Contract Risk Scoring, 10 questions answered

Contract Risk Scoring is a hot topic. IACCM is actively promoting it. But, as this subject is quite new for many of us, we’ll all have a couple of questions. Here below we provide the answers to the most usual ones on the topic. If you have more questions, don’t hesitate to write in the comment section here below and I, or someone else, will certainly provide you with the answers.

1) How can I start with Contract Risk Scoring?

You could set-up your own scoring system, buy software or look for books on the subject. The most straightforward way to start is to go to an existing tool like TRaCRs – an abbreviation of Tender Risk and Contract Review system – available on https://afitac.com/tracrs/.

2) Do I need to be a contract expert to do Contract Risk Scoring?

Not at all. The very purpose of Contract Risk Scoring is to analyse “dry” contracts from the viewpoint of real-life users, situations and risks. For each question, TRaCRs is providing five possible answers written in simple language. It is much easier to choose out of multiple choices than to have to describe a risk from scratch. The report that you will get out of TRaCRs will help you to provide solid feedback on your contract to your risk board in a professional and focussed way. In the near future, we will try to include more tutorials within the system and we will certainly write more posts on the subject. We recommend you to follow us on LinkedIn or directly on our blog www.afitac.com .

3) Is Contract Risk Scoring something for big multinational companies or for SME’s?

It is something extremely useful for both. Big multinational companies usually have their own risk department. They naturally set up a risk evaluation questionnaire. For small and medium sized companies, a pre-formatted system like TRaCRs can be of great help in order not to reinvent the wheel. We have made a post on this subject: Manage your risks like “the big boys & girls” do!

4) When can I consider my contract is low risk or high risk?

On TRaCRs, 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. To give you an idea, a typical World Bank financed project got a score of 25 while a privately funded IPP project can easily go over 50.

5) When tendering, can I determine a level of provisions based on the score of my contract?

The golden rule is to provision 1% of contract price for each 10 points scored. This means that, if your project scored 30, we would recommend you to provision 3% for general contingencies related to contractual and commercial risks.

6) Can risk scoring increase my selectivity during Go-No Go meetings?

Certainly. You can probably not handle all the tenders you get to look at. So, you need to be selective. What better way to do so than to objectively establish the risk level of your potential tenders? If the success probability level is the same, the rational choice is to go for the less risky projects.

7) Can the risk score help you during negotiation?

Definitely, It will show the risk areas in the contract that you are negotiating. This visibility will give you clear targets of where to improve. If you set yourself the challenge to always lower your score, you are on the right track to negotiate balanced contracts for your company.

8) Is Contract Risk Scoring a costly affair?

Absolutely not. TRaCRs is a free tool, available to all (no membership required). And it will remain so. This is a service we provide to everyone working on contracts. It is our pleasure to share more than 20 years of experience on negotiating and analysing the risks in international infrastructure and renewable power contracts.

9) If a question/answers in TRaCRs is/are not applicable to my particular case, what should I do/answer?

First you have to think whether the question is really not applicable to your project. If you are convinced of it, you can simply choose the first answer with a risk level 0. No need to compute risk where there is none. This would artificially increase your score and, as you understood, the lower the score the better. For example, if the Contractor is from the country where the project is located, the question related to tax and importation is not applicable.

When answers are not exactly matching with your situation, we encourage you to choose the answer that comes closes to it. You can then provide some information in the box immediately below the answers to explain your choice and the difference with the actual situation.

10) Can TRaCRs be customized for my particular business, adapted to all types of industries/businesses?

It is possible that the current questionnaire doesn’t match perfectly with the risks your company is facing. In that case, you can write to info@afitac.com and ask for a more adapted version. The current version is especially suited for civil works, infrastructure and power projects. You are welcome to suggest adapted questions and answers for your industry / business.

That’s all for this time. Let’s keep interacting on such a passionate subject as is Contract Risk Scoring. Test TRaCRs on your specific project and let us know how did it go and if you find the outcome useful.

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About AfiTaC

AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “info@afitac.com”.