Question

Discuss the role that risk management plays in contracting and contract administration. What things can an organization do to minimize problems arising from broken or inadequately fulfilled contracts? Share an example from your own work experience or from materials you’ve read in the course so far.

Answer 1

ANS.

The fact is, contracts are the heart of how your business mitigates risk and increases growth. Using the right processes will help protect you—and your organization from liability.

Contracts serve multiple functions. They’re also the DNA of a company—vital to the success and growth of every type of business.

Don’t get stuck with unnecessary risk. Whether it’s in the drafting, or negotiation process, mitigate problems with these best practices.

Risk Management : 1. Create Transparency

Lack of transparency is a recipe for errors: from frustrating scope creep, and revenue loss, to contract clause errors, and increase costs.

Errors are never deliberate, but deliberately eschewing a system that allows you more transparency is a mistake. The errors then become burdens that cause unnecessary lag and disruption to your business deals and processes.

Contract errors are difficult to enforce, can be difficult to fix, and can end in canceling a crucial contract altogether.

• Transparency means that vague language is reviewed and replaced with more specific, agreed-upon language.
• Clear-up any misunderstanding in how you use terms by creating clear definitions of key terms.
• Identify every risk scenario and define it clearly for your business, and where the risk originates: whether as a point of regulatory compliance, or from a third-party.

Risk Management : 2. Review, and Review Again

Review begins with clarifying misunderstandings, and defining terms so that everyone’s on the same page. However, it means creating a clear, audit-able trail of the negotiation process, too. So that you have a running summary from which you can test every area of a contact, and all your contracts, for accuracy, and clarity.

• Are rights and responsibilities clearly defined?
• Do you agree on the soundness of confidentiality terms?
• Are indemnity clauses clear and complete?

Then, be sure to clearly define, and review how and in what ways risk transfer is appropriated.

Risk Management : 3. Qualify Risk Transfer

This is a higher-stakes area in contract risk management and contract negotiation. When you consider risk transfer, you’re considering loss and how that loss is insured—not just for whom. Harvard University advises to transfer risk in a number of ways:

• Financially – To offset all responsibilities, or to share this as a means to limiting revenue loss.
• Indemnity terms – Negotiate indemnity terms that hold you, and your business harmless from any legal consequences and that merit compensation.
• Liability terms – Conversely, guard your organization against risk with a sound wall of liability limits.
• Subrogation waivers – By and large, insurance is a main route to waiving subrogation rights in any loss. Closing any gaps in risk by upping commercial insurance, adding riders and naming third-parties is a must-do step to support your contractual waiver terms.

How to Prevent Risks

Two factors are fundamental in preventing the risks that arise when a contractor is hired: the contracting policies of the company and the attitude of the project manager. The contracting policies of the hiring company can cause many constraints in the project manager’s work (e.g., many companies always hire the contractors that offer the lowest prices, without analyzing their structure or experience). Changing the company’s policies is difficult, because it depends on the level of influence and autonomy of the project manager inside the organization, but a preventative attitude against risks during the contracting process is his/her obligation. The project manager plays a decisive role during the contracting and management of contractors, and therefore must always use the best practices that can help to reduce risks.

it is possible to suggest four steps that can help a project manager with the efficient management of contractors:

• contract planning,
• contractor selection,
• contract administration, and
• corrective actions.

Contract Planning – Take the Time to do it Right

One of the first problems faced by a project manager when hiring a contractor is also often one of the biggest obstacles throughout the whole project: lack of time! Many times the construction needs to start instantly after the signing of the contract, obliging the hiring company to select only those contractors that can start immediately. As many companies do not have an updated list of prequalified contractors, this lack of time in the initial preparation can cause failure in the contracting.

Selecting Contractors – Use Your Planned Criteria

Once the scope is defined and the selection criteria agreed, the moment of hiring the contractors comes. Beginning with the contractors’ proposals, the project manager and his or her team must select the contractors based on the advantages and risks that each one can bring to the project. A necessary part in evaluating a contractor is to review:

• The documentation of the company and employees,
• Good references of past work,
• Price, and
• Company structure

Contract Administration – REALLY be in Control

Once there is a well-detailed contract with all the conditions agreed, the work starts up on the job site. From now on, the project manager has the responsibility of making the contractors fulfill everything that is in the contract, applying all of his or her efforts to manage the contract as best as possible. One of the few things that the project manager knows for sure is that things will change, and it might be necessary to change the contract during the execution of the project.

Corrective Actions – Take Actions Based on Trustworthy Data

How can one determine which actions are necessary to put the project back on track? Closely follow the results obtained from the contractors, comparing them to the contract and to the project schedule. Because of an insufficient planning capacity in the majority of contractors, the general contractor is obliged to keep close control of the contractors’ work and try to anticipate any problems.

Following the productivity of the contractors’ workers is not the responsibility of the general contractor’s team, but we know that this is often necessary because few contractors have real control over the productivity of their workers. The biggest problem is that many general contractors do not prepare the planning structures necessary in order to closely follow the contractors’ work. This practice can make the hiring company only notice a problem when an important milestone is not achieved on time.

Planning and Control – There is No EFFECTIVE Management without EFFECTIVE Control

The contractors’ work plan is the basis for contract control, that is, there is no effective control if there is no planning. After deciding on the final construction schedule, the main deadlines are put into the contractors’ contract as constraints to guarantee that the most important stages of the project will be delivered on time to the general contractor. Performance and productivity goals are also specified in order to facilitate the control of project execution.