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.
7 Comments
Dr Stephen Grey · 18 April 2018 at 4 h 38 min
Does the tool add up scores for the various questions? I realise that there may be some weighting applied as well.
Additive aggregation of scores, whether it includes linear weighting or not, allows for a very poor performance in one area to be masked by good performance in other parts of the rating, possibly offering a false sense of security, especially for inexperienced personnel.
There are ways around this with flags for unacceptably poor scores in any area or, drawing on MAUT methods, using multiplicative aggregation where appropriate. You need to understand where the figure of merit or, in this case, riskiness, is in a simple linear trade-off between factors and where a compromise with moderate scores on two or more factors will be preferred to a case that offers a very good score on one factor and a very poor score on another.
JFJ · 18 April 2018 at 20 h 15 min
Dear Dr Stephen Grey,
Thanks you for your interesting questions and observations. Please find herewith our replies:
Yes, the tool adds up the scores of the various questions. In this version, no weighting is applied.
This is because we have selected 20 questions that are representative for the various commercial and contractual risk areas that we typically see in projects.
In big multinational companies, I’ve seen risk questionnaires with more than 200 questions. But not all of the same level of importance and without the possibility to establish an overall score.
For TRaCRs, the questions have been carefully chosen to represent different risk categories, some more qualitative than quantitative. Some are very unlikely but, when they happen, the consequences are enormous (e.g. termination/rejection). Others are frequent risks (e.g. currency risks) but hopefully with a more manageable impact.
In order not to loose the focus on specific high level risks, we encourage users to also keep in mind the detailed answers with their specific ratings. Answers with rating 5 obviously have the highest priority, followed by 4 and downwards.
The advantage of using the general Contract Risk Scoring is that it allows to do benchmarking.
In certain circumstances a customization to a specific business or company is recommendable. Please contact us for such cases.
BR, JFJ
JFJ · 18 April 2018 at 19 h 48 min
In order to make more people benefit from Contract Risk Scoring with TRaCRs, we have now modified the version. You do not have to provide your e-mail address anymore.
Nevertheless, we do encourage you to provide it so that you receive the report by e-mail. Your e-mail address will be kept strictly confidential.
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