Contract Risk Scoring is an effective way to analyse contracts for their risks on commercial and contractual issues. But how can you do this?
AfiTaC has developed a free tool, available to all, TRaCRs, to rapidly obtain an objective analysis of the commercial & contractual risks. By replying 20 questions covering the whole spectrum of contractual and commercial issues you get an overall Contract Risk Scoring. You will also have identified specific risk areas on your project.
In previous posts, we explained what is Contract Risk Scoring and how works TRaCRs. We recommend you to read these:
- IACCM is promoting tools to score the risk of your contract portfolio
- Manage your risks like “the big boys & girls” do!
TRaCRs will rate your contract on 20 different subjects from 0 (very low risk) to 5 (very high risk). A score below 30 means the contract has low risk. Between 30 and 50, we find the projects with moderate contract risk. Above 50, we can speak of a high risk project that should be followed-up with special care.
Now I am curious to see this applied on a typical World Bank Contract for PLANT (click here to access the reference contract on the World Bank site). I am a big fan of these WB contracts! They strike a good balance between the rights and obligations of Employers and Contractors.
Here are the results:
- You can access the TRaCRs report here: TRaCRs report for World Bank PLANT project
- The Contract Risk Scoring is 25. Not surprisingly, this is a low risk contract. With these limited risks, we would recommend you to provision 2.5% for general contingencies. The golden rule is to provision 1% of contract price for each 10 points scored.
- The worst score for an individual question is 4. This is for the question related to the payment terms. Indeed, the payment terms of “10% for advance payment, 80% on shipment and 10% on acceptance” lead to a substantially negative cash flow on projects where the supplies are not off-the-shelf but specifically designed and manufactured for the specific project.
- One answer scores 3: Contractor may have to implement variation orders without prior agreement up to a total value of 15% of contract price (for all variation/change orders jointly). This is quite harsh for the Contractor when a lot of disagreement exists on the price adjustment or the extension of time.
Such a report will enable you to proceed to a risk board meeting to get the green light to submit your tender. Also, the portfolio of ongoing contracts can be scored to identify risk areas and deal with risk with anticipation.
You can now try TRaCRs on your specific contract. And don’t hesitate to let us know your thoughts about the results.
You can contact AfiTaC in case you want to customize TRaCRs for your specific business.