reducing compliance risk.
The high cost of non-compliance
Failure to comply with these regulations can lead to:
- Financial penalties – Agencies may be fined or face legal action for working with non-compliant vendors.
- Reputational damage – Publicized vendor-related failures can erode trust in government institutions.
- Operational setbacks – Vendors failing compliance audits may be disqualified, causing disruptions to critical services.
To stay ahead, agencies must leverage automated compliance tracking and continuous monitoring tools to ensure vendors remain in good standing throughout their contracts.
The Growing Threat of Vendor Fraud in Government Agencies
Vendor fraud is a multi-billion-dollar problem—and government agencies are prime targets.
Why? Because fraudsters know that manual, outdated processes make it easy to slip through the cracks.
How fraud happens in vendor onboarding
The most common fraud schemes in government vendor management include:
- Fake vendor registrations – Fraudsters submit fake documentation and get approved as vendors.
- Business email compromise (BEC) scams – Attackers impersonate legitimate vendors and request payment changes.
- Duplicate vendors – The same vendor is entered into the system multiple times with slightly different details, leading to overpayments.
The lesson? Manual verification isn’t enough. Government agencies need automated vendor authentication tools that:
- Verify tax IDs and business legitimacy before onboarding.
- Authenticate banking details to prevent payment fraud.
- Detect duplicate vendors in real-time.
The Risks of Paper Trails and Missing Audit Records
Government agencies are subject to frequent audits—but when vendor records are scattered across emails, spreadsheets, and filing cabinets, those audits become nightmares.
Angela, again, has valuable insights here:
“If you have a process where someone has to gather it, and you have maybe more than one person inputting into your ERP and you don’t know who did what at what point or how it got in there, you end up with data you can’t trust. And this affects your entire finance and procurement operation.”
Why manual vendor management creates audit risk
- Incomplete records – Missing contracts, tax forms, or payment approvals.
- Lack of transparency – No clear documentation of vendor selection decisions.
- Difficulty proving compliance – No centralized history of vendor performance or contract changes.
The need for automated audit trails
With an automated vendor management system, agencies can:
- Maintain a complete digital history of vendor interactions.
- Quickly access required documents for audits.
- Ensure approvals are properly logged to meet compliance standards.
Replacing paper-based processes with a centralized digital system allows agencies to reduce audit risk and ensure compliance with procurement regulations.
The Financial Risks of Vendor Payment Fraud
One of the biggest risks in vendor risk management for government is payment fraud. Agencies process billions in vendor payments each year, making them a prime target for fraudsters. And if you think “keeping your eyes and ears open” is enough, think again:
“Every time PaymentWorks stops a fraud, we get a little fraud report from the fraud team that tells us what kind it was, what happened, how it went down. Earlier this summer, I was reading one about a spoof, and in the layout, it said what the real email address was and what the spoof was. And I’m really not exaggerating—it took me several minutes, and I knew one of them was spoofed, to figure out what it was.”
The only way to safeguard comprehensively against this type of thing is automation with a trusted platform.
The role of automated payment verification
Automated payment verification tools eliminate fraud risk by:
- Verifying bank account ownership before payments are processed.
- Flagging suspicious payment changes in real-time.
- Matching invoices to contract terms to detect discrepancies.
When agencies automate vendor payments and verification, they significantly reduce the risk of financial loss due to fraud.
How Government Agencies Can Improve Vendor Risk Management in 2025
Vendor risk management for government agencies isn’t just a lot of work; if not addressed properly, it poses a direct threat to government agencies’ financial security, compliance, and operational efficiency. With fraud schemes growing more sophisticated and regulatory requirements becoming more stringent, agencies must take a proactive approach to vendor risk management. In 2025, this means leaving behind outdated, paper-based processes in favor of automation, verification, and centralized controls.
A modern, automated approach to vendor risk management closes security gaps, improves compliance tracking, and reduces financial loss. By leveraging technology-driven solutions, agencies can ensure that vendor data is accurate, secure, and continuously monitored—rather than relying on error-prone, manual methods.
Get Ready For Vendor Management Appreciation 2025
Yes, we wrapped our second annual Vendor Management Appreciation Day (VMAD)—and YES, the party’s far from over. We’re already making plans for 2025… are you in?
Because let’s be honest—vendor management doesn’t get nearly enough love for the critical role it plays in keeping organizations running smoothly (and safely). That changes here.
🎉 Mark your calendar. Stock up on snacks. VMAD 2025 is coming—and you won’t want to miss it.
VMAD is a new holiday geared toward unifying vendor management professionals and celebrating innovation in the field.
Moreover, we’ve released gifts each month to help you supercharge your vendor management efforts. Additionally, we’re planning some awesome events so everyone can connect and celebrate the important, strategic role of vendor management.
In the meantime, learn more here, and grab some free vendor management goodies.
Want Help Aligning Teams On Vendor Validation?
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Vendor Management Best Practices for the Government Sector in 2025
The New Face of Vendor Fraud Cases
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