Contract Risks in Project Management

John Constance
MSc in Project Management, University of Liverpool
Abstract
A contract risk is any event that can jeopardize the completion or achievement of a contract !f
contract risks are not properly managed the service provider can lose its credi"ility or "#siness
performance rep#tation$ or the service "#yer can "e c#t%off in relationship &ith the contractor '
and may"e other service provider (or every contract the o"jective is to plan the proc#rement
of the contract in the most effective manner$ cond#ct the proc#rement thro#gh a contract that
has its risks identified and mitigation planned and p#t in to action and s#ccessf#lly mitigates the
risks #ntil the contract is s#ccessf#lly completed and terminated
!n order to manage contract risks there has to "e developed a frame&ork that incl#des contract
risk assessment, improvements, monitoring proced#res and comm#nication )his &ill cover risk
identification, mitigation methods, and roles and responsi"ilities, action plan and comm#nication
re*#irements Also, all roles and responsi"ilities associated &ith the performance of the contract
m#st #nderstand the risks and kno& &ho is responsi"le and ho& to identify and ho& to mitigate
the risks respectively
Introduction
A contract is a specific term agreement "et&een t&o or more parties !t legally o"ligates one
party to provide services and the other party to pay for the delivery of the services Services are
provided for and &ithin partic#lar environment that are ever changing "ased on market demand,
technology, etc )here &ill "e #ncertain events +rain, net&ork or po&er fail#re, strike, holidays,
etc, that if they occ#r, &ill impact on the performance of the contract
)hese events are called risk A risk is any #ncertain event that can res#lt to a negative or
positive impact on a contract )o "e s#re threats or opport#nities are ma-imized to the finest of
the contract terms$ the risks associated to the contract m#st "e managed )he contract risk is
an event that if it sho#ld happen can jeopardize the s#ccessf#l implementation of a contract to
the letter )his is something all project or contract managers sho#ld take keen to if they are to
s#ccessf#lly manage contracts
)his paper &ill e-plain the risks involved in contracts and s#ggest &ays in &hich to eliminated,
red#ced, or shared the impact of these risks on performing the contracts .rganization team
roles and responsi"ilities in the risk identification and risk response &ill "e s#ggested and the
reasons for s#ch selection &ill "e e-plained )he paper, thro#gh my personal e-perience and
that of other e-pertise and so#rce, &ill concl#de that, d#e to the inevita"ilities of the glo"al
environment it is critical to remem"er that in the a"sence of proper contract risk management
plan, the performance of contracts are doomed to incompletes if not fail#res
Procurement
!t is a simple fact, &hen Scotti +/001, said that no company or instit#tion has all of the re*#ired
reso#rces to "#ild a prod#ct, or provide the services to complete a project &itho#t ac*#iring
e-ternal reso#rces and materials to s#pport or replace their in%ho#se reso#rces According to
PM2.3 +/004,, project proc#rement management is a"o#t completing the re*#ired processes
of p#rchasing or ac*#iring prod#cts or services considered necessary to o"tain from o#tside the
organization or project team
)hese processes +planning, cond#cting, administering, and closing, m#st "e the fo#ndation of
the "#siness practice done "y the organization$ and have a strategic organizational importance
making s#re the costs of the processes are estimated and controlled in alliance &ith market and
sales$ and that all the legal iss#es and risks of the processes are managed
As the glo"al comm#nity changes so &ill these changes impact project proc#rement processes
Professional proc#rement practitioners have all agreed that their profession is indeed evolving
alongside the glo"al phenomenon, therefore making proc#rement a vital part in organization5s
"#siness strategy and transformation
Contracts
According to Sollish, Semanik, Morris 6 Pinto +/077, a contract is one of several ordering
methods availa"le for the proc#rement of goods and services A contract defines the o"ligation
of all parties !t sets the parameters for time and payments$ it esta"lishes the limited e-pected
responsi"ilities of each party$ and descri"es ho& pro"lems and disagreements &ill "e resolved,
and the penalties of not performing and completing the contract, and displays the names and
signat#res of the parties involved in the agreement
)he contract #s#ally contains a set of activities and tasks and efforts that m#st "e performed to
prod#ce a specific prod#ct )his re*#ires the s#pplies of reso#rces and directing and controlling
these reso#rces to prod#ce the prod#ct to specific *#ality targets, &ithin a partic#lar timeframe,
for a specified amo#nt or costs
Risks
Most people consider a risk a danger or #ndesired end res#lt 2#t according to PM! +/004, a
risk is an #ncertain event that can lead to negative and positive res#lt if it occ#rs 8es indeed it
stems from the "asics of #ncertainty, "#t it might have a positive or negative impact on the
project performance !n order to "e s#re of the o#tcome, the project team m#st identify these
#ncertainties and &ays to eliminate "ad o#tcomes and make #se of the good res#lts that the
event may "ring )his is key in risk management
Contract Risks
A contract risk is an #ncertain event that can impact the performance of a contract if it occ#rs
)hese events may come to pass in the immediate environment or may occ#r as a glo"al event
)his can "e d#e to change in market price or reg#lations$ or the occ#rrence of a nat#ral event
that lead to force maje#re 9epending on the type of project, contract risks can &reck even the
"est project plans and "ring a"o#t cost overr#ns, shortfalls in "#dget, #naccepta"le *#ality and
delay in sched#le and final prod#ct delivery
!n today5s glo"al "#siness milie# and international standardization imperatives, it is important
project team managers stay in to#ch &ith all the necessary re*#irements, and legal iss#es and
risks, "y planning, organizing, directing and controlling the direct and indirect res#lts contracts
have on projects
According to 9avid Carnes +/077, t&o key things to consider in a contract it is to identify risks in
advance and distri"#te them to the party "est positioned to manage each and every partic#lar
risk )hese contract risks may incl#de:
#nrealistic time lines
#nrealistic *#ality standards
poor cost estimating and contract pricing
incorrect assignment of responsi"ility
people risks incl#ding ine-perience staff or contractor
inade*#ate doc#mentation of defined e-pectations
prod#ct malf#nction
apparent a#thority
"reach of confidentiality
#nsta"le market price
#ser dissatisfaction
legal commitments
inactive monitoring and validating
Contract Risk Mitigation Strategy

;enerally, the "est &ay to mitigate contract risk is to follo& the processes of proc#rement
management and risk management as provide "y PM2.3 +/004, )his incl#des planning
proc#rement, cond#cting proc#rement, administering proc#rement and closing proc#rement
)his sho#ld happen alongside planning risk management, identifying risk, and *#alitative risk
analysis, *#antitative risk analysis, planning risk response and monitoring and controlling risk
)o "e specific contract risk mitigation incl#des:
&eighing #p the physical conditions of the &ork site, the area immediate to the project,
prevalent &eather conditions to the project area and list them
contin#o#sly check and make s#re employee have the e-perience and right skills to
carry o#t the contract risks plan
prepare a master list of all risk items and assign rating factors to sho& high, average
and lo& degrees of risks
Create a plan that &ill identify each risk item, &hat the risk &ill ca#se, &hat sol#tions are
in place$ and &hat meas#res &ill "e taken to prevent loss and red#ce impact in case of
occ#rrence
P#t in place processes incl#ding checklists, contract#al commitments, ins#rance and
standard safety meetings, and risk assignment matri-, etc that &ill red#ce, or eliminate
the risks
Assign all risks to team mem"ers involved in the project "y placing high%risk items in the
responsi"ility of staff &ith e-perience and *#alification or directly responsi"le for the day%
to%day tasks associated &ith those #ncertainties making s#re the staffs cond#cts ro#tine
analysis to disclose pro"a"ilities and impacts likelihood
Roles and responsibility of project team
<isks are identified "ased on the so#rce of the ca#se )hese ca#ses are related to vario#s
project activities, tasks, efforts or reso#rces or condition <isk so#rces can "e of a financial,
operational, project conte-t#al, or kno&ledge domain event )o "etter control these risks &o#ld
"e to assign them to role and responsi"ilities in day%to%day project task associated &ith each
partic#lar risk
)herefore financial risk &o#ld "e assigned to the financial team mem"ers$ operational risk &ill
"e assigned to roles &ithin the project operational kno&ledge )his &ill "e the same for risk &ith
sec#rity or kno&ledge domain )hese &ill "e assigned to sec#rity personnel or road engineers
+if it is a road project or the risk is prod#ct malf#nction, )his minimises the contract risk and
increases contract compliance
=o&ever, some companies have separate risk management departments f#lly and solely
responsi"le to manage project risk as &ell as organizational or contract risks )hese people &ill
#s#ally "e people &ell e-perienced and *#alified in #nderstanding the so#rces of risk
Conclusion
Proc#rement plays a key role in the f#nction of an organization to "#y and sell goods and
services and is a core part of the organization5s rep#tation and transformation >d&ards +/00?,
stressed that project team roles and responsi"ilities is very important in proc#rement as &ell as
in the management of contracts )eam mem"ers sho#ld take control of all technical, legal, and
project management activities or re*#irements for the s#ccessf#l implementation of processes
)he a#thor insists str#ct#ring a team &ith varying disciplines is the most "eneficial &ay of
cond#cting proc#rement processes
=o&ever, this is done "ased on the prevailing sit#ation incl#ding the project environment$ "#t
also depends on the criticality of the project or the credence given to risk "y the c#stomer of
performing organization
! remem"er d#ring my &orking days in Li"eria, most government agencies and private
companies did not place risk as high priority, may"e "eca#se most contracts did not really
incl#de severe penalties for mismanagement$ and even the U@ organizations that did place
importance on risk management hardly referred to this plan on a reg#lar "asis =o&ever, as a
project manager that &ants to s#cceed to scope, "#dget and time, it is important to consider
contract risk )his is &hat ! did &hile in So#th S#dan
(rom my e-perience &ith contract risk, the "est thing is involve those &ho &ill "e responsi"le for
the day%to%day activities associated &ith the risk ;et them to identify, plan, monitor and control
and e-ec#te and close each and every risk !n this &ay the project manager can in t#rn find the
time to revie& res#lts and s#pport in the mitigation efforts and s#ccessf#l complete the re*#ired
performance of the contract
____________________________________________________________________________
_________
References
Scotti, J. (2007) Creating competitive advantage with strategic procurement, suppl chain
management!, Offshore, "ovem#er, p. $$ %&nline'. (vaila#le )rom* www.o))shore+mag.com
((ccessed* 2, -a 20.0).
/ro0ect -anagement 1nstitute (2002) A guide to the project management body of knowledge.
$th ed. "ewton S3uare, /(* /ro0ect -anagement 1nstitute.
Sollish, 4., Semani5, J., -orris, /.6.7. ed. 8 /into, J.9. ed. 20... Planning and administering
project contracts and procurement. :aureate ;ducation, 1nc., custom ed. <o#o5en* John 6ile
8 Sons.
9avid Carnes +/077, =usiness Contracts 8 >is5s online %online' (vaila#le )rom*
http*??www.ehow.com?in)o_22$@00A_#usiness+contracts+ris5s.html
;dwards, J.(. (200@) /ro0ect procurement management in practice!. 1n* Binsmore, /.C. 8
Ca#anis+=rewin, J. (eds.) AMA handbook of project management. 2nd ed. "ew Cor5*
(-(C&-.