contract risks in project management

8/12/2019 Contract Risks in Project Management

http://slidepdf.com/reader/full/contract-risks-in-project-management 1/5

Contract Risks in Project ManagementJohn 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 !fcontract 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 andthat 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 orderingmethods 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 andincreases 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, andproject 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 placeimportance 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.oshore+mag.com (ccessed* 2 -a 200).

/roect -anagement 1nstitute (200) A guide to the project management body of knowledge.$th ed. "ewton S3uare, /* /roect -anagement 1nstitute.

Sollish, 4., Semani5, J., -orris, /.6.. ed. 8 /into, J.9. ed. 20. Planning and administering project contracts and procurement. :aureate ;ducation, 1nc., custom ed. <o#o5en* John 6ile8 Sons.

9avid Carnes +/077 =usiness Contracts 8 >is5s online %online' vaila#le rom*http*??www.ehow.com?ino_2$@00A_#usiness+contracts+ris5s.html

;dwards, J.. (200@) ‘/roect procurement management in practice!. 1n* Binsmore, /.C. 8Ca#anis+=rewin, J. (eds.) AMA handbook of project management. 2nd ed. "ew or5*-C&-.

http://www.ehow.com/info_8246003_business-contracts-risks.html

http://www.ehow.com/info_8246003_business-contracts-risks.html

contract risks in project management

Documents