Contract risk management and mitigation strategies

Contracts involve risks. How could these risks be mitigated? Be sure to explain which role (or roles) on the project team within the performing organisation are responsible for identifying and remedying the results when said risks materialise.

A number of inherent risks are woven into certain projects: for example, if the project manager is not sufficiently on task and driven to ensure compliance or underestimates the needs of the project, the project may go over-budget and over time. Due to changes in the organization's leadership "priorities could change in the middle of the project, rendering some objectives moot and elevating previously discarded concerns" (Melbye 2013: 9). Failure of third parties and contractors may result in delays or impingements of quality. The IT department may not adequately support project needs with appropriate computer software, causing delays.

A contract can mitigate risk by a "narrative description of the deliverable and a sample format;" specifying the timing of when the government should expect the project and the level of details required of the deliverables; clearly defining the roles and responsibilities of all organizational members for the deliverables, and also noting "defined dependencies, or other tasks or deliverables that have an impact on content and timing (that is, one deliverable depends on completion and acceptance of another) (Melbye 2013: 9). Along with a timetable, there should be a quality review board which determines how each phase of the deliverables meets specifications. This mitigates risks by ensuring that if quality is not satisfactory, the problem is identified immediately and addressed, not towards the end of the project.

Payment schedules can also offer risk mitigation possibilities. "Milestone payments provide sound contract protection because no funds are expended until the government is satisfied with the quality of the deliverable. At no point in this type of contract does the government make payments based on consultant hours -- payments are made only when a deliverable of value has been received and is of acceptable quality" (Melbye 2013: 10). Milestone payments are thus far superior to 'lump sum' payments because it ensures that there is a financial incentive to maintain a high level of quality at every phase and the payee can cease payment and even terminate the contract if the desired specifications are not met. Also, because payments are directly tied to performance, not merely hours logged on the project, this reduces scope creep and the likelihood the project will generate waste.

Other payment options designed to mitigate risk include retaining a specific amount (10% of the total value of the deliverable, for example) until quality standards are deemed satisfactory (Melbye 2013: 10). Service contracts can also contain provisions for risk mitigation, such as if a certain number of failures to perform within a specific time frame occurs (Melbye 2013:11). Financial and legal personnel must be particularly mindful of the types of warranties used to guarantee the quality of the deliverables, regardless of the payment process. "If the software vendor and implementation vendor are different, it might be difficult to get the implementation vendor to agree to warrant the software against requirements" (Melbye 2013: 10). The warranty obligations should be determined before the final contract is agreed to by all parties.