Talking about contract management, what are the latest evolutions and how can AfiTaC support?

In this post, we are talking with Jan Bouckaert about the evolution in contract management and the role AfiTaC can play in this.

What is evolving for contract management in the broad sense?

Jan: Some of the latest evolutions in contract management are as follows:

  • People are talking about new technologies establishing contractual relationships based on artificial intelligence. Often, proper reading of the contracts made by humans would already be a good start, wouldn’t it ?
  • Business relations are ever more international with inherent risks: fiscal exposure, disputes, integrity issues etc.
  • Even Small and Medium sized Enterprises are obliged to develop their contract management.
  • Negotiations are tough, even though win-win solutions should remain the objective.
  • Companies reduce their internal resources, reducing fixed costs but bringing overload, lack of expertise etc.

Out of curiosity, what does AfiTaC stands for?

Jan: AfiTaC is the abbreviation of “Advice for international Tenders and Contracts”. We are passionate about contracts. An important part of what we do is promoting Contract Management to a broader public than Lawyers and Contract Managers/Administrators. Our blog and exchanges on LinkedIn reflect this. For specialists, we challenge the status-quo based on real-live situations and arguments; for people building up their knowledge, we provide valuable learning bricks.

What can AfiTaC do to accompany the change?

Jan: Apart from our blog available in 4 languages (English, French, Portuguese and Dutch), which is quite unique, we also propose customized/adapted services. AfiTaC offers complementary support to leverage your teams at a far more attractive cost than external legal services and covering a broader scope – from contractual to commercial subjects, covering topics ranging from contract wording, to insurance, financial & tax issues etc. We do this based on 20+ years of experience.

Concretely speaking, how would we work with AfiTaC?

Jan: We will set-up a collaborative platform (cloud-based storage on servers in France, protecting your data) enabling flexible interaction: you can upload your questions and retrieve the answers. This will allow better tracking and sharing than a traditional e-mail solution. However, if you prefer a more traditional way, we can adapt. Of course, confidentiality, loyalty and professionalism are our guiding principles.

Can you tell us a bit more about the services you provide?

Jan: We will give you some examples of how we can create value for you:

Contract Hotline:

Based on a monthly fee, your team can contact us for commercial and contractual issues and receive a reply within 24 hours. The monthly fee will be adjusted, after prior agreement, based on the actual usage of the hotline in the preceding month: no bad surprises for you, visibility upfront and you only pay as per the value we create for you.

Negotiation Coaching:

In B2B relationships, surprisingly, the possibility to create or destroy value during negotiations is still largely underestimated. Often, the commercial staff receives the company’s wish list (must have’s, golden rules etc) but is lacking the arguments to defend their case and, even more, the skills to negotiate. Our coaching can make your team stronger and more effective in finding win-win solutions with your business partners.

Risk Management:

We can audit your contracts, provide a structured approached for risk management, set-up a contract risk scoring system and organize or participate in your risk boards.

Training:

Together, we can establish your team’s needs and build an appropriate training: commercial awareness, contract standards, negotiation practice, international business, contract management etc.

Integrity:

We can set-up a positive environment for this important, but often scary, subject so that your teams can make sure they remain proud of the healthy business environment in which you operate. This contains three steps: (i) establishing an adapted integrity policy and statement, (ii) providing training based on real-life examples and (iii) facilitate an alert mechanism to be used if the team fears that certain practices put their proudness at risk. This will be adapted to SME’s: compact and straightforward, not so sophisticated as in large companies who have dedicated resources for this.

Mediation and Arbitration:

While our goal is to avoid disputes to escalate by anticipation (with all the above services), we also support dispute resolution in a fast, cost effective and balanced way.

Can we test these services to see if they are useful for us?

Jan: Yes, you can. Our principle is to facilitate, as much as possible, the access to our services. You can step in as low as you want and hopefully expand when you see the value we create together.

Contract Management & Music, Time Bar struggle for Muse

When a Contract Manager receives a new contract to follow, probably the first thing she/he should look at is this: Is there a time bar for claims? 

The answer to this question will dramatically change her/his behavior during the contract execution. Together with Muse and their song “Time is Running Out” (of which we have quoted the relevant lyrics here below), we will analyze the consequences of time bars. You can listen while you read by clicking on the below link to YouTube:

What is a Time Bar?

Unfortunately, it is a not a bar where your can spend as much time as you want. Many definitions are available all saying more or less the same. I randomly present you the one given by “The Law Dictionary” (https://thelawdictionary.org) : “Stoppage put on exercising a claim or judgment after a period that was established by a law or custom.”

Original justification of Time Bars

Time Bars were introduced decades ago because Contractors / Employers used to pile up potential claims “just in case” to only launch them at a later timing most convenient to their interests. Usually this coincided with the time they had the maximum bargaining power, for example because the project was already built (for avoidance of counter-claims, no more risk of suspension etc).

In accordance with good contracting practice, both parties should be more transparent and should be pushed to table any issues as soon as they are aware of them, as soon as practical. Time Bars became a usual practice … even though one could regret it between mature and reasonable contracting parties.

The consequences of not claiming within the Time Bar

You will be
The death of me
Yeah, you will be
The death of me

Bury it
I won’t let you bury it
I won’t let you smother it
I won’t let you murder it

When you are beyond that maximum period to formulate your claim, it will simply be barred, not accepted anymore, “buried” with the words of Muse. Anyone can understand that feeling of injustice when the facts objectively show that your claim is valid but the clock says that the time is over. The three last sentences of the above citation show this feeling of resistance, this frustration.

Contractor’s feelings and reactions

Most of the claims barred by this mechanism are Contractor’s claims, so let us see with Muse what reactions this will bring to the Contract Manager.

I think I’m drowning
Asphyxiated
I want to break the spell
That you’ve created

…I want to play the game
I want the friction

The Contractor will feel asphyxiated, under huge pressure to present its claims in time. The Contract Manager, in order to protect himself, will rather formulate too many claims than too little. She/he wants to play the game.

Our time is running out
And our time is running out
You can’t push it underground
We can’t stop it screaming out

And we end up with a “claim machine”: claims for anything. You never know it will be useful. Umbrella claims, we will always be able to attach something to this.

I wanted freedom
But I’m restricted
I tried to give you up
But I’m addicted

Now that you know I’m trapped
Sense of elation
You’ll never dream of breaking this fixation
You will squeeze the life out of me

These “just in case” claims generate a lot of work for both parties, the one formulating and the one reacting. The involved resources don’t add any value if the claims are not legitimate, not substantiated. Key project players are drawn away from the real pro-active project execution. And, the positive atmosphere of the project is spoiled: “what, another claim! That’s outrageous”, …

Time Bars in FIDIC contracts

FIDIC 99 has the Time Bar in sub-clause 20.1 of Red, Yellow and Silver Books with the following wording: “If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim.”

This clause clearly spells out the hard consequences. If you are late, you loose it all. Never mind how justified your claim is and how impacting the consequences are. This also applies for late claims related to Employer’s acts and Risks. On top of that, the Employer doesn’t have an equivalent Time Bar in its claims clause, sub-clause 2.5.

Fortunately, the new clause 20 in FIDIC 17 deals with both Contractor’s and Employer’s claims in the same way. The time bar is now in sub-clause 20.2: “If the claiming Party fails to give a Notice of Claim within this period of 28 days, the claiming Party shall not be entitled to any additional payment, the Contract Price shall not be reduced (in the case of the Employer as the claiming Party), the Time for Completion (in the case of the Contractor as the claiming Party) or the DNP (in the case of the Employer as the claiming Party) shall not be extended, and the other Party shall be discharged from any liability in connection with the event or circumstance giving rise to the Claim.”

General recommendations about time bars

  • Do not set Time Bars too short; the minimum is 28 days. Setting it too short will inevitably lead to a “claim machine” environment where the parties start formulating a continuous stream of claims so that they can always find a way to argue that they started the claim in time. I would recommend time bars not to be below 90 days.
  • Make the clause symmetrical / bilateral, meaning that the same time bar and duration should apply to both parties. During negotiations, parties tend to become much more reasonable when they know the same provision will also apply to them.
  • Ideally, the entitlement to claim should only be reduced to the extend that the other party was unable to mitigate its losses due the claim being late. This will avoid barring of obvious entitlements that could not be mitigated anyway.

Let us stop with the stereotypes that Contractors are just claim machines and look for the reasons. The vicious circle of ever lower time bars is not going to help. The above post and the music of Muse allow us to rethink our ways of working in a positive atmosphere outside of the rush of day-to-day projects.

This post is part of our series illustrating important contract management subjects by music to make it more fun. You can click here to see other posts of that series.

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 “advice@afitac.com”. 

During/after holidays is a good time to self-assess your commercial & contract competences.

Now that we are all on holidays or just coming back is the good time to do a relaxed but critical self-assessment of our competences as Commercial or Contract Managers. This will enable you to identify your development areas for the next year.

For this self-assessment, 10 subjects have been carefully selected enabling you to perform the assessment in 2 minutes. It is targeted to Project, Contract and Tender Managers mainly active in construction, infrastructure, oil & gas and renewable energy projects. Of course, if you are slightly out of this focus group, you can still give it a try.

To keep it short, we had to leave out other important subjects like indemnity, termination, force majeure etc. By no means the questionnaire has the intention to cover all required knowledge. It is only a representative sample to establish the depth of your knowledge.

Your information will be kept strictly confidential and will not be communicated by us to anybody other than to the e-mail you may indicate, but it’s not mandatory, to receive the assessment report. Without e-mail address, you can still click on “submit” and get the result.

If you have any comments, suggestions or encouragements, you can provide them as a comment to this post.


Welcome to your Commercial and Contract self-assessment

Please select the most representative answer for you on each question. Only take an answer further down the list if all of the preceding answers are also true (except the first answer, of course).

1. Are you familiar with the following types of Customers?
2. Are you familiar with any of the following types of Contracts?
3. Risk allocation between Contractors and Employers
4. Delay and performance liquidated damages
5. Limitations of liability
6. Warranty
7. Bank guarantees
8. Currency risk protection
9. Fiscal Risk
10. Insurance

Thanks for completing your self-assessment.

Please provide your email to receive your assessment report (not mandatory / confidentiality is guaranteed)

 

Contract Risk Scoring, how can it help you in your decision process?

Introduction

This post analyses the decisions you can take with your Contract Risk Scoring methodology & tool. The objective is to maximize your chances to achieve your desired business results.

What is Contract Risk Scoring ?

Contract Risk Scoring is a methodology to identify risks in contracts, to attribute a representative risk score to each relevant subject (with the help of a tool) and to generate an overall score for the contract. Usually, specific risks on the relevant subjects are rated from 0 (low) to 5 (high) with an overall contract score on a scale of 100. The higher the score, the more riskier the project.

This methodology is specifically suited for the project businesses: infra, construction, turn-key equipment supplies, power, renewable energy, oil & gas etc. Typically, all the subjects in the image below are covered:

You can also click on the image to access an example free-use tool: TRaCRs – Tender Risk and Contract Review system.  

Why should you use Contract Risk Scoring ?

Unbalanced contracts can become a hurdle for the achievement of your business targets. A general differentiation between “balanced vs unbalanced contract” is too vague, too qualitative as a concept. Contract Risk Scoring tools compute an overall score for the contract/project and include also detailed scores per topic (20 representative questions & answers).

If you are unfamiliar with the concept of Contract Risk Scoring, we recommend you to read the following article first: Contract Risk Scoring, 10 questions answered

4 decisions that can be made with a Contract Risk Scoring system

You can take the following decisions with the support of a Contract Risk Scoring system (and TRaCRs specifically):

1. Deciding whether you should go, or not, for a project.

The Go-No Go decision can be based on the overall Contract Risk Scoring. Typically, scores above 60 or 70 should strongly make you consider a “No Go” decision. Also, a combination of several high scores on specific topics can trigger a “No Go” decision. This is because the project would have too many hurdles so that you can no longer realistically expect to achieve your outcomes.

2. Deciding what are your target improvements during negotiation.

The subjects where a high risk-level answer (4 or 5) is applicable as per the RfQ (Request for Quotation), should get your attention. Either, you can accept the risks and mitigate / control them. Or, you identify them as a negotiation target to improve your position. If you don’t succeed, you can still take a “No Go” decision and get out of the project.

Contract/Negotiation training

3. Deciding on what level of provisions you want to include in your pricing.

You are exposed to a risk when, in a certain number of scenarios, your company is going to lose money. Taking risk “for free” is not a good long-term strategy. And, believe me, companies do it more often than one imagines. This, due to a lack of acknowledgment and valuing of risks. Adverse scenarios will occur, sooner or later, as per their statistical probability. You can be lucky on a single contract. On a series of projects/contracts luck is not even an option and you have to make a provision to cope with the problems when they occur. You will keep unused provisions on projects where the risk doesn’t materialize for future projects. Like this, you can amortize the cost of overcoming specific risks over a project portfolio.

4. Deciding on what level of profit you want to have on a contract.

Of course, there is a correlation between risk taking and profit. If risky projects would not be more profitable, why would anyone go for them? Less risky projects are very attractive. Consequently, price competition is higher and profit margins go down. To tender successfully for a project, you need to be aware of the Contract Risk Scoring. With that information you can lower your margin for balanced contracts and increase it when you are taking higher risks.

Catalogue AfiTaC

Conclusion

Risk analysis is moving back to where it belongs, the decision process. Contract Risk Scoring tools help you to support the identification of the commercial & contractual hurdles that may stop you from achieving your desired outcomes. They help you to focus on the following:

  • implementation of mitigation actions,
  • establishment of acceptable risk and liability levels,
  • determination of provisions & margin levels etc.

TRaCRs is a free Contract Risk Scoring tool suitable for the construction business, for infrastructure projects, for power plants etc. The tool can be adapted for your specific business and expanded to focus on specific hurdles. Don’t hesitate to contact us so that we can discuss this in further detail for your specific case.

For further reading on Contract Risk Scoring, we recommend you the following publications:

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”. 

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 advice@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.

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”. 

Contract Risk Scoring: how does a World Bank contract for PLANT score?

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:

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.

IACCM is promoting tools to score the risk of your contract portfolio

IACCM, the International Association for Contract & Commercial Management, is promoting that we would start risk scoring our contract portfolio. Here is an extract of what they state on their website:

We’ve all heard stories about bad contracts that caused a crisis, cost a fortune and killed careers.  Yet despite these scandals, most people still have little insight into the good, the bad and the ugly of their own contract portfolio.  Many of us will still suffer serious financial pain because of contractual weakness that reveals itself too late.  But what if we could get ahead of the problem?  What if we could analyze, measure and score our contract terms, and flush out the weak links? Well now you can.

With contract scoring, […] you can benchmark your contracts against your peers and demonstrate measurable improvements in performance.  You can ensure that higher risks are factored into pricing and commercial decisions.  And you can demonstrate how contracts make hard, measurable contributions to the financial performance and health of you business.  

At AfiTaC we fully agree with the above words. Even more, with TRaCRs, the Tender Risk and Contract Review system, we have developed a tool for contract scoring. This tool will rate your contract on 20 different subjects from 0 (very low risk) to 5 (very high risk) enabling you to identify the problem areas, subject by subject, and also in the aggregate for your project. 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.

We recommend you to:

In case you would like a demo on your specific contract, the AfiTaC team is willing to fill out the tool with the relevant answers for your contract for the 5 first candidates that request us to do so on the following e-mail: tracrs@afitac.com. Free of charge, of course!

By doing the above actions, at AfiTaC, we hope that we can contribute to your objective to negotiate and execute balanced contracts. Please don’t hesitate to write us, in the location foreseen here below, with any reaction you have on this subject.

Thank you FIDIC for explaining changes introduced with FIDIC Rainbow Suite (ed. 2017)

Maybe you have already received it from another source but this is a must-read. I therefore prefer to also share with you the FIDIC document available at the link below. It explains the changes from the first (1999) to the second (2017) edition of the Rainbow Suite (Red, Yellow and Silver Books):

http://fidic.org/sites/default/files/press%20release_rainbow%20suite_2018_03.pdf

After 20 to 30 minutes of reading, you will have a good understanding of the changes. Most of us have over a decade of experience with FIDIC 1999. We know the clause numbers and where to look for the appropriate mechanisms. Here you have a short summary of what I got out of reading the attached document and where to find the changes:

There are few but important changes to the contract structure and some relocated clauses:
  • Limitation of liability is no longer in Clause 17 but has been moved to become the last sub-clause of Clause 1.
  • Former “Force Majeure” has been renamed “Exceptional Event” and is delt with in clause 18.
  • Insurance has been moved to clause 19.
  • We now have 21 clauses. Former clause 20 is split in two parts to deal first with claims (new clause 20, also covering Employer’s Claims) and then only with disputes (new clause 21).
FIDIC cares about conflict/dispute avoidance:
  • There are encouragements to reach agreements between the Parties.
  • The role of the Engineer or Employer’s Representative is clarified in order to “act neutrally between the Parties” on certain issues and “to fairly consider the amount of interim payment due” (sub-clause 14.6).
  • FIDIC favours standing Dispute Avoidance/Adjudication Boards (now DAAB instead of DAB) under clause 21.
Step-by-step approaches also reflect this. The parties will know where they are in the process on the following subjects:
  • Claims and determinations (sub-clause 3.7).
  • Unforeseeable conditions (sub-clause 4.12).
  • Review of Contractor’s design (sub-clause 5.2).
  • Advance payment (sub-clause 14.2), interim payments (sub-clause 14.6) and Final Statement (sub-clause 14.11/14.13).
  • Termination by Employer (clause 15) and Contractor (clause 16).
  • Employer’s and Contractor’s claims for time and/or money (sub-clause 20.2).
  • Disputes (sub-clause 21.4)

Variations are an important source of conflict and are therefore further detailed:
  • Employer to show financial arrangements are in place for Variations (sub-clause 2.4).
  • Mechanism to recover in case an instruction does not state that it is a variation (sub-clause 3.4/3.5).
  • Determination does not just apply to claims but also to issues like: variations, payments, EOTs, day-works etc.
  • Contractor’s right to object to an instructed variation (sub-clause 13.1).
  • Additional entitlement for changes to permits/permissions/licences/approvals obtained for the Works (sub-clause 13.6).
And finally, further Project Management best practices are incorporated: 
  • Regular management meetings (sub-clause 3.6/3.8).
  • Detailed requirements for initial programme and updates (sub-clause 8.3). For example, the requirement for a supporting report to overcome effects of any delay.
  • Detailed test programme (sub-clause 9.1) and repeat testing (sub-clause 11.6).
  • Equal time bar for claims from both parties (sub-clause 20.2).
Conclusion:

We will all need some more time before we are as familiar with the FIDIC 2017 editions as we were with FIDIC 1999. Personally, I am happy to change. FIDIC has put good efforts in making their standard contracts more balanced (dispute avoidance, dealing with delicate issues like variations and programme and further introducing project management best practices). The ultimate goal remains, of course, to have a maximum of successfully completed projects, which meet the expectations of all parties and the end users.

Other publications concerning FIDIC can be found by clicking here.

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”. 

Contract Risk Management for SME ‘s – Manage your risks like big companies do!

Introduction

This article provides useful information about contract risk management for SME ‘s.

Give a contract to anyone to read and see what they comment afterwards…

Most of us will find this a boring exercise, not sure what to look for. About half of us will find the contract conditions “quite OK” and the other half “absolutely unacceptable”. This has more to do with the personality of the reader than the actual contract conditions:

  • optimist vs pessimist;
  • more trustful or rather suspicious. 

Unless you are a contract expert with a solid experience and capacity to compare, in your head, against benchmark contracts, you will have a hard time to give a solid opinion and identify risk areas after a first reading.

How big companies work

Big companies have a solid staff to analyze such contracts. The commercial manager will look at the overall picture and will be supported by the legal department and several specialists (fiscal/tax, finance, insurance). They will systematically set-up a risk review system in which the team can identify, track, mitigate, establish value (risk provisions) and, last but not least, validate the risks that necessarily have to be taken by the company in order to secure a good deal.

Contract Risk Management for SME ‘s

TRaCRs – free tool for Contract Risk Scoring

What can you do as a small or medium size company (SME)? … Certainly not a massive recruitment.

But how then can contract risk management for SME ‘s be done without additional resources? … Having commercial managers with a broad enough spectrum is the objective but also a challenge. A good start is to have your commercial manager fill out the contract information in TRaCRs, which is an on-line tool that can be used free of charge (accessible at the following link: TRaCRs).

Twenty questions, carefully chosen to cover the whole spectrum of commercial and contract risk, will be asked. You just have to select the most representative answers. Automatically, this will establish the corresponding risk level on a scale from 0 to 5 for each topic. And also the Contract Risk Score for the overall project. 

Click here to get answers on 10 usual questions regarding Contract Risk Scoring.

With the Contract Risk Scoring report, you can hold decisive meetings

By e-mail, you will immediately get a report, listing the answers with their rating. Based on this report, good practice is to set-up a review board including the managers that will execute the contract and that are capable of judging the overall risk. Typically, you will start with “red flag” issues, having a rating of 5, and try to mitigate the risk, working down the list towards the lower ratings needing less attention. You can:

  • while still in tender stage, consider a deviation to the contract.
  • look for mitigation measures (e.g. establish an action plan to avoid that the risk materializes; measures that will keep the consequences of a risk event under control; insurance etc).
  • provision the risks based on their probability of occurrence and impact.
  • build a consensus within your team on risk-taking, which is a good foundation for successful project execution.

You can click here to get more information on typical decisions made with the Contract Risk Score.

The project’s Contract Risk Score

A Contract Risk Score for the whole project of below 30 means the contract has low risk. An example of this are projects with World Bank conditions.

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. 

Next steps & conclusion

If you find that the current questionnaire doesn’t match with the risks your company is facing, you can write to advice@afitac.com and ask for a more adapted version.

Most of us know that contract risk management for SME ‘s will be a “must have”, sooner or later.  To be a successful company in the long run, pro-actively managing the risks is essential. So, better to start now and not miss the boat!

You can find other articles on Contract Risk Scoring on this blog by clicking here.

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 publications on LinkedIn and writing to us ” advice@afitac.com “.