The risks on a project, as well as the rewards, need to be shared equitably.
Contracts have a significant role to play in what is sometimes referred to as managing with risk ie going ahead with a project while accepting that there will always be a degree of uncertainty… and that uncertainty can create opportunities, rather than always creating adverse risk consequences.
In The Contract in Successful Project Management, the authors argue that:
- as well as managing with risk, the contract needs to consider how risk is now shared between those two parties (and their insurers)
- it is not sensible to allocate all the risk to one party or to design a contract which increases the total risk to the project
- it is not appropriate to hide risks or assume they do not exist
- managing with risk is improved if the contract includes feedback mechanisms (including incentives/remedies for performance)
- relationships and culture relating to risks can be designed from the start – using the contract
- the project owner has the greatest power to manage risks relating to organisational failures – particularly by its choices relating to procurement strategy, type of contract and how risks are shared
- whilst the project owner often has – or believes it has – significantly more power when the contract is being created, sharing risks will drive successful project management
- the contract needs to mix carrots (incentives to create a net gain for all parties) with sticks (sanctions for failure)
- contract negotiation also impacts how risks are shared.
Contracts can emphasise the parties’ independence or their interdependence – their differences or their mutualities. It is the relative proportion of these elements (sticks v carrots) that will dictate the nature of their relationship.
What should you do?
Don’t wait for a project crisis before you establish a favourable culture within which risks are properly managed – do this right from the start with a balanced fair contract which shares risk so everyone can benefit.
Source: The Contract in Successful Project Management (2002)
