Contract Risk Management:
Contract Planning Risks

Importance of contract prior to work
- Customers have their greatest negotiating leverage before start of work. Once work starts it is often difficult to reverse course because of time constraints and resources.
- About a third of my outsourcing consulting services involves work as a consultant in legal disputes between customers and suppliers, and millions of dollars in damage claims. In most cases, no contract existed between the parties – at best, only an MOU. I've recently been an expert witness in such a matter with 10,000 pages of depositions and 1,000 exhibits from both sides. Very expensive.
- Contracts can take only a short time to complete. Time is reduced if the customer has a draft contract proposal ready when the supplier is selected, and if the draft proposal T&C's are within the range of industry practices.

Do not underestimate the project requirements
- Attitudes such as "what we need is not rocket science" or "the service provider is the expert" too often results in weak contracts and eventual unsatisfactory performance.
- Even major corporations make this mistake. For example, Boeing Aircraft said in a news article in the Seattle Times a couple years ago that the 787 program delay was due largely to their over-estimating key off-shore supplier capabilities.
- Also, be sure that your project requirements of the supplier comprehend the sometimes extensive requirements of your key customers.

Avoid using the bidder / supplier's templates
- Best practice contracts for the customer will in many cases, be almost entirely different than the bidder "standard" contract template.
- Bidder templates are often highly favorable to the service provider. Terms important to the customer either weak or missing entirely - for example: influence in selecting supplier's project manager (often a key factor for project success), contract termination restrictions on the bidder, liability limitations for the customer, comprehensive and relevant performance measures.

Plan for RFP language to be incorporated into the contract
- Be sure to consider how supplier responses will be incorporated into the contract. For example format of costing detail, expected PO lead-times, warranty, prices for potential future services – important if a multi-year contract.

Key objectives in entering the contract?
How will it be known when these objectives are met?
Arms-length relationship or partnership?
Fixed-fee, time-based, cost plus, or fees dependent upon results?
Under what conditions if any, will changes in pricing be allowed?
Should contract terms with other key parties be incorporated?
Importance of other services now or in the future?
Special or uncommon service requirements?
Need for involvement in the management of sub-tier suppliers?
How high are the "switching costs" to change suppliers?
Need for access to privately-held supplier financial statements?
How best to protect owned IP if the supplier becomes insolvent?
Have similar contracts proved enforceable if work is offshore?
Likelihood of including consequential damages; how to measure?
… and other issues depending upon circumstances and requirements.