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Risk Assessment in Public Contracts

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DOI: 10.21552/epppl/2019/1/4

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EPPPL 1|2019 Risk Assessment in Public Contracts 7

Risk Assessment in Public Contracts

Katherine Bloomfield*

This article aims to introduce a novel approach to risk assessment in public service commis-
sioning contracts, through the lens of the UK’s defence sector. It begins by providing a con-
cise background to the contemporary service commissioning tools and approaches that are
currently adopted by public sector organisations, paying particular attention to the contem-
porary implementation of framework agreements. Risk assessment in public sector contract-
ing is embedded by the choice of prescribed terms and conditions, which by design, are for-
malised within a contract to mitigate a menu of recurrent or common risks. Whilst the in-
terpretation, incorporation and reasonableness of the contractual terms and conditions are
readily acknowledged amongst legal practitioners as a fundamental pillar for risk assess-
ment, the dynamic patterns associated with risk remains undervalued. To fully account for
the dynamic nature of risk, a tool for mapping the migration of risk has been developed in
order to provide a new method of ex ante risk assessment to the design and inception of pub-
lic sector contracts.

Keywords: Contracts; Public sector procurement; Risk assessment; Systemic risk; Frame-
work agreements.

I. Introduction associated with contracts that fail to be completed

The efficacy of the procurement techniques adopt-
ed by the public sector in its purchase of goods and
services is a topic that has received growing atten-
tion. In current practice, it has become apparent that
in order to achieve successful procurement out-
comes, the public sector must first recognise the
repercussive effects that can arise from a misalloca-
tion of risk in the contract that underlies a procure-
ment. Often enough, such misallocations of risk are
DOI: 10.21552/epppl/2019/1/4
* Katherine Bloomfield is a Post Doctorate Research Associate at
the Risk Institute, University of Hull.
1 European Parliament and Council Directive, 2004/18/EC of 31
March 2004 on the coordination of procedures for the award of
public works contracts, public supply contracts and public ser-
vice contracts [2004] OJ L 134/114.
2 European Parliament and Council Directive, 2014/24/EU of 26
February 2014 on public procurement and repealing Directive
2004/18/EC [2014] OJ L 94/65.
3 PwC, ‘Stock-taking of administrative capacity, systems and
practices across the EU to ensure the compliance and quality of
public procurement involving European Structural and Invest-
ment (ESI) Funds’ prepared for the European Commission Luxem-
bourg 2016, available at: <https://publications.europa.eu/s/jDez
>.
on time, to budget or to the right specification. How-
ever, the principles of public sector management
(PSM) may also become negatively affected, tainting
the reputation of the public sector organisation in
terms of its perceivable interests, accountability and
undertaking of good administrative practices. The
careful assessment of risk is therefore critical to the
prolonged performance of public sector organisa-
tions, a process which is partly dictated by the choic-
es made during the selection of its procurement in-
struments.
Since the establishment of the 2004 Public Sector
Directive,1 (prior to amendment in the 2014 Direc-
tive)2 the rise in implementation of aggregated pro-
curement instruments across government has pre-
vailed, as reflected by the proportion of government
tenders that have been classified as operating under
either: (i) framework agreements, (ii) dynamic pur-
chasing systems, or, (iii) joint purchasing activities.
Figures collated in a report prepared for the Euro-
pean Commission in 2016 revealed that the share of
framework agreements accounted for 43% of public
sector procurements in the UK,3 further demonstrat-
ing the recent prominence of this progressive pur-
8 Risk Assessment in Public Contracts
chasing instrument. By definition, a framework
agreement represents
an agreement between a contracting authority and
one or more suppliers, contractors or service-
providers the purpose of which is to establish the
terms, in particular with regard to prices and,
where appropriate, the quantity envisaged, gov-
erning the contracts to be awarded during a given
period.4
In comparison to traditional procurement proce-
dures, framework agreements offer substantial ben-
efits to both the purchaser and supplier in terms of
their administrative efficiency gains, which can save
on resources, cost and time.5 Despite the apparent
benefits, framework agreements are subject to a
number of weaknesses, a topic which has gained
recognition amongst scholars and practitioners in the
field. A common criticism relates to the lack of trans-
parency granted by a framework agreement once it
has been concluded, together with the limited com-
petition within the frameworks, caused by the closed-
shop nature of the market. Current literature howev-
er fails to acknowledge that risk has the capacity to
transpire in an uncontrolled manner within frame-
work agreements, a stance that is advocated through-
out this article.
Diverting some attention beyond the holistic view
of the framework agreement, Andrecka draws a spe-
cific focus towards the call-off award process. In par-
ticular, Andrecka highlights the benefits reaped from
the rising implementation of framework agreements
across Europe, drawing particular attention towards
the risks that can emerge during the award of the
call-off contracts that underpin the overarching
agreement.6 Whilst the identification of risks found
within the award phase of a call-off contract provides
a valuable contribution to existing knowledge and
practice, little attention has been dedicated towards
the through-life performance of those call-off con-
tracts, and more specifically, how a call-off contract
may be formulated to deal with the systemic nature
of risk, beyond the contract award. To address this
gap in the literature, this paper aims to reveal new
insights into the potential risks which may arise un-
der a framework agreement’s call-off contract(s), and
the seismic impacts that can materialise as a result
of the procurer’s disregard for risks that lie beyond
the contract award. To undertake a real case analysis,
a sample of live framework contracts were obtained
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from a broad range of the Ministry of Defence’s ser-
vice commissioning projects. Within the research,
each call-off contract was dissected and analysed to
establish the anatomy of the contract in terms of its
structural elements and resultant risk-related behav-
iours, enabling the overall effectiveness of the con-
tracts to be determined.
II. Risk Mitigation in Public Contracts
For centuries, contracts have signified a legally en-
forceable promise made between two or more par-
ties, capable of being constructed orally and/or en-
cased within a written document.7 At their core, all
contracts comprise of the same fundamental pur-
pose, that is, they seek to provide legal enforcement
to an agreement made between the contracting par-
ties. Under close observation, the structure and con-
tent found within one contract will likely differ from
another, since a contracts’ content is often deter-
mined by the principal characteristics of the purchas-
ing requirement and procurement route taken. In
this case, when selecting the most appropriate con-
tractual method, the contract writer will consider:
the type of purchases involved; the anticipated vol-
ume of purchases; and the ability to specify the key
contractual terms and conditions with accuracy.8 In
doing so, through careful assessment, the contract
writer will seek to apply the most appropriate con-
tracting method which best aligns the project with
its desired outcomes, whilst offsetting any potential
risks that may otherwise arise as a result of the selec-
tion of an unsuitable contracting method.
In cases where the information surrounding the
works, services or supplies to be procured is not com-
plete, a framework agreement would most likely be
administered since it is often advocated in circum-
stances where the exact quantities of the requirement
4 Christopher Bovis, Public Procurement in the European Union (1st
edn, Palgrave Macmillan 2005) 64.
5 SIGMA, ‘Public Procurement: Framework Agreements’ prepared
for OECD 2016, available at: <http://www.sigmaweb.org/
publications/Public-Procurement-Policy-Brief-19-200117.pdf>.
6 Marta Andreka, ‘Framework Agreements: Transparency in the
Call-off Award Process’ [2015] 10 EPPPL 231.
7 Catherine Elliott and Frances Quinn, Contract Law (Pearson
Education, 2007).
8 The Defence and Security Public Contracts Regulations, Order
2011, SI 2011/1848.
EPPPL 1|2019
are unknown, or where there is a repeated require-
ment for the purchase of works, services or supplies.9
If then, the requirement for such purchases is
deemed practicable, a framework agreement may be
selected on the grounds of suitability, provided that
it constitutes an economic and efficient means of pur-
chasing. Presently, the UK government publishes of-
ficial guidance positioned towards meeting its over-
arching objectives (eg to deliver value for money, re-
main transparent, and so on). One prominent publi-
cation, the Green Book, covers a broad range of the
government’s obligatory policy areas, whilst provid-
ing a quick reference guide for the management and
facilitation of outsourced arrangements that may be
categorised as being Public Private Partnerships (con-
tained in Annex A4 of the Green Book).10
Whilst the careful selection of an appropriate pro-
curement method is critical to the success of the
project undertaken, it must be highlighted that the
licit content and structural elements of the associat-
ed contracts (or call-off contracts) are what deem each
repeated purchase as being legally enforceable, and
therefore act as a crucial contributor to the overall
success of the procurement activity. In other words,
the terms and conditions set within the overarching
framework agreement are what governs and dictates
the legal obligations of all suppliers awarded with a
call-off contract, under the agreement.11 What this
means is that the terms and conditions included un-
der the framework provision are closely replicated in
every associated call-off contract. With this in mind,
the anatomy surrounding each call-off contract may
be easily comparable and the commonality of these
9 SIGMA, ‘Public Procurement: Framework Agreements’ prepared
for OECD 2016, available at: <http://www.sigmaweb.org/
publications/Public-Procurement-Policy-Brief-19-200117.pdf>.
10 Her Majesty’s Treasury, ‘The Green Book: Appraisal and Evalua-
tion in Central Government’ [2018] London: HM Treasury.
11 Ministry of Defence, ‘Framework Agreements’ (The Commercial
Toolkit, 1 November 2018) <https://www.aof.mod.uk/aofcontent/
tactical/toolkit/content/topics/framework.htm?zoom_highlight
=framework> accessed 16 November 2018.
12 Peter Gillies, Concise Contract Law (Federation Press, 1988).
13 Stephen F LeRoy and Larry D Singell, ‘Knight on Risk and Uncer-
tainty’ [1987] 95(2) Journal of Political Economy 394.
14 Alasdair Marshall, Udechukwu Ojiako, Victoria Wang, Fenfang
Lin and Maxwell Chipulu, ‘Forecasting unknown-unknowns by
boosting the risk radar within the risk intelligent organisation’
[2018] <http://www.sciencedirect.com/science/article/pii/
S0169207018301420> accessed 28 December 2018.
15 Fiona Cownie, Anthony Bradney and Mandy Burton, English
Legal System in Context 6e (Oxford University Press, 2013).
Risk Assessment in Public Contracts 9
procurement instruments becomes apparent once
the contracts have undergone a detailed, cross-com-
parative analysis. Whilst such generalisability is ad-
vantageous when determining the effectiveness of
framework agreements in the defence department
(and even, the wider public sector), the call-off con-
tracts should first be examined more closely for their
proficiency in the mitigation of unwanted risk. To
begin with, the call-off contracts must satisfy the
overarching aims of a contractual document, that is,
they must be capable of enforcement in the prevail-
ing court of law.
In English Contract Law, to achieve a legally bind-
ing status, a contractual agreement must comprise
of four essential elements: offer, acceptance, consid-
eration, and, the intent to create legal relations.12
Without these fundamental contractual pillars, a con-
tract would be nullified in the English Court of Law,
and so, the contract must be carefully drafted to en-
sure that it reflects the formal intentions of the con-
tracting parties. In all cases concerning contract law,
the contract may only be deemed successful if it per-
forms as was intended, and where no recourse to the
courts is required. Despite this, a contract may be-
come vulnerable to an unanticipated event, which
may make the contract difficult, or even impossible
to perform. When referring to an unanticipated
event, the characteristics of uncertainty become rel-
evant, in particular, the knowability of an event or
outcome. LeRoy and Singell submit that uncertainty
often arises where the distribution of an outcome is
entirely unknown (ie an ‘unknown unknown’), as op-
posed to being certain (ie a ‘known known’).13 The
stance adopted in this article conforms to the sepa-
ration of meaning proposed by Marshall et al, which
expands the dimensions of uncertainty into four sep-
arate categories (known knowns, known unknowns,
unknown knowns and unknown unknowns).14
Aligning with this four part separation of uncertain-
ty, this article recognises that uncertainty may origi-
nate as any of the aforementioned categories, and
thus, it is essential that the contract acknowledges
these. Ultimately, in the instance where an unantici-
pated negative event has arisen that is deemed im-
practicable for settlement via informal dispute reso-
lution or a tribunal between the contracting parties,
a case may be escalated to the courts,15 the outcome
of which will be determined through consideration
of the contracts’: incorporation of the terms, inter-
pretation of the contract, and, whether the contract
10 Risk Assessment in Public Contracts
is able to withstand the test of ‘reasonableness’ in ac-
cordance with the Unfair Contracts Terms Act 1977
(UCTA).16 Acknowledging that these three consider-
ations are accounted for by the courts when inter-
preting a legal dispute, the contract writer will draft
the contract with these in mind, preventing any dam-
age related claims made in the event that the contract
is legally contested.
In addition to this, to prevent further risk from
impeding the performance of the contract, the con-
tract drafter will incorporate a set of risk prevention
conditions within the contract, relative to the nature
of the agreement. Taking the specific case of the UK’s
defence department, traditionally the insertion of a
set of legally binding terms and conditions are divis-
ible into two categories: the standardised ‘defence
conditions’ (DEFCONs), and, the narrative ‘special
conditions’, which may be built into the contract in
separate, easily navigable sections, or combined to
achieve a comprehensive format. In either instance,
the defence department’s commercial procedures en-
sure that the essential combination of DEFCONs have
been incorporated within their contracts in order to
safeguard the defence organisation from negative
risks, and to assure its compliance with overarching
legislation. However, since many of the contracts
placed by the Ministry of Defence (MOD) are com-
modity based and/or transactional in nature, the de-
fence department recognises the limitations associ-
ated with writing contracts under a custom-made ap-
proach, particularly in instances where the drafting
process is not considered to be cost effective (ie in
cases where a contract is not in excess of £5 million).17
In this instance, where lower value contracts are re-
quired, the traditional approach of writing contracts
with DEFCONs and narrative conditions may result
in the inconsistent application of the provisions; am-
biguously written provisions; or with contradictions
between the provisions.18 In this case, the level of le-
gal protection achieved through traditional contract-
ing methods is deemed to be inadequate, and instead,
the MOD’s lesser value procurements must mitigate
against legal dispute through the application of stan-
dardised contracting templates.
As previously detailed, the premise of this paper
reflects the findings of a research study which was
undertaken on behalf of the Defence Science and
Technology Laboratory (Dstl) to determine the effi-
cacy of risk assessment provisions in the defence sec-
tor’s current purchasing decisions. The research ex-
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amined a set of real defence service commissioning
contracts (the value of which exceeds £5 million in
each case), and are therefore not considered to rep-
resent simple transactional arrangements. The focus
of this paper therefore gravitates towards those con-
tracts that have been awarded for a significantly
greater value and for longer periods of time, where
the risk assessment landscape changes, and the re-
quirement for more advanced contractual mecha-
nisms, such as framework agreements, becomes crit-
ical.
As already discussed, the structural considerations
made by the contract writer typically entail the care-
ful selection of an appropriate contracting method,
which for consistency, comprises of a set of prede-
fined templates. To some degree, the threat of risk
will be accounted for in the design of these replica-
ble templates, particularly in relation to the choice
and ordering of the terms and conditions that are in-
serted into these legally binding documents. In con-
junction with this, beyond the sole focus of the con-
tract, the identification and consequential manage-
ment of risk within the overarching project has of-
ten been deemed as inadequate where the method
adopted for treating risk does not account for both
the systemic nature of risk, and/or human behaviour.
In a recent paper, Williams discusses the importance
of recognising the human ramifications of risk, as
opposed to concentrating solely on the independent
risk.19 Here, Williams highlights the importance of
the reaction to risk among a project’s causal linkages,
proposing that these must be accounted for in con-
junction to the independent risks, which may be iden-
tified in standard practice through the application of
a risk register.20 Further emphasis is placed on the
importance of human behaviour in an article by
Brown et al. which builds on the foundations of trans-
action cost economics, by categorising human behav-
iour as being either ‘perfunctory’ (ie where the par-
16 Unfair Contracts Terms Act 1977, S11 (1).
17 Ministry of Defence, ‘Standardised Contracting’ (The Commercial
Toolkit, 1 November 2018) <https://www.aof.mod.uk/aofcontent/
tactical/toolkit/content/topics/stancon.htm> accessed 8 Novem-
ber 2018.
18 ibid.
19 Terry Williams, ‘The nature of risk in complex projects’ [2017] 48
Project Management Journal 55.
20 Terry Williams, ‘Using a risk register to integrate risk management
in project definition’ [1994] 12(1) International Journal of Project
Management 17.
EPPPL 1|2019
ty behaving perfunctorily has a greater payoff but
imposes more cost on the other party) or ‘consum-
mate’ (ie the party behaving consummately receives
a lower payoff, whilst the alternate party receives
greater benefit).21 In both cases, what appears to be
foregone in contemporary procurement practice is
the acknowledgement of the systemic properties of
risk, a characteristic that is used to denote the com-
plex interdependencies of risk that are intrinsic to
the system being observed. The term ‘systemic risk’
is one that has grown in recognition among scholars
in the financial and banking disciplines,22 and the
medical field respectively.23 In project management,
Ackermann, Eden, Williams, and Howick acknowl-
edge the existence of risk systemicity, defining it as
a quality of risk that encompasses a network of ‘in-
terrelated possible events’ (p 40).24 Expanding upon
to this logic, this paper posits that an essential expan-
sion of current risk assessment practice in public sec-
tor contracting calls for better acknowledgement of
systemic risk in the design and inception of its con-
tracts. However, the interrelated characteristic of risk
systemicity requires the establishment of a new
method of identification that is capable of capturing
the dynamic movement of risk within a system.
Systemic risk may be better understood where its
core characteristics can be deduced, that is, the causal
dynamics that interlink a systems’ components are
accounted for with greater transparency. In the case
of a contractual arrangement, the cascading move-
ment of risk is made possible by two principal stim-
ulants that are embedded in the anatomy of the con-
tract. The first relates to the contracts citations made
between the conditions, which serves the purpose of
making the contractual obligations more robust, at
the detriment of granting risk the capacity to migrate
across the wider contract. The second relates to the
risk delegation process and the subsequent absorp-
tion of risk that is agreed between the contracting
parties and enforced in writing. Underpinning this
21 Trevor L. Brown, Matthew Potoski and David Van Slyke, ‘Manag-
ing complex contracts: a theoretical approach’ [2016] 26 Journal
of Public Administration Research and Theory 294.
22 Olivier De Bandt, Philipp Hartmann and José Luis Peydró, ‘Sys-
temic risk in banking’ [2009] The Oxford handbook of banking.
23 Charles Vincent, Sally Taylor-Adams and Nicola Stanhope,
‘Framework for analysing risk and safety in clinical medicine’
[1998] 316 BMJ: British Medical Journal 1154.
24 Fran Ackermann, Collin Eden, Terry Williams and Susan Howick
‘Systemic risk assessment: a case study’ [2007] 58(1) The Journal
of the Operational Research Society 39.
Risk Assessment in Public Contracts 11
particular attribute of systemic risk is the notion that
the transfer of risk between the contracting parties
may implicate the contract, if the balance of risk
transfer does not align with the intended outcomes
of the arrangement. Both features of systemic risk
are discussed in more detail in the preceding sections,
before a new instrument for identifying and assess-
ing the respective risk dynamics upfront is present-
ed.
III. The Migration of Risk between a
Contract’s Conditions
Already it has been highlighted that the incorpora-
tion of the terms and conditions within a contract
are administered by the contract writer in order to
mitigate the onset of a legal dispute or associated dis-
ruption to the overarching requirement. Correct im-
plementation of the terms and conditions therefore
act as a crucial risk prevention mechanism, capable
of influencing the outcomes of the required works,
services or supplies. To facilitate the inclusion of ap-
propriate terms and conditions, the contract writer
will adopt methods of best practice that are current-
ly advocated by the legal and commercial branches
of the purchasing organisation, reassured that these
remain compliant with governing law. In general, the
contract type administered by the purchasing organ-
isation will consist of either a standard form contract
or a bespoke contract. Under the prior contract type,
an identical set of terms and conditions may be ap-
plied to provide legal protection to a range of inde-
pendent works, service or supply requirements. Un-
der the latter, the contract will incorporate a set of
essential terms and conditions, combined with cus-
tom provisions that are unique to the contractible re-
quirement. Where the works, services or supplies re-
quired by the purchasing body are most appropriate-
ly procured under a framework agreement, the con-
tracts often comprise of bespoke structures due to
the complex nature of the requirements.
At present, the acknowledgement of a uniform
analysis process that leads to the determination of a
contract’s structural choices is limited, and instead,
the contractual provisions appear to relate largely to
the contextual requirements and intended outputs of
the contract. When a contract incorporates cus-
tomised sections, the contract writer objectively de-
cides which provisions are to be included within the
12 Risk Assessment in Public Contracts
contract, based on the nature of the procurement. For
example, a contract concerned with research and de-
velopment is likely to contain conditions that are
geared heavily towards the protection of information
and/or the ownership of information, as roused by
the creation of new innovation or knowledge gener-
ation. When inputting a set of bespoke conditions
into the formal contract, the writer will formulate the
independent conditions that best fit the requirement
and generate the desired outputs, with little consid-
eration for the underlying risk behaviours that may
interconnect the conditions. The choices made when
constructing a written contract therefore show little
regard for the interrelated nature of risk and how ci-
tations made between a contract’s terms and condi-
tions may ultimately aid the systemic migration of
risk.
The first element of this research paper seeks to
address the current shortfalls of the treatment of risk
in public sector contracting by examining how the
conditions underpinning a contract interlink, and
whether such interlinkages provide a platform for
the prevalence of systemic risk. To account for these
underlying risk patterns, a sample of commissioning
service contracts obtained from the Ministry of De-
fence, (each representing a call-off contract taken
from a set of unrelated framework agreements) were
examined. By observing the bespoke sections of the
contract, the terms and conditions were analysed one
at a time in order to identify and map the intercon-
nected conditions that had been inputted into the
contract’s formal provisions, at the time of writing.
Repeating this process throughout the entire con-
tract, the contract’s structural spine (which consists
of the condition’s identifiers or titles) may be mapped
to indicate where the interdependencies exist be-
tween different sections of the contract. Where two
or more conditions within a contract are connected
via a formal or written citation, if the onset of risk to
the primary condition were to materialise, the con-
tract would hold the capacity to migrate the risk to-
wards the paired condition. In many cases, the pair-
ing of conditions within a contract is intended to
make the contract more robust, since referencing two
clauses as opposed to one provides greater legal re-
inforcement where the onset of unwanted risk pre-
vails. Taking one example, the force majeure condi-
tion often cites the termination condition, since
where force majeure is unpreventable or disastrous,
it will likely prompt the activation of the contract ter-
EPPPL 1|2019
mination provision. Whilst in theory the intercon-
nectivity of a contract’s conditions does provide ad-
ditional reinforcement, it also serves as a platform
whereby risk is not contained in a localised manner,
and instead, it is able to migrate system-wide across
the entire contract.
Furthering this point, risk can materialise in the
procurement’s planning phase, prior to the com-
mencement of the call-off contract. During the inves-
tigation into the contractual structures used in the
MOD’s call-off contracts, it was deciphered that risks
are capable of originating during the planning and
implementation phase of the procurement due to ear-
ly mismanagement. If left undetected or unresolved,
it was found that the repercussions of these risks have
the propensity to migrate towards the live aspect of
the provision, infiltrating the phase of the lifecycle
where the written contract is situated. By design,
where the contract bears structural weakness from
the outset, its inherent capacity to protect against the
early onset of risk is foregone, further impeding the
success of the overarching project.
IV. The Transfer of Risk between
Contracting Parties
The interrelation between a contract’s terms and con-
ditions represents an influential characteristic of sys-
temic risk, the identification and measurement of
which remains nebulous in the relevant literature. In
addition to this, a second pattern of risk mobility
must also be acknowledged in terms of the transfer
of risk between the contracting parties. In contracts,
the prevention of risk to one party (usually the con-
tract writer) is executed through its risk transfer pat-
terns, that is, the party who holds initial responsibil-
ity for the risk (the transferor), relieves themselves
of a risk (which, for example, could be financial or
performance related) by assigning it to one or more
of the contract’s counterparties (the transferees). Of-
ten the act of balancing risk between the contracting
parties is determined by two common contractual as-
sumptions; first that transferring too little risk from
the transferor towards the transferees will result in
weakened contractual relationships. Underpinning
this logic, is the notion that the ascertainment of risk
by the contractor should prompt incentivised behav-
iours, that is, the transfer of risk into the contractor’s
remit should be sufficient enough to provoke the suc-
EPPPL 1|2019
cessful performance of the contract, in line with the
intended outcomes of the works, services or supplies.
The counterbalance to this inter-party risk trans-
fer pattern relates to the heavy transfer of risk to-
wards the transferees, which ultimately comes at a
significant financial cost to the transferor. The move-
ment of risk between the transferor and the transfer-
ees is covered in significant detail throughout the
contract theory literature. Of particular relevance is
the principal-agent problem (inclusive of the notions
of moral hazard and asymmetric information shar-
ing) which surmises how a principal (or transferee)
may not be provided with sufficient information,
specifically when determining whether or not a con-
tractual arrangement has been satisfied. If the con-
tract in question fails to be satisfied, then the trans-
feror is likely to incur agency costs. Understandably,
the procuring party’s incurrence of unanticipated
costs is undesirable, particularly in the instance
where the firm represents a public organisation that
is incentivised to achieve cost savings. To realise such
efficiencies, the UK’s public sector organisations
must adhere to policy guidance surrounding its oblig-
ation to achieve Value for Money, an objective that
remains recurrent in its publication of overarching
reports, such as the Managing Public Money review.25
For this reason, the inter-party transfer of responsi-
bility represents a second critical risk pattern that
must be carefully examined during the period of con-
tract design, refinement and inception in order to
strike an optimal relational balance between the con-
tracting parties. To reflect this, the case study re-
search undertaken incorporated a method of identi-
fying the balance of risk transfers between the trans-
feror (ie the MOD) and the transferee (ie the private
organisation), which was mapped alongside the
aforementioned risk migrations between the con-
tract’s terms and conditions.
Applying the risk mapping tool to a set call-off con-
tracts, taken from a sample of defence commission-
ing framework agreements, a prominent character-
istic became apparent when observing the inter-par-
ty transfers. In all cases, the sample of call-off con-
tracts reflected a heavy imbalance of risk transfers,
whereby the majority of risk was transferred by the
Contracting Authority (the buyer) towards the Con-
25 Her Majesty’s Treasury ‘Managing Public Money’ [2013] London:
HM Treasury.
Risk Assessment in Public Contracts 13
tractor (the seller). Whilst transferring risk in this
manner protects the Contracting Authority from the
onset of unwanted risk throughout the duration of
the contract, a disproportionate risk transfer pattern
between the contracting parties has the capacity to
cause other negative impacts to arise under the con-
tract. In particular, what was revealed was that the
imbalance of inter-party risk transfer causes relation-
al degradation, a characteristic which prompts the
transferee to act in an independent or self-interested
manner. In such cases, the transferee’s legal obliga-
tion to undertake and deliver the majority of require-
ments (as stated in the contracts’ terms and condi-
tions) prompts the establishment of an arms-length
relationship which ultimately impedes any collabo-
rative purpose that the contract may have envisioned.
Where transactions like this occur recurrently, over
time the procuring public sector organisation is left
vulnerable to lost knowledge and/or capability in its
respective department.
Of course, if the work, service or supply under pro-
curement was set up as a simple transaction with
minimal complexity, the transfer of contractually
binding obligations are more likely to depict a dis-
proportionate distribution of risk in favour of the
contract writer. In such cases, the procurement in-
strument implemented has an increased likelihood
of being of standard form, as opposed to a compre-
hensive alternative. Therefore, what must be explic-
itly highlighted in this case is the need for a contract
writer to not only recognise the diversity available
among purchasing choices, but also the importance
of aligning the contract’s structural elements in the
most appropriate way so that they pose little contra-
diction to the purpose of the contract.
V. Developing a Tool for Mapping
Systemic Risk Patterns
In order to better understand (i) the migration of risk
between a contract’s conditions, and, (ii) the inter-
party transfer of risk, it has become evident that there
was a requirement to establish a robust and replica-
ble tool for measuring both features of risk systemic-
ity. In particular, it was envisioned that the develop-
ment of such a tool must be practicable enough to
aid the contract writer’s choice of structural compo-
nents upfront. To measure the systemic migration of
risk that occurs across a contract, a visual tool has
14 Risk Assessment in Public Contracts
Figure 1: A simplified risk mapping prototype depicting a balanced allocation of risk between the
contracting parties.
been developed in order to account for the two afore-
mentioned risk dynamics. Prior to the formal map-
ping of these systemic patterns, each case study con-
tract underwent a deductive coding process which
thematically categorised the contract’s condition and
sub-condition(s) in terms of their risk associations
(labelled as: Representation, Performance, Finance
and Contract risks). By coding the contracts in such
a way, a top-level depiction of the contracts risk pri-
orities is decipherable, which provides the investiga-
tor with a provisional impression of the contract’s in-
tentions. Whilst the thematic categorisation of risk
provides a valuable source of information, examin-
ing the contracts solely in this way disregards the un-
derlying dynamics that can interact under a contrac-
tual arrangement, and provides further justification
for the need to construct a visual mapping tool.
Risk migration is one of the core processes to be
depicted when mapping risk dynamics, defined in
this instance as the movement of risk from one con-
tract condition to another, further reflecting the in-
terrelated characteristic of systemic risk (ie a leads
to b).26 Observing the map presented in Figure 1,27
the horizontal row of textboxes replicate the indexed
terms and conditions of the contract (referred to as
the ‘contract spine’). Using this as the base, a series
of directional arrows can be drawn to reflect the first
of two risk dynamics (ie the interconnected condi-
tions of the contract). The mapped arrowheads can
EPPPL 1|2019
move right or left, dependant on which condition
they are associated with, reflecting the citations made
in the written contract, at the time of writing. Given
this dynamic, it is important to recognise that migra-
tion of risk in this instance is a result of the sure ci-
tations made in writing, which permits risks to cas-
cade to other sections of the contract, whilst the con-
tract is live. That is not to say that risk cannot origi-
nate before the formal commencement of a contract,
rather, it must be recognised that the visualisations
provide a depiction of how the surrounding risk man-
agement landscape may exacerbate risk, if these are
not controlled for.
Expanding on the risk migration map depicted in
Figure 1, a second risk dynamic may also be incorpo-
rated (ie inter-party transfer of risk). By examining
the balance of risk between the contracting parties,
the investigator is able to decipher whether the allo-
cation of risk detailed in the formal contract aligns
with the relational intentions of the project. To map
this component, the arrowheads which depict the in-
terconnected contract conditions may be positioned
either above or below the horizon (see Figure 1). The
26 Katherine Bloomfield, Terry Williams, Christopher Bovis and
Yasmin Merali, ‘Systemic risk in major public contracts’ [2018]
International Journal of Forecasting. <https://doi.org/10.1016/j
.ijforecast.2018.10.005> accessed 20 November 2018.
27 ibid.
EPPPL 1|2019
arrowheads positioned above the horizon reflect the
contractual conditions which transfer from the buy-
er, towards the supplier. In this case, the supplier is
legally obligated to take ownership of the specified
risk, on behalf of the buyer. Likewise, all arrowheads
located below the horizon represent risk transfers in
reverse, that is, the movement of risk from the sup-
plier towards the buyer. Mapping the transfers of risk
between the contracting parties represents an essen-
tial component of risk mitigation, since it establish-
es the optimal point at which risk is most effective-
ly distributed. Such effective distribution of risk
prompts a range of advantageous behaviours under
the contract, such as collaboration, transparency, in-
centivisation, and trust, all of which influence the op-
erability and overarching performance of the con-
tract throughout the specified duration.
The mapping of the two risk dynamics inherent
within a contract aims to provide a novel contribu-
tion to risk forecasting and subsequent management
in the provision of public contracts. By applying the
risk mapping tool presented, it is envisaged that the
design and implementation of the formal contracts
that underpin public projects will be better equipped
to assess potential risks upfront. Furthermore, the
contract must not disregard the adoption of appro-
priate legal provisions, ie those that take into account
the fundamental requirements of the works, services
or supplies to be contracted for, since it has been ar-
gued that these assist with mitigating the impacts
arising from systemic risk. Whilst it is anticipated
that the employment of additional risk assessment
tools in the planning and inception phases of a new
requirement held under a framework agreement may
demand more time and upfront cost, these are de-
signed to be outweighed by the long term savings
made through the inclusion of risk minimising tech-
niques.
VI. Conclusion
This paper aims to provide new contributions to the
legal realm of public sector procurement by drawing
a particular focus towards establishing and enhanc-
ing the assessment of risk during the design and in-
Risk Assessment in Public Contracts 15
ception phase of a works, service or support require-
ment. Procurement policy in the UK currently imple-
ments a strong preference towards achieving value
for money in the purchase of public goods and/or ser-
vices. With this in mind, it has been recognised that
current procurement policy may not allow for the in-
clusion of an additional risk management tool in the
implementation of its public projects, on the premise
that this may contradict its current objectives. In ad-
dition to this, framework agreements currently un-
derpin and dictate a significant proportion of pro-
curements within the public sector, yet their call-off
contracts appear to be relatively rudimentary in na-
ture. Through investigation into a sample of live, de-
fence commissioning call-off contracts, this paper
touches upon the key structural impediments that
limit the robustness of these bespoke arrangements.
All public sector contracts are subject to thorough
procedural checks and legislative parameters, and
therefore the construction of a contract gravitates to-
wards the selection of certain terms and conditions
that are deemed by practitioners as satisfying good
practice in contract law.
Whilst the current contract drafting procedures
may not be criticised in their entirety, this paper has
argued that they merely act as a starting block in the
implementation of a contract that is designed to min-
imise risk. When drafting a contract, the intricate dy-
namics that underlie the initial selection and order-
ing of the terms and conditions must be acknowl-
edged. Through the dissection and analysis of a sam-
ple of call-off contracts, taken from a set of defence
framework agreements, a risk migration mapping
tool was subsequently developed. Underlying the
fundamental purpose of the tool is the proposition
that if administered in practice by the contract
drafter, a preliminary risk assessment of the contrac-
tual document would be achieved. By applying the
risk migration mapping tool, a snapshot view of the
interconnectedness of the contract’s conditions, to-
gether with the balance of risk transfers becomes de-
cipherable. Where the patterns depicted show an un-
desired balance of risk that appears misaligned with
the intentions of the requirement under procure-
ment, then it can be deduced that the contract be-
comes more susceptible to the onset of negative risk.
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