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Assessing potential risk is not easy. But being able to understand what could go wrong on a project might be the difference between survival and failure. Managers need to find a balance between quick wins, such as reducing costs and generating cash, and long-term aspiration for growth. A risk management strategy is essential.

Risks are always changing. What you did last time may not work in the current set of circumstances. Does your organisation really understand risk and reward?  

How should a contracts professional plan for and manage the unknown? The simple answer is you cannot allow for every possible eventuality but you can hedge your bets. Is asking your supplier to take all the risk the right thing to do? Are they sufficiently equipped to shoulder this burden and will you be inflating the price you pay due to the risk premium the supplier is attaching to a risk, which, by its very nature, may not occur?

Risk and reward is all about understanding the consequences of agreeing to contract for something in a certain way.

Contract managers need to understand how deals are put together and the implications of how commercial tensions can alter the shape of the deal and affect risk and reward. Being able to assess opportunities and threats while staying aware of the bigger picture is essential.

It is good practice to only accept a risk if you are in full control of it and can influence any corrective actions. By simply pricing in a sum of money to cover the risk you may protect the bottom line, but this will not stop adverse publicity and potential reputational damage. If senior management wants to own a risk, it is essential that this is based on an informed decision where all the implications of doing so have been clearly articulated by the contract manager and other key members of the team.

Risk management is an established profession in its own right and there are various risk tools and models that can predict and manage risk. 

Even if you have a risk manager on board, the contracts professional will still be key to any risk strategy because understanding the contract and the implications of failure is an important part of the risk process.

Best practice would be to:

• Include risk management obligations on the parties in the contract
• Insist on regular risk meetings and the frequency and format of the reporting as contractual commitments.
• Fully understand the contract and the deliverables of both parties to be able to monitor the likelihood of a risk.

If you are tracking the obligations due in the next few months you can see what is on track and what is slipping. By adding a ‘traffic light’ ranking system this can easily be distilled into a summary for reporting purposes. If a potential risk has been identified as particularly problematic, it may be possible to put steps in place that could be implemented if the worst did happen. For example, it is common for IT contracts to contain business continuity obligations and disaster recovery provisions.

A contracts professional can’t use a crystal ball to predict and guard against every possible risk – but the key is knowing what to do when a risk presents itself and understanding the ripple effect on other parts of the agreement.

Next: Changes within the contract >>