Commercial Risk

THOROGOOD
PROFESSIONAL
INSIGHTS
A SPECIALLY COMMISSIONED REPORT
PROJECT RISK
MANAGEMENT
THE COMMERCIAL DIMENSION
Tim Boyce
THOROGOOD
PROFESSIONAL
INSIGHTS
A SPECIALLY COMMISSIONED REPORT
PROJECT RISK
MANAGEMENT
THE COMMERCIAL DIMENSION
Tim Boyce
Published by Thorogood
Other Thorogood 10-12 Rivington Street

London EC2A 3DU.
Professional Insights t: 020 7749 4748

f: 020 7729 6110
e: info@thorogood.ws
Techniques of Structuring and w: www.thorogood.ws
Drafting Commercial Contracts
Robert Ribeiro © Tim Boyce 2003
Successful Competitive Tendering All rights reserved. No part

Jeff Woodhams of this publication may be
reproduced, stored in a retrieval
The Legal Protection of Databases system or transmitted in any

form or by any means,
Simon Chalton
electronic, photocopying,
recording or otherwise, without
The Internet and E-Commerce the prior permission of
Peter Carey the publisher.
This Report is sold subject to the

Technical Aspects of Business condition that it shall not, by way
Leases of trade or otherwise, be lent,
Malcolm Dowden re-sold, hired out or otherwise
circulated without the publisher’s
The Commercial Exploitation prior consent in any form of

binding or cover other than in
of Intellectual Property Rights
which it is published and without
by Licensing a similar condition including this
Charles D. DesForges condition being imposed upon
the subsequent purchaser.
The Competition Act – Practical
No responsibility for loss
Advice and Guidance occasioned to any person acting
Susan Singleton or refraining from action as a
result of any material in this
publication can be accepted by
the author or publisher.
Special discounts for bulk quantities
of Thorogood books are available to
corporations, institutions, associations and
other organisations. For more information A CIP catalogue record for
contact Thorogood by telephone on 020 this Report is available from
7749 4748, by fax on 020 7729 6110, or the British Library.
e-mail us: info@thorogood.ws
ISBN 1 85418 257 9
Printed in Great Britain

by printflow.com
The author
Tim Boyce began his career in the Ministry of Defence holding executive positions
in contracts, contracts policy and finance. His industrial career began at Plessey
in 1980 after which he enjoyed appointments with Siemens, British Aerospace
and more recently as commercial director at BAE SYSTEMS. His functional
responsibilities have included contracts, commercial, procurement, estimating,
legal, project accounting and the implementation of the European Business Excel-
lence Model.
His committee work includes the Chartered Institute of Purchasing and Supply
National Contracts Management Committee, the CBI Contracts Panel, the CBI
Defence Procurement Panel and the CBI/MoD working groups on partnering
and incentive contracting. He was the CBI observer at the HM Treasury Central
Unit on Purchasing working group on incentivising industry. In 1997 he was
invited by the Director General of the CBI to join the CBI Public Private Partner-
ship Forum. He has lectured widely in the UK and in the US on business, contract
and commercial management.
Contents
1 TOTAL RISK MANAGEMENT 1
2 GETTING TO CONTRACT 8
1. The risk – risk scenario ...........................................................................9
2. The bid/no bid decision ..........................................................................9
3. Bidding ...................................................................................................16
4. Pricing for risk ......................................................................................19
5. Risk review board .................................................................................23
6. Making an offer .....................................................................................25
7. The priced list of risks ..........................................................................29
8. The caveats register ..............................................................................30
9. An effective contract ............................................................................31
10. Negotiation ..........................................................................................34
11. Contract launch ...................................................................................35
12. Pointers for project risk management ..............................................36
Checklist .....................................................................................................36
3 FINANCIAL RISK 38
1. Prime contract financial risk ................................................................39
2. The nature of price and the sharing of cost risk ...............................39
3. The client will not pay ..........................................................................43
4. The client cannot pay ...........................................................................46
5. Inflationary cost increases ...................................................................46
6. Foreign currency fluctuations .............................................................48
7. Contract termination ............................................................................51
8. Financial claims against the prime contractor ..................................53
9. Pointers for project risk management ................................................54
Checklist ....................................................................................................55
THOROGOOD PROFESSIONAL INSIGHTS

4 TECHNICAL RISK 58
1. Do we want to take this risk? ..............................................................59
2. Analysing the requirement ..................................................................60
3. Options ...................................................................................................60
4. Sharing the risk .....................................................................................61
5. The commercial engineer ....................................................................62
6. Setting the baseline ..............................................................................63
7. Requirement creep ...............................................................................64
8. The changing requirement ..................................................................65
9. The work takes longer than expected ................................................66
10. The never-ending contract ................................................................68
11. Failure of performance ......................................................................69
12. Buyer initiated problems ....................................................................70
Checklist .....................................................................................................72
5 TIMEFRAME RISK 74
1. Bidding compliant delivery .................................................................75
2. The timeframe obligation .....................................................................78
3. Time is of the essence ...........................................................................79
4. Consequences of delay .........................................................................79
5. Liquidated damages .............................................................................81
6. Force majeure .......................................................................................81
7. Delivery incentives ................................................................................83
8. Client delay ............................................................................................84
9. Subcontractor delay .............................................................................86
10. Prime contractor delay .......................................................................86
11. The threat of termination ...................................................................88
12. The threat of damages ........................................................................89
Checklist .....................................................................................................92

6 SUBCONTRACTOR RISK 95
1. For the want of a nail ...........................................................................96
2. Subcontracting: Benefit, risk and strategy ........................................97
3. Subcontractor lateness .......................................................................104
4. Subcontractor failure .........................................................................105
5. Subcontractor work unfit ..................................................................106
6. Monitoring subcontractors ...............................................................106
Checklist ...................................................................................................108
7 PROJECT COMPLETION AND BEYOND 113

1. Life after completion ..........................................................................114
2. Key contractual milestones ................................................................114
3. Residual obligations and risks ...........................................................117
5. Acceptance ..........................................................................................118
6. Products rejected ................................................................................120
7. Title does not pass ..............................................................................121
8. Products lost or damaged in transit .................................................122
9. Failure after delivery/acceptance ......................................................122
10. Warranty ............................................................................................123
11. The hand over of technical data to the client ................................125
12. Third party intellectual property rights .........................................127
13. Account management ......................................................................129
14. Pointers for project risk management ............................................130
Checklist ...................................................................................................131

THOROGOOD
PROFESSIONAL
INSIGHTS
Section 1
Total risk management
Section 1
Total risk management
The basis of all business is buying and selling goods or services or a combina-
tion of the two. The word product is these days used for both goods and services.
A television is a product and a particular type of insurance scheme may be
described by the provider as a product. For the purposes of this Report the word
product will be used in the former sense. Products are designed and produced
and sold to customers as end items in themselves. The characteristics of a product
might include: it is available off-the-shelf; it is produced (hardware) or replicated
(software) in quantity with each unit being identical to every other; the design
is driven by the supplier (albeit aimed at specific markets) rather than by an
individual customer; the performance characteristics are well known prior to
the product being made available to customers; its constituent parts are readily
available as materials or components.
On the other hand there is a particular type of service which is called a project.
It commonly comprises the bringing together of many disparate products into
an overall solution. The characteristics might include that it is bespoke; it is unique;
the design is driven by one customer; performance characteristics can be designed
and modelled but not known until the project is complete; its constituent parts
may comprise products which themselves must be specially designed. Projects
tend to be of large financial size and long timescale. Whilst no business enter-
prise is without risk, it can be seen quite readily that projects are by their very
nature of considerably greater risk than products. Management of risk in a projects
environment is therefore of considerable importance.
Project Risk Management is a well established doctrine supported by many tools

and techniques. Risk analysis, risk registers, risk models and active risk manage-
ment are all important in seeking that ultimate goal of project management –
completion on time, to specification and within budget. There is, however,
another key distinction between products and projects, the significance of which
is perhaps sometimes overlooked. Products tend to be bought or sold subject
to standard terms of contract. The buyer or seller, usually whichever is in the
stronger position, subjects the transaction to his standard terms. In a percentage
of cases there may be some negotiation of these terms, but frequently not.
Conversely the prime contract terms for a project are invariably negotiated,
specially drafted and often of significant contention before the parties come to
agreement. Each side may come to the negotiation armed with a preferred set
THOROGOOD PROFESSIONAL INSIGHTS 2

1 T O TA L R I S K M A N A G E M E N T
of terms, some or all of which may be based upon standard terms. Each will
try to exploit the strength of its bargaining position to secure its terms but
ultimately the agreed terms will always be of a bespoke nature, reflecting not
only the outcome of commercial negotiations but in many instances reflecting
the fact that individual standard terms may simply not exist or may be inade-
quate for the unique situation of the particular project.
Interestingly the choice between buyer and seller standard terms in a routine
product transaction is fraught with danger for the side that concedes, for the
simple reason that standard terms are never generated with fairness or balance
in mind. The reason that every transacting organisation has different standard
terms for sale and for purchase is that each organisation expects to purchase
from its suppliers on terms which it would ideally never confer on its customers
and vice versa. The central reason is that each organisation likes to both buy and
sell at zero or minimum risk to itself. Standard terms are a means of pushing
risk ‘down’ to suppliers and ‘up’ to customers. Everyone in the supply chain has
the same motive. Of course in simple product transactions little attention is given
because nobody expects anything to go wrong. The product is identified by part
number or catalogue number, specifications exist, and price and payment are
straightforward. The client gets what he is expecting and the supplier gets his
money. The allocation of risk under the contract terms is of no practical interest
other than in the very small percentage of cases where things do go wrong.
Projects are different. It is not so much that the parties expect things to go wrong
(if they did, they have no business in proceeding) but that they are aware that
the risk of difficulty is inherently much higher. Not only are there usually more
risks but several of the risks may have a significant probability of arising and
the impact of a risk that materialises may be catastrophic. This results in two
things. Firstly, each side (preferably jointly) will consider how best to manage
the project so that risks do not materialise at all or, if they do, that the impact
is minimised. Secondly great attention is given to the negotiation of bespoke
contract terms. The contract is ultimately the single vehicle by which risks are
allocated (or shared) between the parties. It is essential that each party knows
where it stands both before a final decision is made to enter into the contract
and afterwards, if risks materialise.
A project management plan may ascribe responsibilities between the parties.

A risk management plan may purport to allocate individual risks to one party
or the other but the contract must be clear on what these allocations mean from
a legal perspective. This is not just a point of technicality. For example, if the
client agrees to carry responsibility for a particular risk (which affects the proba-
bility of timely completion of the project) and to undertake risk mitigation activities,

where does that leave the prime contractor? Supposing the client neglects to
undertake the mitigation (perhaps to save money) and the project runs late, can
the prime contractor charge for his own increased costs? If the project runs late
because of this failure to mitigate, where does that leave the client? Can he still
terminate the prime contract for default (failure to complete on time) on the part
of the prime contractor? Common sense or a sense of fair play may incline the
reader towards one answer or another, but common sense and fair play are
unfaithful guides. The answer of course is that what happens in the real world
of project management and active risk management cannot be divorced from
the hard questions of liability and the consequences of doing or not doing
something.
So, the prime contract is the ultimate risk vehicle. Pre-contract negotiations will
have established an allocation of risks enshrined in the prime contract. The form
of contract may represent a simple allocation of risks – i.e. it is a record of which
party owns each risk and the consequences of that ownership. Alternatively,
the form of contract may in itself be constructed so as to deal with risk in a way
that encourages client and prime contractor to cooperate in the management
of risk. Project risk management is the hands on tool for helping the project
towards a successful conclusion. Putting these things together we are inevitably
drawn to the fact that risk identification must inform the prime contract negoti-
ations and the prime contract must inform the management of risk during project
execution. Understanding between project or risk managers (doing the job) and
business or commercial managers (doing the prime contract) is therefore essen-
tial. In fact the combination of project risk management and commercial risk
management might be called Total Risk Management:
TECHNICAL RISK COMMERCIAL RISK TOTAL RISK

MANAGEMENT MANAGEMENT MANAGEMENT
It worked We got paid Happy company
We finished it We didn’t get sued Happy customer
Cost within budget We made a profit Happy shareholders
Figure 1: Total Risk Management

If this idea of TRM is to succeed it is first necessary to consider when the relation-
ship between project risk management and commercial risk management of a
project really begins. The two facets certainly come together at the prime contract
negotiation stage, but in many ways that is already too late. There are four key
points when the coming together must occur:
TRM STAGES THE KEY QUESTION
Bid/no bid decision What is the probability of submitting the winning bid?
Tender preparation What is the probability that the emerging

risks can be contained?
Prime contract negotiation What is the probability of securing a ‘safe’ deal?
Prime contract performance What is the probability of completing the prime contract
on time, to specification and within budget?
The view of total risk can be considered as maturing as these stages come and
go:
Bid/no bid An initial view
Can we win at
an acceptable risk?
Tender
preparation A considered view
Contract
A merging view
Negotiation
Can we complete the

Contract
project to time, budget An ongoing view
performance
and performance?
Figure 2: Maturing View of Risk

Although there is an overlap between them, the two questions – can we win
and can we perform? – are in essence quite different in character. A mistake
that is sometimes made is to undertake risk analysis during the bid stage only
in respect of the second question. This is to deny to the fundamentally impor-
tant first question the benefits of risk analysis and risk management.
Consider these issues presented somewhat differently:
Can we win?
Bid risk management
CONTRACT
NEGOTIATION
Can we perform?
Pre-contract project
Project risk management
risk management
Request for Bid Contract Project

bids received submitted awarded completed
Figure 3: Risk Management Transition
In the pre-contract stage two risk management activities should be underway.

One looks at the problems associated with preparing an attractive bid on time
and defeating the opposition. The other is concerned with predicting whether
or not the project can be completed successfully. Naturally if the early work on
the latter question produces a very high probability of failure, then that result
could have a devastating effect on the desire to bid and bid risk management
would become superfluous. In this diagram it has been convenient to introduce
the expression bid risk management but preparing a bid for a project is in fact
another project. So it would be more accurate to say that the prime contract
negotiation is the transition from one (bidding) project to another (doing) project
and that project risk management in tandem with commercial risk management
are needed in both stages.

There are many other considerations in business risk management from

personnel recruitment strategy to investment strategy to market orientation
strategy. These are outside the scope of this Report which addresses itself to
the commercial aspects of total risk management in a projects environment. The
text describes matters from the perspective of a prime contractor undertaking
a project for a client. In this context the prime contractor places work with subcon-
tractors. Where a very general point is to be made the text adopts the more neutral
buyer and seller. In places the text refers to penalties. The usage is that of the
layman and not the lawyer. To a layman a penalty is an unfortunate consequence
of some event. Lawyers have a more particular definition that leads to a general
principle that penalties are not enforceable in English law contracts. The text
refers in places to products. This is intended to mean the physical manifesta-
tion of the project as delivered, for example a system or any part thereof which
is handed over to the client.
At the end of each Section is a paragraph called Pointers for Project Risk Manage-
ment. The purpose of this is to capture the essence of the commercial aspects
that most need to be absorbed into a project risk management perspective. Each
Section also has an appendix that provides a more detailed checklist of do’s
and don’ts to better illuminate how key commercial risks may be dealt with in
a contractual manner.
For a much fuller exploration of the commercial aspects of business the reader
may refer to The Commercial Engineer’s Desktop Guide (Hawksmere).

THOROGOOD
PROFESSIONAL
INSIGHTS
Section 2
Getting to contract
1. The risk – risk scenario
2. The bid/no bid decision
3. Bidding
4. Pricing for risk
5. Risk review board
6. Making an offer
7. The priced list of risks
8. The caveats register
9. An effective contract
10. Negotiation
11. Contract launch
12. Pointers for project risk management
Checklist
Section 2
Getting to contract
1. The risk – risk scenario

Bidding for a contract involves a twin risk. Firstly there is the risk of losing the
competition and secondly there is the risk of winning it! As has been said before
now, ‘the good news is that we’ve won the competition, the bad news is that
now we have got to perform the contract’. In any competition for business there
is the risk that the prize turns out to be a lemon. A lemon contract is one that
is more difficult to complete than expected or one that becomes impossible to
complete at all. This is bad news for all the stakeholders. The prime contractor’s
finances and reputation will suffer, with potentially disastrous consequences.
The client will not get what he wants when he wants it. His reputation (as a compe-
tent procurer) may also suffer, with knock on consequences. The client may suffer
additional cost which may not be recoverable from the prime contractor or anyone
else. The prime contractor’s shareholders will suffer and any end users of the
project (for example in public services) may also lose out.
So the decision to bid is not to be undertaken lightly. In this Section the process
of moving through evolving bid risk management into a ‘no turning back’ decision
and then on into an effective ‘risk understood’ contract will be explored.
2. The bid/no bid decision

Making a decision to bid for a significant prime contract is a major step. Once
the decision has been made the bid gains a momentum and almost a person-
ality of its own. Once it is thundering along it can be almost impossible to stop.
The risk that is taken at this early stage is gambling the cost of bidding against
the chances of winning. The cost of bidding is more than just the money spent.
The diversion of resources, the inability to bid for other contracts and the reputa-
tion of the prime contractor are all considerations. Money spent on one bid means
that money not being available for bidding for other contracts. Bidding soaks
up valuable resources as the prime contractor not un-naturally wishes to put
its best people onto bidding for an important new project. Many companies do

2 GETTING TO CONTRACT
not have the luxury of maintaining top teams whose task is exclusively bidding.
Indeed such dedication may in itself be a risk insofar as bid preparation by people
not involved in prime contract execution lacks that vital element of experience,
the absence of which either makes the bid of academic interest only to the client
or some key activity or risk is missed in the costing/pricing exercise. Thus the
best source and possibly the only source of expertise for the bid team may be
those people engaged on current contact work, where the diversion of key people
may introduce additional risk, cost and possibly delay to that work. Once the
bid is underway it becomes a personal challenge, and rightly so, for the bid
manager to submit the bid no matter what and, of course, to win the prime
contract. Similarly the prime contractor in its dealings with the client and with
potential subcontractors is keen to show that it can submit an attractive bid.
Again, this is rightly so but the point is that once bid preparation is in hand no-
one wants to stop it for fear of loss of face, writing off nugatory expenditure
and losing the chance of winning. This means that the decision to bid in the first
place must be a good decision.
Risk analysis of the prospects of winning and risk analysis of the potential prime
contract must begin very early on and be maintained throughout. Certainly the
prospects of winning can alter as the bid phase proceeds, as more information
or intelligence becomes available. News that an arch competitor has a new and
unique approach to the particular project, news that an overseas bidder has
support from his own government in making a subsidised bid, news that the
prime contractor has become unpopular with the client all might indicate that
the prospects of winning have slumped. These things do happen and so bid
strategy should be based upon:
Pre-bid: Predict and prevent
In-bid: React and mitigate
Post-bid: Pro-act and manage
Figure 4: Phases of Risk Management

In the examples given it might be possible to predict the possibility of an overseas

subsidised bid and prevent it by political lobbying. If the prime contractor is
rumoured to be unpopular (e.g. because of problems on a current contract)
then it should react and take extraordinary steps to mitigate whatever the
problem might be before the client develops a mind-set in which the percep-
tion of the prime contractor’s alleged poor performance becomes absolutely
fixed. If after the bids are submitted, a competitor is discovered to have unexpect-
edly offered a novel approach the prime contractor may try spoiling tactics by
attempting to rubbish that new product in the client’s eyes by drawing its atten-
tion to the unproven and hence high risk nature of that approach.
In the extreme, a continuing risk analysis (of the probability of winning) as bid
preparation proceeds might lead to a conclusion that, where at the outset the
chances of winning were estimated at a certain level, the unfolding of events
and the gaining of intelligence during the bid alters that initial perception:
100%
BID ZONE
Confidence in winning
WORTH BIDDING AXIS

IFB Bid Bid Bid Winner
received decision confirmation submitted announced
NO BID ZONE
0
Time
Figure 5: Progress of confidence in winning

Figure 5 gives a not untypical view of the progress of the confidence level in
submitting the winning bid:
Pre-IFB: Early confidence may be very high because the initial

intelligence is that the prime contractor is the market
leader, has the best record of delivering projects on time
and is competitive on price. Confidence may wane as,
perhaps, discussions with the client show he is keen to
encourage new, innovative solutions to his requirements
that point to the selection of a different prime contractor.
IFB Received: Confidence recovers as it is realised, perhaps, that the

IFB highly matches the prime contractor’s intended
solution. So a decision to bid is made.
Post decision to bid: Again confidence wanes as the enormity of the require-
ment, lack of adequate bid preparation time, scarcity
of top people all strike home.
Bid submitted: Confidence level is high as the bid team congratulates

itself on completing the bid and getting it submitted on
time.
However, the prime contractor should be clear at what level of confidence it is

worth bidding. If ongoing risk analysis shows the confidence level (the dotted
line on figure 5) falling through the Worth Bidding Axis then there should be
a serious re-appraisal of the prospects and if action taken does no stop the rot,
a decision to withdraw should seriously be considered. Bid re-appraisal/confir-
mation points should be built into the bid plan at least as far as two thirds the
way through the bidding period. After two thirds most of the bidding cost may
have been incurred and it may be as well to finish the bid even if confidence is
low. Before the two thirds point the options are greater. Indeed it is possible to
postulate a Rule of Thirds (figure 6).

BID BID
DECISION SUBMITTED
• Too difficult to • Re-assess • Bid cost

re-assess risk risk mostly spent
• Press on • Not too late • See it through

to cut losses
1/3 1/3 1/3

Figure 6: Risk re-assessment – the rule of thirds
In the first period, unless some fundamental, catastrophic event occurs any risk
re-assessment would be too uncertain to allow a positive decision to stop the
bid. It is only really in the middle period when a more objective re-assessment
is possible and while sufficient time and un-spent bid cost remains to make a
reversal of the bid decision a possibly wise choice.
In deciding to bid, the following risks need to be considered and re-assessed

as events unfold.
Competitors:
• How do their products compare with ours?
• How do their prices compare with ours?
• What is their delivery performance like?
• Do they offer long term product support?
• What standing/influence do they have with the client?
• What pricing strategy will they follow (e.g. ‘loss leading’)?
• Is there a ‘sitting contractor’?
The Requirement:
• How complex?
• Are we familiar with it?
• Can we offer compliancy on technical features?

Bidding Resources:
• Do we have top team people available to produce the bid?
• Have we got the money to bid?
Partners:
• Do we want to bid in a team?
• If so do we lead?
• Is there enough time to put a teaming agreement in place?
• Can/will team members defect to the opposition?
Subcontractors:
• Do we need any?
• Are they single source?
• Do we have time to get and negotiate formal proposals?
Prime contract Award:
• What validity must we offer?
• How does this fit in with our long term resource plan?
Prime contract:
• Can we or dare we reject or comment on the terms and conditions?
• What risks do they contain?
It can be seen that there are very many things to consider and in terms of those
risks, which are not associated so much with the process of bidding but more
to do with the potential prime contract, it is essential to have a strategy for dealing
with all such risks. The options may be:
Option Principle
1 Ignore the risk and hope it does not materialise
2 Comment on it at the bid stage (i.e. draw it to the client’s attention)
3 Remain silent at the bid stage but aim to deal with it at the prime
contract negotiations
4 Remain silent at bid and prime contract negotiation stages but have a
plan to eliminate or transfer the risk once in contract

Ignoring the risk is not an option! Of the other choices the best approach is not
always obvious. Commenting on a risk at the bid stage is theoretically the right
thing to do because it exposes the issue early on and shows the client how
thoroughly the prime contractor has understood the potential prime contract
and the lengths to which it has gone to respond realistically. On the other hand
it may count against the prime contractor when the client adjudicates all the
bids. To eliminate the risk of a caveat against the potential prime contract preju-
dicing the adjudication, companies sometimes choose not to mention the issue
until the process is sufficiently well advanced for prime contract negotiations
to have started. The danger here is that a good opportunity may not present
itself or that the client may not entertain new things being introduced at that
stage. In this latter situation the risk is that introducing new things may at best
irritate a friendly client or at worst cause him to re-open the competition. This
leaves the final choice which is to say nothing until the prime contract is awarded
and underway when raising the issue, with the intent perhaps of re-negotiating
the prime contract, may meet a stonewall or a penalty of some sort.
For example, if a prime contractor considers bidding for a prime contract knowing
or believing it could not complete the project on time it has a number of choices:
Option Principle
1 No bid
2 Offer an alternative schedule
3 Bid to meet the completion date but aim to shift the date in prime
contract negotiations, perhaps by offering something in return
4 Bid to meet the completion date but plan to ‘manage’ the problem away
as opportunities arise during prime contract performance
Option 1 may very well be the right answer if it is known that the client will not
under any circumstances consider alternative dates and if the prime contractor
is convinced that it could not in any circumstances meet the required dates and
if there was no probability at all of things changing during prime contract perfor-
mance. These are big ifs and the circumstances quite unique. If any of these
propositions does not hold true then another option should be preferred. Bidding
an alternative date is ostensibly the right thing to do, but it runs the risk that
the bid will be ruled out at an early stage of the adjudication. However the client
will no doubt do his own risk assessment on offered completion dates and it
may be that the prime contractor’s preferred but ‘late’ date is of lower risk than

any offered by competitors. So this option could turn out to be the best. To avoid
the risk of premature elimination it may be that Option 3 is preferred. It is driven
by the ‘let’s get to the table’ philosophy but of course runs the risk that the client’s
risk analysis will reveal the strategy. The final option depends on a hard nosed,
some would say pragmatic, approach that major projects almost always entail
a change of scope or direction at some stage and that such events are the best
time to reset the prime contract schedule.
3. Bidding
Once the decision to bid is made, it having been decided to risk the cost of bidding,
diversion of resources etc against the potential benefits of securing the prime
contract, the real risk is that the bid will not be produced in a way that gener-
ates an attractive result.
Putting a bid together is a project in its own right. There is a requirement to

meet and a deadline to achieve. The result must be a quality bid, produced within
budget and delivered on time. Like any other project it needs a management
team (figure 7) and the disciplines that go with it.
BID MANAGER
Task setting
Bid structure
Bid approvals
Co-ordination
Risk analysis
Proposal structure Marketing manager Finance manager Commercial manager Project manager
• Story boarding • Competitor analysis • Bid cost control • Partners • Technical
• Word processing • Lobbying • Costing • Subcontractors • Programme
• Printing • Intellegence • Pricing • Legal • Project

management
• Briefings • Negotiation
• Quality
Figure 7: Bid Management

This is a fairly stylised structure but indicates the sort of organisation, functions
and responsibilities that can be involved. Its size and constitution will depend
on the scale of the bid but to be successful it will depend upon:
• Having top team experts
• Operating as a tight, effective team
• Being dedicated to the bid
• Having the necessary assets and facilities
• Having the necessary finances available
A half hearted, non-expert, part time, unfunded team will not produce the winning
bid! As an absolute minimum the project manager must be retained from the
bid phase into the prime contract phase. Ideally the commercial and finance
managers should also be common to both phases. A successful bid put together
by these key players will be translated into a major risk to project implementa-
tion if there is little or no continuity of personnel between the bid and the contract.
This can then become a resource management problem for the prime contractor.
As has already been said, bid teams need the experience of staff working on
contracts and yet, if successful in a new bid, some of those key staff need to move
onto the new contract to provide that essential continuity.
An important task for the bid team is to establish a win strategy so that cost
and effort can be optimally deployed. The win strategy will always be highly
project-specific but must be based on the best intelligence with regard to:
• Mandatory requirements of the IFB;
• Adjudication procedures;
• Adjudication criteria.
Identifying adjudication criteria is not always easy. Adjudication criteria tend

to be: formal and published to the bidders; formal but not published; informal
(i.e. invented once bids are received) or absent. If there are no criteria at all then
lobbying could well be the principal if not the single element to the win strategy.
If there are formal, published criteria which include relative weightings between
criteria then a more objective, scientific win strategy can be developed so as to
ensure that valuable bid time, money and effort are devoted to those aspects
which will win most points in the adjudication.
Another technique for reducing the risk of the bid being unsuccessful is to put
in place a bid review team. The review team’s task is not to contribute in any
way to the preparation of the bid but to regularly review the bid during its prepa-

ration from the client’s perspective. Its role is not an editorial check of the bid.
Its task is to shake the bid and ask the fundamental question, is it any good?
The characteristics of the review team are:
• Members must be senior to the bid team members so as to command

respect and exercise authority;
• Disciplines must mirror the disciplines of the client’s adjudication team;
• Members must know the client and have the experience to put
themselves in the client’s shoes;
• Members must have the time and commitment to read and absorb all
the bid invitation material and not just ‘float around’ being clever but
disruptive;
• Members must be hard nosed and willing to sack members of the bid
team or to tell the bid team to tear it up and start again.
The review team has two principal questions to answer. Firstly it must ensure
that the bid is attractive in terms of presentation, content, substance and intel-
ligibility. It is often the case that bids, certainly the major ones, are comprised
of contributions from a wide range and number of sources possibly including
subcontractors or teaming partners. The result can be incoherent and look as
though it has been thrown together, even down to relatively minor points such
as paper size (EU and US use different standard sizes for example) and character
style/font size of typescript. The red team must aim to ensure that the end result
is pleasing to the eye and is reader friendly. Again, this is more than a proof read.
The essential question is: does this bid have the look and feel of a serious and
professional offer from a prime contractor competent to undertake the project?
The second purpose is to ensure that the bid responds to the questions set by
the IFB. Bid invitations frequently specify the required structure of bids (e.g.
number of volumes, content of each, number of copies with and without price
information), documents to be provided (e.g. plans and specifications), responses
to be given (e.g. compliancy matrices) and options to be offered. Bid teams can
get carried away doing their own thing. It is the task of the review team to drag
the bid team back onto the right path. The aim is not simply to verify that the
bid is technically competent and well presented. The aim is to confirm that the
bid is answering the right question.

4. Pricing for risk

Assuming then that a final, irrevocable decision to bid has been made and
assuming that the pre-contract project risk analysis is well established then a
most pressing question arises as to what allowances should be made in the price
to cover perceived project risks. Theoretically if the price is high enough the
prime contractor will take any and all risks. However, clients do not have unlim-
ited funds, competition does not permit generous covering of risk within the
price and in any event a primary obligation of the prime contractor is to protect
the shareholders’ interests and that militates against ‘unintelligent’ acceptance
of untenable or high impact/high probability risks.
If the level of risk is significant and the nature of the principal risks is such that
they lend themselves to mitigation and elimination through joint action between
prime contractor and client, then a form of contract that is based upon cost-
risk sharing may be preferred (see Section 3). In such a contract all risks are
effectively shared because the immediate risks of performing the contract (e.g.
technical and timeframe risks) have, it could be said, no more than a cost impact
if they arise. Thus if costs are shared, risk is shared and there is a mutual incen-
tive to cooperative active project risk management. The remote or consequential
risk of performing the contract (e.g. a third party claim against prime contractor
or client) is not so easily shared, but must still be considered.
If cost-risk sharing is in operation the degree of provision to build into the scheme
still needs to be assessed and discussed, but by both sides. However, for the
purposes of this Section it is assumed that cost-risk sharing does not apply and
it is for the prime contractor alone to determine how to cover risk with regard
to prices to be offered. This is called pricing for risk. Some provisions may be
included in the cost base or added as percentages or amounts to cost or added
as percentages or amounts to price. For these purposes all will be referred to
as pricing for risk. The primary aim is to keep risk provisions out of the price
as any unnecessary allowances merely make the price uncompetitive. To reiterate,
it is better to get to the negotiating table with a low price and a game plan to
improve the position than to take the safe route of fully pricing for all risk and
being immediately eliminated from the competition on the basis of high prices.

Thus, using the project risk register, it should be possible to eliminate certain
categories of risk insofar as pricing is concerned:
Category Risk description
1 Risks that can be passed to the client under the prime contract
2 Risks that can be passed to subcontractors under the terms of purchase

orders and subcontracts
3 Risks that can be covered by insurance
4 Risks that, ostensibly, the prime contractor will carry but for which
feasible plans exist to shed the risks if and when they should materialise
These categories cause very many risks to be excluded from pricing. Category
1 risks include such things as inflation risk which can be passed to the client by
including a variation-of-price clause (see Section 3). Category 2 risks may, for
example, include eliminating exchange rate risk by paying overseas suppliers
in Sterling. In Category 3 insurance may cover costs of delay caused by fire.
Liability for lateness in Category 4 might be later transferred to the client by
showing that delay was caused by his acts or omissions.
Finally attention should be turned to those risks that remain. It is sometimes

helpful to split these into two main headings:
Risk Allowances: Events certain to occur but to an uncertain extent.
Risk Contingency: Events which are uncertain to occur.
Provisions for both may be included in pricing. Whatever the type of risk, analysis
of impact and probability should be carried out and thought given to the relation-
ship of risk to price (figure 8). Pricing for risk is an essential part of bid preparation.

High
IGNORE IT IGNORE IT
PRICE
Impact
IT
IGNORE IT IGNORE IT
Low
Low Probability High
Figure 8: Impact and Probability
Figure 8 shows that many risks are best ignored in so far as pricing is concerned.
No risk should be completely ignored but, other than in a cost-risk sharing scheme
(see Section 3), there is no point covering all the risks by provision in the price.
Not only would this produce an uncompetitive price but some risks are not appro-
priate for treatment by pricing provision. The risk of the prime contract being
cancelled for the convenience of the client is a serious financial risk but there
is little point in putting something in the price for it as, if the prime contract is
cancelled, the price will never be paid as such.
High impact, high probability risks can be ignored because if the impact is high,
having a notional value of, say, five times the prime contract price, then there
is absolutely no purpose in including 5% or 10% in the price. Such risks can
only be treated in one of two ways. Firstly by having a plan to avoid or shed
the risk if it arises. Secondly by deciding not to bid in the first place! High impact,
low probability risks can more safely be ignored. Again there is little purpose
in putting a nominal risk provision in the price against a high impact risk which
is actually not expected to arise. The strategy should be to ignore it in pricing
but keep it under constant review in risk management to ensure it does not materi-
alise. High probability, low impact risks on the other hand demand a provision

in the price, but if the impact is very low it is unlikely to be noticeable in the
swings and roundabouts of prime contract performance. Almost by definition,
low probability, low impact risks need not have a pricing provision made for
them.
The foregoing material on pricing for risk has made one implicit assumption.
This is that the cost of the job is the subject of sound cost estimates to which
provisions are then added, or not added as the case may be, in relation to identi-
fied risks which may later arise, the impact and probability of which have been
analysed. However, it is possible that this stable basis may be unstable if the
basic cost estimates are wrong, either because of poor estimating or because
the job was not understood at the time it was priced. There is little comfort in
having done a brilliant analysis of future risks as a result of which 12.75% risk
provision was included in the price if the basic costs were underestimated by
500%! Needless to say a comprehensive understanding of the prospective job
backed up by quality estimating is an essential pre-requisite to pricing.

5. Risk review board

In many companies when a bid is approved for submission many people are
involved in ‘signing it off’ but sometimes the approval procedure is excessively
concentrated on the price. Such procedures should make it clear that each function
within the prime contractor is signing for something slightly different. These
functions and their responsibilities can be many and varied:
Function Primary approves the bid in respect of
Project Manager The entire requirement is understood.

Plans and resources exist to discharge the prime contract
Technical Manager The technical aspects are understood
Production Manager The manufacturing requirements are within the prime

contractor’s capability and capacity
Estimating Manager The requirement has been fully analysed and estimated ‘bottom
up’ using appropriate estimating methods
Programme Manager Detail plans exist to show the prime contract can be completed
on time
Finance Manager That cost estimates and prices have been formulated in accor-
dance with approved rates and factors
Contracts Manager That the terms and conditions have been reviewed and
commented upon in line with prime contractor policy
Quality Manager That the quality requirements are consistent with prime
contractor approvals
In addition, those functions which will provide resources in the performance

of the prime contract should:
• Confirm that resources and their facilities exist or will be brought on-
line as the prime contract demands.
• Contribute to the cost estimating process and confirm that their respon-
sibilities can be discharged within the costs allowed.
• Identify any capital expenditure or other investment necessary for the

performance of the prime contract.

The whole bid should be reviewed and authorised with perhaps the final sign
off occurring at a ‘bid approval’ or ‘tender vet’ meeting. However, such proce-
dures make the implicit assumption that each function has identified and dealt,
in some way or another, with any risks which are associated with their area of
responsibility. This type of approach is inadequate as it fails to give risk the neces-
sary exposure in the review-and-approve part of the process. The procedure
should require the establishment of a Risk Review Board whose tasks are:
• To review, modify if necessary and approve the Pre-Contract Risk

Analysis;
• To interrogate the bid team or the prime contractor functions listed

above on the identification of risks in their respective areas and the
mitigation plans;
• To ensure that all risks are owned by an individual.
• To make the final decision that the risks having been identified analysed
and mitigation planned result in a net total risk that is acceptable to
the prime contractor.
These heady responsibilities demand that the Risk Review Board is comprised
of senior managers representing the broad perspectives of the prime contractor’s
interests. In particular the fourth responsibility listed above is most onerous.
Companies are in business to make a profit in return for taking a risk, but that
does not mean that a prime contractor is in business to take any risk no matter
how great, no matter how dire the potential consequences. Therefore the final
decision to proceed or not with the bid must rest with the Risk Review Board
un-swayed by the bidding costs incurred, the momentum and wishes of the bid
team or the possible reaction of the client if a bid fails to appear.
Of course the risk-risk scenario demands that initial bid/no bid decisions are
made only in relation to those projects where there is an acceptable probability
of winning, combined with anticipation that the resultant potential prime contract
will be good business. Thus the risk-reassessment undertaken during the bid
should not only continue to question the probability of winning but, as the pre-
contract risk analysis develops, it should also continue to question the
attractiveness of that potential prime contract. No-one will thank the bid team
for developing a position where there is a 99% probability of winning the greatest
lemon in business history. Thus in the normal course of events, bids coming
to the Risk Review Board for sanction will be approved but nevertheless in
performing its duties as Grand High Risk Inquisitor the Risk Review Board will
have made an invaluable contribution to the bidding process.

6. Making an offer
Having seen preparation of the bid through to its completion and approval surely
there can be no risks associated just with putting the offer on the table? Well,
there are eight areas of possible risk:
• Accidental offers;
• Validity considerations;
• Differences between client and prime contractor terms;
• Misrepresentations;
• Representations;
• Entirety of the offer;
• Language;
• Law.
When the prime contractor is ready to make its offer then it should do so by
sending its letter, quotation, proposal, bid, or tender and in all cases marking
the bid as a quotation and signed by the prime contractor representative having
the authority to make formal offers. On the latter point, to the outside world it
matters relatively little if the person signing the offer does not actually have the
authority of the prime contractor provided that he appears to have. Indeed it
could be said that there is no greater implication of such authority than the act
of signing the offer. However, in regular dealings with particular clients it is good
practice for the prime contractor to ensure that the client does know which of
its representatives is entitle to sign offers. Furthermore, in the extreme, there
is no requirement for offers to be signed by a person provided it is clear that
the prime contractor is making an offer albeit that some clients will demand
signed offers. The corollary of making it clear that an offer is indeed an offer
(i.e. capable of acceptance in the legal sense) is to make sure that communica-
tions with the client which are not offers should be clearly so identified. Letters
or other documentation conveying information, outline proposals, indications
of cost, budgetary estimates etc should be phrased so that it is clear that no offer
is being made. Oral communications should be similarly safeguarded.
When an offer is made it is wise to express a validity period. This is the period
within which the offer can be accepted so as to create a prime contract. Unless
there is a tender bond, or some valuable consideration for holding the offer
open for the stated validity then the offer can be withdrawn or amended by
the offering party at any time, although to do this during the adjudication of
competitive tenders can be risky unless the client has called for revised proposals

or otherwise allowed adjustments to be made. In any event an offer is effec-

tively cancelled if a counter offer is made, such as the client making an offer
of prime contract which is different in some way to the prime contractor’s offer.
The risks in offering a validity period of any significant length are principally
two fold. Firstly that new information will emerge which would cause the prime
contractor to wish seriously to re-consider its willingness to bid either in absolute
terms or on the basis of the prices or other terms presently on the table. Secondly
there is the problem that the validity required is longer than that offered by
the prime contractor’s subcontractors. This risk should have been identified,
assessed and allowed for as appropriate in the pricing exercise but it is never-
theless a good example of the need for careful consideration in offering particular
validity periods.
By the time that the offer is submitted to the client all negotiations with major
subcontractors should ideally have been completed both as to price and terms
but with the proviso that further negotiations may be necessary as negotiations
evolve with the client. Ideally those completed negotiations will have produced
terms and conditions agreed with subcontractors which are no less onerous
than those required by the client or those upon which the prime contractor expects
to settle with the client. The phrase ‘no less onerous’ is important because it repre-
sents the minimum position in terms of holding subcontractors on ‘back-to-back’
terms with the client’s potential prime contract. For example if the client wants
twelve months warranty then subcontractors should be required to give twelve
months warranty. However, whilst this is strictly back-to-back and no more
onerous it leaves the prime contractor with the risk of failure of a subcontractor
item which is just outside the subcontractor’s warranty but still within the client’s
warranty, because of the dwell time between prime contractor receipt and onward
handing over to the client. Hence the prime contractor should seek, say, fifteen
months warranty from the subcontractors so as to eliminate its risk in this area.
Thus the prime contractor can legitimately seek ostensibly more onerous terms
from its subcontractors. However, the real risk at the point of making the offer
to the client is that those ideals (subcontractor negotiations complete, no less
onerous terms) may not have been achieved. At that stage, actual or anticipated
mismatches should have been taken into account either in pricing or in
responding to the clients intended terms. Nevertheless the risks should be recog-
nised and negotiations with subcontractors continued after the offer has been
made in order to eliminate or reduce those risks. A danger here is that having
failed to achieve the ideals, subcontractors’ bargaining positions are strength-
ened if they know that the prime contractor’s bid has been submitted.

Misrepresentations are those inducements to the client to enter into a prime

contract which are deliberate or innocent misrepresentations of factual infor-
mation. In the extreme the remedy is recession of the prime contract and liability
for damages plus the possibility of criminal proceedings if the misrepresenta-
tion was fraudulent. Thus great care must be exercised when saying and doing
things which are intended to persuade the client to place the prime contract
with the prime contractor.
On the other hand, representations are those inducements which are factually
correct and which the client is entitled to believe that he can rely upon even though
the prime contractor may not have intended those inducements to form part
of his offer or of the consequent prime contract. If the client took into account
such inducements in making his decision to award the prime contract then he
can expect them to be implied into the prime contract even though express terms
are absent. Representations can be made quite unintentionally and the risk can
be high of undertaking a greater obligation than was intended. Although clients
are expected reasonably to distinguish between material which is merely adver-
tising puffery and that which is intended to create a binding obligation, the division
between puffery and real intent can be unclear particularly in matters of technical
detail. In the bidding and adjudication process it is common for clients to seek
clarifications from bidders as to the detail or ambiguities in their individual offers.
Answers given can be the simple clarification sought or they can possibly create
additional obligations either because a simple, brief answer establishes a broader
obligation than that conveyed by the detail of the original technical proposal
or because the prime contractor chooses to take advantage of the request for
clarification by ‘improving’ its bid (indeed it may be that was exactly what the
client was seeking). Similarly so when the client allows bidders to summarise
their offers by giving a presentation of their bids followed by a question and
answer session. This is usually a golden opportunity for the prime contractor
to really sell its offer and yet in enthusiastic, ‘don’t worry, we can do it’ presen-
tation-speak representations really can accidentally be made.
The risk of accidental representations can be avoided by including in the prime

contract an ‘entire agreement’ or ‘complete agreement’ clause which details all
of the documents which together constitute the whole agreement between the
parties. The parties can therefore decide whether the prime contract is made
up only of those prime contract documents prepared by the client as a formal
offer of contract or whether the agreement can incorporate by reference earlier
material such as the prime contractor’s bid, written clarifications, third party
specifications and standards. Thus by expressly stating what is in the agreement,
anything else is automatically excluded including representations (such as those

conveyed by presentation visual material, hand-outs etc) which could otherwise

be implied into the prime contract. The use of entire agreement clauses to exclude
what otherwise would have been implied terms is subject to a reasonable test.
Preceding the entire agreement clause, the prime contract should have the prime
contractor providing an ‘entire offer’ statement within its bid. For example the
bid may be submitted under a covering letter highlighting the key benefits of
the offer written in marketing terms rather than those of the lawyer. The offer
may be bound in several volumes of which one is an executive summary the
purpose of which again is to focus on the main advantages of awarding the prime
contract to the prime contractor. In either case it should be decided whether
such summaries are part of the formal offer in the strictest sense. They certainly
are part of the proposal but are they intended to be part of the resultant prime
contract? Sometimes the client may ask for information (e.g. an analysis of prices,
predicted life cycle costs) which is helpful in bid adjudication but which is definitely
not intended (by the prime contractor at least) to be part of the prime contract.
The discipline of providing an entire offer statement helps the prime contractor
to be clear what exactly it is offering and what it is not.
Finally there are the issues of the language and applicable law of the prime
contract. In any international contract the contract should state the official
language of the contract. All contracts should state the applicable law under
which the prime contract is created and to which it will be performed (these
can be different, one law for formation and one for performance and possibly
a third for arbitration). If the language is other than English there is a risk of
ambiguity arising in the translation. The converse is true for the non-English
speaking client of course but since English has become the standard language
of commerce, business and industry English is preferable. If the law is other
than English Law or Scots Law there is introduced much uncertainty as foreign
laws can be markedly different from the UK varieties in terms of implied obliga-
tions and duties. Thus the English language and a UK law should be stated as
a premise for the bid.

7. The priced list of risks

The foregoing shows that the simple act of making an offer can be fraught with
risks. Nevertheless as the bid goes onto the table it represents, amongst other
things, a particular set of proposed risk allocations between prime contractor
and client. However there is nothing to prevent, and much to commend, the
prime contractor offering options in terms of allocation of risk. Most risks have
a value to a buyer (how much would he pay not to carry a risk) and a value to
a seller (how much would he reduce his price to avoid a risk). These values are
variable in themselves and may not naturally coincide between prime contractor
and client. For example the prime contractor may be prepared to reduce its price
by 5% in exchange for the client carrying the risk of inflation-driven cost increases.
The client may be prepared to pay 10% more not to carry that risk. Clearly there
is room to negotiate! Such variation in the valuation of particular risks may reflect
no more than a differing perception of the probability and impact of the risks.
It may reflect the fact that one side may be better able, or is logically the more
appropriate, to carry the risk.
Emerging from these considerations is the idea that the prime contractor could
put forward a priced list of risks as options for the client to consider. All compa-
nies are used to offering options that would have the effect of altering the cost,
scale, performance and timescale of the project but the concept of offering risk
options is one that should be given some thought. The risk options can be offered
with the bid or during prime contract negotiations whichever appears the
optimum strategy in the given circumstances. Not only does this approach do
full justice to the principle of using the prime contract as a risk allocation vehicle
but it would also assist in post contract dispute resolution. For example, if post-
delivery liabilities (express warranty, implied warranty, Sale of Goods Act implied
undertaking) can be shown to have been discussed in detail pre-contract with
the client, who took some financial or other valuable advantage in return for
eliminating such liabilities, the prime contractor has a strong and clear case for
defending any later action by the client in the event of a post-delivery problem.

8. The caveats register

From the point at which the invitation for bids is received through to the moment
at which the prime contract is signed, the very many people involved in bid prepa-
ration and in the planning of prime contract execution regularly identify issues
associated with the potential prime contract. Some of these issues may be so
important that they must be identified at the time of bidding. Some may be less
critical and can be left until prime contract negotiations. Some may be minor
issues to do with the terms and conditions. Others may be fundamental premises
upon which the price has been formulated. All these assumptions, exclusions,
premises, understandings, dependencies etc can collectively be referred to as
caveats and should be put into a register (figure 9).
Serial Caveat Source Resolution Price Impact Action
Figure 9: Caveats Register
The register should be brought into being on the first day of the bid prepara-
tion and it should be the receptacle for all thoughts, ideas, concerns that are at
all to do with the potential prime contract. In many instances the pre-contract
risk analysis and caveats register can be merged into a single document which
should be kept up to date throughout the period of bid preparation and prime
contract negotiation.
Once prime contract negotiations have commenced it may be decided to produce

a version of the register to table with the client as a basis for structured discus-
sions on risk allocation.

As well as providing the essential function of recording all the identified caveats
the greatest purpose of the register is to keep each caveat ‘open’ until something
positive has been done to resolve it. In principle there are only seven possible
resolutions:
1 OBE – Overtaken by Events because…
2 Risk carried by client – expressly by prime contract clause…
3 Risk carried by client – impliedly because…
4 Risk carried by prime contractor – expressly by prime contract clause…
5 Risk carried by prime contractor – impliedly because…
6 Prime contractor risk but covered by insurance – see policy clause …
7 Prime contractor risk but conveyed to third party – see subcontract

clause…
In particular categories 4 and 5 force the prime contractor to keep in mind pricing
for risk. Categories 6 and 7 force the person negotiating the prime contract to
be mindful of and interactive with other business functions such as insurance
management and purchasing.
9. An effective contract
Having concluded negotiations the aim is to sign the prime contract as soon as
possible. This aim conveys two concepts. Firstly that the prime contract must
be signed by people (one from each party) and secondly that if signature is
required then the prime contract must be in writing. Apart from so-called
speciality contracts (which cover a very small range of types of contract) there
is no requirement either for signatures or for the prime contract to be in writing.
However, written, signed contracts serve to eliminate the risk of uncertainty both
as to the intent of the parties to make their prime contract and as to the detail
if later a question of understanding or interpretation were to arise.
Both parties will want their prime contract to be effective and there are four
main risks to achieving this:
• Improper Formation
• Uncertainty
• Mistake
• Frustration

To be properly formed a contract must satisfy the legal requirements of valuable

consideration; offer and acceptance; mutual intent to create legal relations;
capacity of the parties to make contracts; legality and possibility. In business
contracts the only one of these that usually gives a problem is offer and accept-
ance. Although Lord Denning made attempts to soften the rule, the law still
demands a clear offer met with an unequivocal acceptance for a contract to have
been formed. The Battle of the Forms 1 is one example where a complete offer
and acceptance can be difficult to determine. Another area of difficulty is where
one side ‘accepts’ the other’s offer ‘subject to the following’. This strictly speaking
is a counter offer and no contract is created (unless the counter offer is met with
an unequivocal acceptance) and yet the parties proceed as though there were
a contract. Indeed if the ‘contract’ is eventually performed (seller delivers and
buyer pays) then a contract will indeed have existed and if there is then a dispute
it would, in the ultimate, be for the courts to deduce the applicable terms. This
is not a satisfactory situation. If the uncertainty is to be avoided the parties must
strive at the outset to ensure that there is an entire agreement reflecting a genuine
offer and acceptance.
Another facet of offer and acceptance is the method of acceptance. The general
rule is that acceptance must be communicated, but with the exception of accept-
ance under the postal rule, which allows acceptance to have occurred when a
communication of acceptance is put into the post, whether or not the other side
ever actually receives the communication. Even today cases come before the
courts on the question of the postal rule. To avoid this problem the offering party
should include in his offer an explicit, written statement that a contract has only
come into being upon his receiving a written, unequivocal acceptance from the
other side.
The word uncertainty has already been used here in the sense of an entire under-
standing as to terms not being achieved. As has been mentioned this would not
necessarily affect the existence of the contract. A court would have to imply
‘missing’ terms or to arbitrate between conflicting terms, but only in so far as
the original intent of the parties can be deduced by the court. However, if the
uncertainty is so great that a court cannot find any evidence of a common under-
standing then the entire ‘contract’ can be made void for uncertainty. To avoid
this risk the parties should go to great lengths to ensure that the agreement is
not only complete but also clear and unambiguous.
1 Where the parties proceed with the ‘contract’ without achieving a clear instant of unequivocal
acceptance but ‘exchange blows’ in passing paperwork – quotation, purchase order, delivery
note etc – in which seller and buyer each in turn refers to its own standard conditions

The final possible risks to the effectiveness of the contract are mistake and frustra-
tion. In both cases a court could set the contract aside. A mistake in this sense
is something fundamental (such as the existence of the goods) in which the parties
were in error at the time the contract was made. A frustrating event is an occur-
rence (such as the destruction of unique goods) which happens after the contract
was made which so fundamentally alters the position as to have been entirely
outside the imagination of the parties when the contract was made. Fulsome
discussion, checking, examination prior to contract should remove the risk of
mistake. Frustration is theoretically a risk which is impossible to prevent since
the intervention of something completely unforeseeable can not be dealt with
in advance. However, in business contracts virtually all risks can be foreseen
and dealt with in the contract and a contract voided on the grounds of frustra-
tion is a rare event. Incidentally the law does not recognise that a contract can
be set aside for mistake or frustration because one side made a bad bargain. If
the buyer mistakenly orders the wrong thing that is just hard luck for him. If
the seller finds that he cannot complete the contract within his budget that is
just hard luck for him.
These things are all important in avoiding these risks to properly form a contract
which is complete and certain. And yet in the dynamics of the real business world
a buyer may issue a Letter of Intent (LOI) or an Instruction to Proceed (ITP).
Although an LOI may increase the confidence of the seller that the buyer is going
to proceed, the seller nevertheless goes ahead at his own risk if he starts work
solely on the basis of an LOI. An ITP can be more useful if it is so drafted to be
an offer of contract albeit that it conveys only the key terms such as a summary
of the work, timeframe for performance, price (or method by which price will
be agreed) and payment. If the ITP is capable of acceptance then acceptance
will constitute a contract although there is then a risk that the parties will never
conclude complete terms. Certainly the risk to the buyer is that once the seller
is working against an accepted ITP there is little incentive for the seller to agree
unfavourable terms which the buyer later seeks to introduce, especially since
ITPs tend to be used in cases of urgency leaving the balance of bargaining advan-
tage with the seller.
The last point to note is that a contract need not be effective upon signature.
It is permissible to include a condition precedent, the non-satisfaction of which
would cause the contract to fail to come into existence. The most common
example is a condition which requires that the seller shall have received the
buyer’s advance payment before the contract shall come into effect. To start
work prior to the satisfaction of a condition precedent is to proceed at the risk
of loss of the cost incurred and the effort deployed being wasted if the condi-
tion is not then satisfied.

10. Negotiation
Somewhere between making an offer and making an effective contract is the
risk of throwing away all the good work of the bid team and securing a lemon
contract. Between bid and contract there will be a period of negotiation between
bidder and client. The negotiation is a crucial phase that can make the differ-
ence between the contract proving to be a commercial success or disaster. The
golden rule of negotiation is to follow the seven Ps: – Prior Planning and Prepa-
ration Prevents Pretty Poor Performance.
The importance of planning, preparation, objectives analysis, rehearsal, game

planning, tactics and timing in contract negotiation cannot be over-stressed.
The risk of being out-smarted by the client’s ace negotiator is a real one. The
prime contractor should field its strongest negotiator or negotiation team
comprised of those who have the best balance of negotiation skills, job knowl-
edge and ‘acceptability’ to the client (figure 10).
Difficult to get NEGOTIATION SKILLS Negotiates in

to agreement the dark
JOB KNOWLEDGE CUSTOMER

RELATIONSHIP
Cannot get
the best deal
Figure 10: Components of the Ideal Negotiator

For a full analysis of the skills and risks in contract negotiation readers are invited
to refer to Successful Contract Negotiation (Hawksmere).
11. Contract launch

The final risk of the pre-contract stage is that those people to whom responsi-
bility falls for the performance of the prime contract may not fully understand
the nature of the prime contract, its risks and the evolution of terms through the
process of prime contract negotiation. The best way to mitigate this risk is to
hold a prime contract launch meeting immediately following prime contract award
and prior to commencing the work. Indeed ISO9000 proposes such a review and
provides a basic agenda for that purpose. All of the relevant business functions
must be required to attend including those not closely involved in the work. For
example it is important for functions such as Finance (who provide project, cost
and management accounting) and Personnel (who may have to recruit staff for
the prime contract) to be as involved as those actually undertaking the project.
The principle aims of the prime contract launch meeting are to:
• Describe the nature, scope and timeframe of the prime contract;
• Identify the key terms and their meaning;
• Review the entire pre-contract risk analysis/ caveats register and explain
how all the risks were dealt with;
• Summarise the progress of the negotiations with the client highlighting

any sensitive areas to be avoided in future contracts with him;
• Identify key subcontractors, suppliers and partners and describe how

dealings with them should be conducted;
• Launch the prime contract risk register based on mitigating all risks
residing with the prime contractor;
• Identify the budget and cost allocations available to spending depart-

ments within the prime contract price.
The meeting should be properly minuted with key actions identified. In fact
IS09000 requires a written record to be kept but the individuals responsible for
conducting the meeting must ensure that the record produced is a useful basis
for undertaking the work and not a blank record produced solely for the purpose
of satisfying the ISO.


• The linking of project risk management and commercial risk manage-
ment must commence at the earliest possible stage in the life of a project.
The best opportunity is in the time leading up to the decision to bid
for the project.
• Bids for major projects should be treated as projects in their own right.
This leads to active risk management not only for the bid but also for
the prospective prime contract. The decision to bid must be kept under
review with a preparedness to withdraw if ongoing project and
commercial risk analysis points either to a low win probability or to
the probability of winning a lemon.
• The actual process of converting a bid through negotiation into a

binding, effective and lemon free contract is itself subject to many risks.
Risk management through this key phase is crucial.
Checklist
Risk: The potential prime contract is a lemon

DO
• Keep the decision to bid under review
• Link project risk management and commercial risk management

together at the bid decision stage
DON’T
• Keep going with a bid just because you have started or because of the
sunk costs
Risk: The bid is not taken seriously

DO
• Treat all bids as ‘must win’
• Allocate top quality resources
• Plan to retain key bidding staff into the prime contract phase
• Establish a bid review team
• Give the bid review team teeth and staff it with senior managers

DON’T
• Do bids on a simple percentage basis
• Leave the bid team to its own devices
Risk: Pricing for risk is unintelligent

DO
• Price for high probability low impact risk
• Differentiate between risk allowances and risk contingencies
• Remember risks can be contractually allocated to client or suppliers
• Remember it is possible to insure against some risks
DON’T
• Price for low probability low impact risks
• Price for high impact risks
• Just add an arbitrary percentage or amount for risk
Risk: Offer is unintended or defective

DO
• Remember an offer can be met with an acceptance creating a contract
• Be clear when an offer is being made
• Be clear what constitutes the offer
• Specifically exclude what is not in the offer (e.g. representations)
• Give a validity period
DON’T
• Allow unauthorised offers
Risk: Prime contract is defective

DO
• Take care to ensure prime contract is properly formed
• Hold a prime contract launch meeting in line with ISO9000
DON’T
• Forget a defective contract at best will not provide for what was expected
and at worst may be no contract at all

THOROGOOD
PROFESSIONAL
INSIGHTS
Section 3
Financial risk
1. Prime contract financial risk
2. The nature of price and the sharing of cost risk
3. The client will not pay
4. The client cannot pay
5. Inflationary cost increases
6. Foreign currency fluctuations
7. Contract termination
8. Financial claims against the prime contractor
Checklist
Section 3
Financial risk
1. Prime contract financial risk

There are two financial parameters that are at the heart of any project.
Profitability and cash flow. Profitability relates to the final relationship between
cost and price. The outturn profit compared with the expected profit (being a
main reason for the prime contract having been bid in the first place) is a function
of the outturn costs compared with the costs estimated at the bid stage. Costs
are both internal (primarily labour and overheads) and external (primarily subcon-
tract). Internal costs may be under the direct control (for example the hours booked
to the project) of the project manager or outside his direct control (for example
overhead rates that are dependent on business volume). External costs likewise
may be inside his control (multiple sources of supply) or outside his control
(dominant subcontractors). Cash flow similarly may be inside his control (for
example achievement of payment milestones) or outside (for example pay day
for the labour force).
2. The nature of price and the sharing of cost risk

There are four basic types of contract price that are used for most projects:
Governing principle
Firm Price A price which is not variable for any reason other than change
in specification, quantity or time for performance.
Fixed Price A price the final value of which is fixed by reference to some
variable parameter such as an inflation index or currency
exchange rate
Cost Incentive A price based on the prime contractor’s actual costs but with
client and prime contractor sharing overspends or under
spends against a pre-agreed target cost.
Cost Re-imbursement A price based on the prime contractor’s actual costs plus a pre-
determined amount or percentage by way of profit.

3 FINANCIAL RISK
Combinations of these may be used and there may be what appear to be varia-
tions, such as where the price for the project does not become due in effect as
a lump sum2 upon completion of the project, but in installments as and when
the completed project delivers the service for which it was intended. But these
four basic patterns reveal the essential relationship between cost and price. In
effect they represent a spectrum of cost-risk allocation between client and prime
contractor as shown in figure 11.
FIRM PRICE COST

RE-IMBURSEMENT
Seller has Buyer has

cost risk cost risk
Figure 11: Cost Risk Spectrum
In a conventional arms-length relationship the prime contractor will prefer a

firm price where he perceives the risk to be small and the opportunity for profit
great. Where the risk is high he will prefer cost re-imbursement and hope that
the client will have plenty of money to cover the inevitable expenditure that
will be incurred purely as a result of the uncertainty in the contract. The client’s
perspective is the exact opposite. The greater the risk the more he will want a
firm price arrangement so as to contain the risk, allocate it to the other party
and avoid any financial liability beyond paying the contract price. The fixed
price approach deals with one or two risks only such as inflation and foreign
currencies, of which more later. The primary choice is between firm price and
cost-reimbursement which sit at opposite ends of the cost risk spectrum. The
cost incentive contract provides the compromise solution for high risk work
where neither side is willing or able to carry the entire cost risk. The relation-
ship between cost and profit is illustrated in figure 12.
2 Notwithstanding that the amount is paid out in stages during, on or after performance
of the contract.

3 FINANCIAL RISK
Fee
Unlimited fee
A
Maximum fee
Max % fee
60/40
Min % fee
B
Target fee 70/30
C
Minimum fee
Cost
Most Target Most Max
optimistic cost pessimistic price E
cost cost
COST INCENTIVE RANGE
Figure 12: Cost Incentive Scheme
The essential principles of the cost incentive scheme are:
• The price is agreed after the prime contract is completed on the basis
of costs incurred but according to a cost incentive scheme agreed at
the outset.
• The parties agree a target cost and a cost incentive range within which
the actual costs are expected to fall.
• The parties agree a target fee which is the profit to be paid if the actual
costs exactly equal the target cost.
• The parties agree ratios in which they will share under spend or
overspend against the target cost.
Thus the final price for the prime contract is the actual costs incurred plus the
target fee plus the agreed share of savings against the target or less the agreed

3 FINANCIAL RISK
share of overspends against the target. A key difference therefore between a

firm price and a cost incentive scheme is the tolerance within which the costs
are reasonably expected to fall. For a firm price where the technical content of
the contract is well understood the cost estimating accuracy may be +5%. In a
cost incentive scheme where the technical risk is much higher the tolerance
around the target cost may be +15%. In the example shown in figure 12 the
following are assumed:
Parameter Normal Assumption
Target Cost Reasonable estimate assuming normal efficiency

and typical problems
Most Optimistic Cost Improved efficiency and no problems
Most Pessimistic Cost Degraded efficiency resulting from and together

with major problems
Target Fee A percentage of the target cost
Under-run share ratio Negotiable (shown as 60/40 in figure 12)
Over-run share ratio Negotiable (shown as 70/30 in figure 12)
If life were as simple as assuming that the actual costs will definitely fall within
the cost incentive range then the scheme and the graph would only run from
point A to Point C. However, the parties must legislate for the possibility of costs
emerging outside the two extremes where they have a number of choices:
Point A: The scheme might permit the prime contractor to continue to

improve its fee at the same under-run share ratio if costs are lower
than the most optimistic cost. This results in an unlimited fee
opportunity. Alternatively the parties may agree to limit fee either
in absolute or percentage terms.
Point C: The scheme might allow that for costs exceeding the most pes-
simistic cost the prime contractor should suffer no further erosion
of its fee and a minimum fee in absolute or percentage terms should
apply. On the other hand the client may demand an absolute limit
on its liability and include a maximum price (point D).

3 FINANCIAL RISK
Point E: If a maximum price is operative point E does not exist as the prime
contractor’s fee erodes at the rate of 100% from point C until it reached
point D after which losses would accumulate at the rate of 100%.
However, in such event the client may agree to limit the prime
contractor’s liability for loss and introduce a point E at which the
curve changes shape to fix the loss in absolute or percentage terms.
This one graph shows the scope for variation that can be negotiated not only
beyond the normal boundary conditions at A and C but also between them in
terms of the share ratios, target fee and cost incentive range. The first main advan-
tage of such schemes is that they are flexible and can be tailor-made to individual
circumstances.
The second advantage of cost incentive schemes is that they promote co-opera-
tion, openness and sensible decision-making between client and prime
contractor. If both sides are set to benefit by technical decision-making and
problem solving which minimises cost then so much the better than in a firm
price arrangement where the client is motivated to squeeze the last ounce of
performance from the prime contractor (regardless of cost to the prime
contractor) and the prime contractor is motivated to deliver the bare minimum
performance (regardless of client’s situation).
3. The client will not pay

In essence when the prime contract is fully performed the client is obliged to
make payment of the prime contract price. From the prime contractor’s perspec-
tive reliance on this simple premise has three main drawbacks:
• Negative cash flow while the prime contract is in hand
• No time limit on when the client should pay
• Inadequate remedies if payment is late
Taking these in turn it is clearly the case that carrying the burden of funding
work in progress under the prime contract is a risk. If no payment is to be made
at all until the work is finished there is at best the cost of funding the work in
progress and at worst there is the risk of the prime contractor becoming insol-
vent as no cash comes in to offset the outpouring of cash into salaries, wages,
overheads, materials and suppliers. Set against the client’s wish to pay nothing
until the prime contract is fully performed is the prime contractor’s wish to have

3 FINANCIAL RISK
100% of the prime contract price paid as an irrevocable down payment placed
with order. Somewhere there is an acceptable medium between the two. The
basic options are as follows:
Arrangement Operative principle
Advance payment A proportion of the prime contract price placed with order
Stage payments Discrete sums of money paid as and when proportions

of the work are completed
Milestone payments Discrete sums of money paid as and when specific,

key tasks are completed
Progress payment Regular re-imbursements of costs incurred

by the prime contractor
The details of these arrangements should all be worked out pre-contract.

Inevitably these approaches will feature in the price negotiation as the effect
of them is to move the cash flow risk between client and prime contractor. Having
agreed to make payments while the work is in hand the protection or security
that the client seeks is to make payments only at his discretion (i.e. if he is happy
that good progress is being made), to achieve early passage of title in parts
and materials under vesting, to make the payments recoverable in the event
of delay or default and to retain a sizeable element of the price until the prime
contract is fully performed and all of the liabilities (e.g. including those under
warranty) of the prime contractor have been discharged. All of these are undesir-
able to the prime contractor as they mean that the timing of such payments
and their absoluteness are at risk.
Unless the prime contract specifies the time within which valid invoices shall
be paid the prime contractor has to fall back on the Sale of Goods Act which
merely requires the client to pay within a reasonable time. This is too vague
and open to interpretation and argument. The prime contract must be crystal
clear that once the relevant event (e.g. completion of a milestone, the making
of a delivery) has occurred the prime contractor is entitled to raise an invoice
which must be settled within a fixed and specified number of days. Client discre-
tion or the client’s right not to pay until he has received monies from his customer
(the ‘pay-when paid’ regime) introduce uncertainty and therefore risk to the
prime contractor both of which were supposed to have been avoided by the
inclusion of firm payments arrangement. Payment against a letter of credit
whereby a third party (normally a national bank in the country of the prime

3 FINANCIAL RISK
contractor) will automatically pay against the proper presentation of documents

defined in the prime contract removes this uncertainty and risk although such
arrangements are usually reserved for trading with overseas clients who may
be considered of low credit-worthiness, not motivated to pay and remote from
effective legal action.
Traditionally the prime contractor’s remedy for late payment is generally not
strong. The law makes no immediate commercial linkage between perform-
ance and payment. It takes a clinical view that once the parties have exchanged
their promises and made their contract the client is entitled to expect perform-
ance and the prime contractor is entitled to receive payment, in that order. That
is to say if 100% performance is met by non-payment the prime contractor is
entitled to sue for payment and that is all. It leaves the prime contractor with
no bargaining power and no recourse other than the pursuit of his money
through litigation. However, governments have for some years been seized of
the damage that is done, especially to small firms, if payments are delayed. There
is an expectation that payment should be made within 30 days of a legitimate
invoice and, in some circumstances, there can be an entitlement to interest on
payments outstanding. Nevertheless, contractual rights and remedies are almost
always of greater utility than general law or regulation and the prudent prime
contractor will seek both to have these standard rights enshrined in contract
and to have stronger remedies, which might include a right to terminate or
suspend the prime contract if payment is late. In many cases termination might
injure the prime contractor more than the client and as such it would be a
measure of last resort. The right to retain title in the product until full payment
can also be a powerful position in which to be since it allows the prime contractor
to recover the goods and sell them elsewhere. Again this can be a two edged
sword since recovering the goods can be difficult, costly and unrewarding. The
right to interest on late payments can be more persuasive as it is more immediate
and hits the client where it hurts – in the pocket. In the absence of a contrac-
tual provision, recovery of lost interest is not a financial loss which the courts
normally recognise.
Finally, it can be as well to include a contractual right to set off in the circumstances
where the client both buys from and sells to the prime contractor. Thus if the client
owes the prime contractor money the prime contractor can set the debt off against
amounts which he owes to the client under a different transaction.

3 FINANCIAL RISK
4. The client cannot pay

From the prime contractor’s perspective the difference between the client being
unable to pay and his not paying for some other reason may be largely academic.
If money is owed it must be pursued although the cost of pursuit should be
weighed against the value of the debt. Small debts may be better written off.
Of course if the client has no money then pursuit of the debt is unlikely to be
rewarded any more than if the client simply is not paying for his own cash flow
motives or as a result of a technicality. Either way the aim is to reduce or elimi-
nate the risk of non-payment by a combination of contractual terms which
motivate the client to pay (e.g. the right to interest on late payments), a water-
tight mechanism (e.g. the letter of credit) and the passing or sharing of the risk
with an insurer (e.g. ECGD).
5. Inflationary cost increases

It is important to be precise about the term inflation, which is generally taken
to mean the effect on costs brought about by changes in economic conditions,
where economic conditions means those generally prevailing as opposed to those
specific to the prime contractor. Passing some of this inflation risk to the client
can be worthwhile using prime contract clauses variously described as ‘Varia-
tion of Price’ (VOP) or ‘Contract Price Adjustment’ (CPA). These generally work
on the basis of a formula:
Pa = Po x (A + B Lf + C Mf)
Lo Mo
Where
Pa = Prime contract Price as adjusted
Po = Original Prime contract Price
A = Non-variable element of price
B = Labour proportion of variable element
C = Material proportion of variable element
Lf = Labour index final
Lo = Labour index original
Mf = Material index final
Mo = Material index original

3 FINANCIAL RISK
The original prime contract price is the prime contract price at a particular
economics base. It may be the economics prevailing at the date of contract, the
date of quotation, the date of invitation to tender or any other convenient point.
The prime contract price as adjusted is the final value of the original price after
the application of the formula albeit that interim adjustments can be made rather
than wait entirely to the end. A, B and C add up to one. For example if their
values are respectively 0.1, 0.7 and 0.2 it means 10 per cent of the prime contract
price is not variable, 70% is attributable to labour which is variable and 20%
to material which is also variable (the labour/material proportions of the prime
contract being 7:2). It is important to express it in this way so that it is the entire
prime contract price (excluding the non-variable element) which is adjusted
including overheads and profit rather than just in respect of wages/salary/material
cost changes. L and M refer to inflation indices published by Industry or the
Government and selected for the relevant sector of industry. Lo and Mo are the
indices as at the economics base date of Po. Lf and Mf are the value of the same
indices prevailing at appropriate later dates. For example Mf may be at the mid
point of material deliveries or invoices. Lf may be at, say, three months prior
to due delivery reflecting the mid point of the manufacturing cycle.
In a fixed price contract the prime contractor would prefer A to be zero conveying
all the inflation risk (to the extant that movement in the chosen indices is likely
to reflect actual potential changes in the particular prime contractor) to the client.
VOP/CPA clauses, therefore, tend to cover some or all of what may be referred
to as ‘background’ inflation over which the prime contractor can exercise little
control. Material costs can be controlled by seeking long term prices and
salary/wage costs can be controlled by everything from fear of redundancy to
profit sharing schemes. However, buyers are generally wary of inflation clauses
which link to the prime contractor’s actual variation in wages/salaries and
materials as there is little incentive on the prime contractor to exercise any
control.

3 FINANCIAL RISK
6. Foreign currency fluctuations

The choice (for a UK based prime contractor) of currency in which to trade
depends on the circumstances:
UK Client paying in £ US Client paying in £ US Client paying in $
UK Suppliers £ √ √ X
US Suppliers £ √ √ X
US Suppliers $ X X √
The example is between Sterling and US dollars. This is only an example and
the framework shown suits any Sterling v overseas currency situation. However,
many projects involve circumstances much more complex than that shown
especially if suppliers are chosen from a wide range of overseas territories. Consid-
erations to bear in mind are:
a) The currency in which the end client will pay.
b) The stability of various currencies – the greater the instability the greater
the risk.
c) The availability of currency.
d) The commercial advantage in paying overseas suppliers in currencies

other than their own.
e) The cost of dealings in foreign currencies.
Primarily the aim is to quantify the risk so that it can be adequately provided
for in the price at the time of agreeing the prime contract. For example if a UK
prime contract paid in Sterling has a large overseas supplier content then the
suppliers should be paid in Sterling (which transfers the exchange rate risk to
them) or the value of the suppliers orders should be bought forward in the relevant
currencies so that the exchange rate(s) in question have been effectively fixed
at the date of contract. Alternatively, if a UK prime contractor is selling abroad
to a client who will pay in his own currency, the currency should be sold forward
or the prime contract should include a formula for adjusting the price for varia-
tions in exchange rate:
Pa = Po x (A ER0 + B)
ER1

3 FINANCIAL RISK
Where
Pa = Price as adjusted for exchange rate variation
Po = Price at date of prime contract
A = Variable element
B = Fixed element
ER0 = Exchange rate at base date
ER1 = Exchange rate at date of variation
Rather like the VOP or CPA formula covered earlier in this Section, ERV formulae
tend to have a fixed element and a variable element. The greater the fixed element
the greater the currency risk which is left with the prime contractor. The exchange
rate base date might be the date of tender or date of contract. The date of varia-
tion might be the date of delivery or invoice to the client.
An ERV formula can protect the prime contractor against all or part of the
currency risk when a client pays in other than the prime contractor’s own national
currency. It works by adjusting the prime contract price as the prime contract
price currency fluctuates – However an ERV formula can also be used where
the client pays in the prime contractor’s national currency but where the prime
contractor has significant expenditure in a different currency. So in this case
the formula works by adjusting the prime contract price for changes in the prime
contractor’s costs caused by currency fluctuations in its overseas expenditure.
In the formula given above the variable element (A) would be less than (fig) 1,
reflecting the proportion of the prime contract price which is attributable to the
overseas expenditure. ER1 would be the exchange rate at, say, the mid point of
disbursement of the foreign currency.

3 FINANCIAL RISK
Customer
Sell forward ERV formula Use ERV to

if customer pays if customer pays protect against
in foreign currency in foreign currency overseas expenditure
Company
Buy forward Pass currency

Pay in own
for overseas down from
currencies
expenditure customer
Suppliers
Figure 13: Currency Risk Management
The final approach which is illustrated in Figure 13 together with the other
currency risk management options is having foreign currency ‘flow through’
the prime contractor transparently. For example a UK client could be invited
to pay partly in sterling and partly in the currency of the prime contractor’s
overseas suppliers. This completely insulates the prime contractor from the
exchange rate variation risk and requires no involvement in currency dealing.
As with VOP and CPA clauses it should be remembered that ERV formula can
produce reductions in the prime contract price as well as increases depending
on the actual direction of movement of exchange rates.

3 FINANCIAL RISK
7. Contract termination
Essentially a prime contract can come to a premature end in one of only three3
ways:
Arrangement Key premise Enabled by
Mutual agreement Termination suits both Agreement

parties. No matter their
respective reasons neither
has any wish to continue.
Termination for default One side (usually the prime Contract Law
contractor) fails in some and/or a
fundamental obligation contractual
under the prime contract. provision
Cancellation for One side (usually the client) Contractual

convenience may opt to end the prime provision
contract.
If termination suits both sides then that event is hardly a risk in the sense that
it is here being used. Insofar as the financial consequences are concerned the
effect might be small. For example a low value contract terminated early in its
life on the basis of anticipatory breach might leave the defaulting party with
little unrecoverable costs, although lost anticipated profits or lost business oppor-
tunity may be a bigger concern. On the other hand the impact may be very great
where a large value contract is terminated for actual lateness leaving the defaulter
with huge costs, an idle workforce, unsellable part-used materials etc. However,
one thing which is clear is that termination for default on a major contract is
probably assessed as high impact low probability at the bid stage; thus if the
risk materialises the defaulter has little control (obviously if he had control the
prime contract would not have been late in the first place).
In a termination for default clause it is most unlikely that the innocent party will
agree to compensate the defaulter in any way other than to pay for goods received
and accepted. However, it is possible that a period of notice may be provided.
If this obligation on the client to give notice can be further refined to require
him to allow extra time for the prime contractor to catch up, or propose an alter-
native programme, so much the better.
3 For practical purposes we ignore contract frustration mentioned in section 2

3 FINANCIAL RISK
Cancellation for convenience is usually understood to mean cancellation for

the convenience of the client. Rarely do contracts allow the provision to be
operated vice versa. Because it is for the convenience of the client, the client
must accept liability for the consequences of his breaking the original deal. The
frequent dilemma is over the extent of the consequences. Clients will agree to
reimburse costs properly incurred to the date of cancellation and perhaps profit
on those costs but usually not anticipated profits. For these reasons it is as well
for prime contractors to avoid cancellation for convenience clauses. A decision
to take a prime contract may in part have been based upon anticipation of the
benefits beyond making a profit on that prime contract. The order may take
the prime contractor into a new business field or onto a grander scale of opera-
tion. For these opportunities decisions may have been made to invest in capital,
acquire new premises or take on new staff. The particular order may have been
taken at the expense of other more routine work. To have these opportunities
and decisions potentially frustrated for no greater reason than the convenience
of the client is wholly unattractive.
Finally it is a major risk to assume that a termination or cancellation will be revoked.

Clients may threaten one or the other in order to get the prime contractor’s atten-
tion or as a negotiation tactic and it is important to analyse the risk of such threats
being carried out. Having made such a major decision actually to cancel or termi-
nate it is unlikely that the client would revoke that decision since he too will have
done his analysis and presumably have determined cancellation or termination
to be his best possible course of action.

3 FINANCIAL RISK
8. Financial claims against the prime contractor

Claims against the prime contractor must always be taken seriously. The sources
of claims can be as follows:
Examples
Contractual Liquidated damages

Price reduction for under-performance
Damages following termination
Express warranties
Statutory Implied undertakings under Sale of Goods Act

Product safety under Consumer Protection Legislation
Legal Failure in duty of care

Failure against implied terms
These categories and examples should not be taken as exhaustive. They merely
suffice to show that there is more to this contract business than meets the eye.
It is important never merely to admit a claim. Once admitted, liability is not in

question, just the number of pound notes to make the claimant go away. Even
recognising that a claim has been received could prejudice the position. It is better
to rebut statements that purport to be claims. Often, if a claim is made, it causes
the claimee to examine all the background facts, information and evidence in
order to establish all possible defences, but in addition it causes him to think
about the performance and behaviour of the other side. This can lead him to
make a counter claim (usually bigger!) against the claimant. If nothing else it
can be a useful bargaining card.
Whilst the vast majority of commercial claims are settled by the parties, legal
advice should be sought wherever there is the possibility of the matter becoming
formal whether under conciliation, mediation, arbitration or litigation. Not only
does this help to identify defences against the claim and lines of argument in
commercial negotiations but it also helps to stop the claimee from saying or
doing something which might later count against him in a formal forum. If there
is any chance of money changing hands in order to resolve the claim then a
financial provision should be made in the prime contractor’s books of account
so that the risk of having to part with cash is planned into the business model.
If this heart-rending act of the prime contractor parting with its money appears
inevitable then the longer it takes the better. After all, if the delay is long enough,

3 FINANCIAL RISK
the claimant may give up. The possibility of blaming (i.e. transferring the liability
for the risk that has materialised) someone else should always be considered.
This has two avenues. Firstly as a bluff which, if it works, is fine. Secondly, and
going back to first principles, the contract may allocate the particular risk to
the other party despite what common sense may indicate to the contrary.
If a deal has to be done it should always be without admission of liability and

without prejudice and, if possible, without hard cash. Parties who trade with
each other beyond a single transaction may well have things to offer other than
cash. A discount on the next contract and dropping of another separate claim
are examples of cash-free settlements.

• The most immediate financial risk in performing a prime contract is
the risk that actual costs will exceed the estimated costs. This is blind-
ingly obvious. Part of the solution may be to consider a form of contract
in which cost-risk is shared with the client. For higher risk projects
this may be the best approach and brings other benefits through the
inherent encouragement of cooperative working. Remember the prime
contract is the vehicle for allocating risks. Consider allocating some
to the client. This may be better value for him too.
• Give great attention to the principles and mechanisms by which the

prime contractor will get paid. Use combinations of advance,
progress, stage and milestone payments. Ensure milestone definitions
are clear, meaningful, demonstrable and achievable. Make sure the
prime contract is an active enabler of payment, not a barrier.
• Take seriously the always-present risk of a claim against the prime

contractor. No matter when a claim arrives, the seeds will have been
sown much earlier. Combine project risk management with a constant
alertness for downstream contractual danger. Today’s fudge or fix may
be tomorrow’s claim.

3 FINANCIAL RISK
Checklist
Risk: The Client will not pay

DO
• Make payment ‘the essence of the prime contract’.
• Retain title to the product until payment is made.
• Break prime contract performance into several separable parts.
• Seek advance payments.
• Seek milestone or stage payments.
• Include a right to claim interest charges on overdue payments.
• Require payments to be made under a confirmed irrevocable letter of

credit.
• Include the right to suspend work if payments are delayed.
• Specify precisely procedure and paperwork required for invoicing.
• Specify a maximum credit period.
• Include a set-off right.
DON’T
• Use unconfirmed or revocable letters of credit.
• Accept payment retentions.
• Accept rolling retentions.
• Agree to pay-when-paid clauses.
• Agree to client ‘discretion’ in the making of payments.
• Agree to vesting clauses.
Risk: The Client cannot pay

DO
• Investigate the financial standing of the client pre-contract.
• Seek bonds or guarantees from the client’s parent prime contractor

(if appropriate) or from a third party such as a bank.
• Seek credit insurance from ECGD or NCM depending on territory and

status of client.
• Seek payment in Sterling.
DON’T
• Accept open credit terms from shaky clients.

3 FINANCIAL RISK
Risk: Inflation increases cost

DO
• Pass the risk to the client.
• Seek firm (non-variable) prices from suppliers.
• Seek long quotation validation facilities from suppliers.
DON’T
• Assume that any government inflation figures and forecasts are

representative.
• Assume that inflation rates are stable.
Risk: Foreign currency fluctuates adversely

DO
• Buy or sell forward as appropriate.
• Look for currency equivalence.
• Pass the risk to subcontractors.
• Mitigate the risk by exchange rate variation clauses.
• Look for payment in multiple currencies.
DON’T
• Forget to assess the currency issue at bid preparation time.
Risk: The Prime contract is terminated

DO
• Avoid termination clauses.
• Include the obligations on the client to give notice of termination.
• Include the right to recovery of costs and profits.
• Include ‘back-to-back’ provisions with suppliers.
DON’T
• Assume a termination will be revoked.

3 FINANCIAL RISK
Risk: Financial Claims against the prime contractor

DO
• Rebut any claim received
• Consider making a counterclaim
• Muster all the defences
• Take legal advice
• Consider a financial provision
• Delay
• Blame someone else
• Include an overall limit of liability
DON’T
• Admit a claim
• Make a financial settlement other than as a last resort
• Admit liability in any settlement

THOROGOOD
PROFESSIONAL
INSIGHTS
Section 4
Technical risk
1. Do we want to take this risk?
2. Analysing the requirement
3. Options
4. Sharing the risk
5. The commercial engineer
6. Setting the baseline
7. Requirement creep
8. The changing requirement
9. The work takes longer than expected
10. The never-ending contract
11. Failure of performance
12. Buyer initiated problems
Checklist
Section 4
Technical risk
1. Do we want to take this risk?

Business is about taking risks. Take a contract and you take a risk. The risk is
that you may not be able to complete the work on time and within budget. Cost
and time are the key issues and it is the scale and complexity of the technical
requirements of a project that are the main driving forces on cost and time. If
the technical scale and complexity are not understood then cost will increase
and the work will take longer. The cost will increase not only because there is
more work to do than had been realised but also because more work usually
takes longer. More time almost always means more money.
Bidding for contracts of high complexity and long duration inevitably invites
the question as to whether taking the risk on at all is a wise move. In a difficult
economic environment any business is good business. The prime contractor that
consistently chooses not to bid because the risks are too high has no work and
no future. Its fate is sealed and it may as well issue the redundancy notices straight
away. However, the prime contractor that bids and wins high risk work which
it does not fully understand is only delaying its fate. Contracts which over-run
on time or underachieve on performance lead to client dissatisfaction. Contracts
which over-run on budget tend to disillusion shareholders. The combination
of dissatisfied clients and disillusioned shareholders is not the best recipe for
long term business survival!
And yet not bidding for work which is obviously in the prime contractor’s market
sector and ostensibly within its capability and capacity is not a serious option.
The answer to the question ‘do we want to take this risk?’ is ‘No, but we will’.
Unless the prime contractor is able to diversify into lower risk markets where
there is a market share to be won against the sitting suppliers then, inevitably,
the conclusion must be drawn that bidding is the only choice. The objectives
then become the proper understanding of the scale and complexity of the require-
ment and finding ways of reducing, eliminating or sharing the risk inherent in
the potential prime contract.

4 TECHNICAL RISK
2. Analysing the requirement

The twin problems of bidding high-complexity contracts are not enough time
and not enough money. And yet in the bid phase there are assumptions and
decisions made which will forever affect the performance of the prime contract.
It is far better to bid for fewer projects than to bid as many as possible hoping
it will be alright on the night.
For a complex requirement spread over a number of years the risk that can have
an impact include:
• Rate and direction of technology evolution.
• Rate and direction of manufacturing process evolution.
• Availability of IT support.
• Evolution of new software languages, tools and other development

environments.
• Obsolescence of designs, materials and components.
• Scale and complexity under-estimated.
• Changing technology in the client environment.
• New or revised statutory requirements on standards, procedures,

inspection and health and safety matters.
It is important that the formulation of the project risk register takes into account
the commercial aspects of all such risks. For example, some of these may affect
subcontractors, one result of which may be the late completion of project subcon-
tracts, with all the consequences that might then be brought.
3. Options
One approach in handling these sorts of matters is to offer the client options
that allow a low risk path to meeting his entire requirement. If the technical
requirement contains for example 10,000 features which have to be met and the
pre-contract programme risk analysis shows only a 5% probability of delivering
all 10,000 features on time, then it can be much better to offer initial delivery
with limited functionality followed by phased upgrades over time which repre-
sent a growing capability culminating in total performance. This approach is
lower risk to both sides. The prime contractor carries a lesser risk of encoun-
tering contractual and cost penalties and running into trouble. The client enjoys
a greater probability of receiving something that works on time with a reliable
path towards full specification.

4 TECHNICAL RISK
4. Sharing the risk

The ultimate logic for the client to consider is that leaving all risk in the perform-
ance of the prime contract with the prime contractor does not equate to
eliminating the risk of the prime contract not being performed on time and to
specification. Hence if there is significant risk in the work it can be more prudent
to accept that managing the risk is best done as a joint activity. After all, even
if contractually all risk lies with the prime contractor this can in practice be of
little consolation to the client if the prime contract is delivered late or at under-
performance. The best means of sharing the technical risk is to share the cost
risk. Technical uncertainty means uncertainty over cost. Hence if technical
decisions are made jointly in an environment where both sides together stand
to gain or lose financially depending upon the quality of those decisions, then
there is the greater incentive for sound decision making. The principles of cost-
risk were discussed in Section 3. Furthermore the cost risk sharing scheme can
be modified to actually allow variation in the achievement against the technical
requirement (figure 14).
Profit
Performance incentive region
Target
fee
Target Cost
cost
Figure 14: Performance Incentive

4 TECHNICAL RISK
In a scheme such as this, additional profit can be earned from bettering speci-
fied minimum standards of technical achievement providing both the opportunity
for improved profits through pure cost management and additionally through
a specific performance related formula.
5. The commercial engineer

Many large contracts and projects absolutely rely upon engineers to undertake
or participate in crucial activities such as:
• Estimating costs;
• Estimating time;
• Producing outline designs, prototypes at the tender stage;
• Producing complex designs, products and systems in prime contract;
• Producing technical proposals as part of the bid;
• Producing implementation specifications in response to requirement

specifications;
• Producing specifications and statements of work for subcontractor/

supplier request for quotation;
• Project manage the prime contract;
• Generate change proposals;
• Handle the day-to-day interface with clients and suppliers.
The importance of ensuring that the engineers who bear the responsibility for
those activities are commercially aware as well professionally competent
cannot be over-stated. The legal, contractual and financial implications of their
actions should be an essential part of their understanding of their responsibil-
ities. It is as easy to lose £100,000 on a £250,000 prime contract as it is to lose it
on a £25,000,000 prime contract. The development of commercial engineers should
be seen as a strong plank in the overall process of project risk management.

4 TECHNICAL RISK
6. Setting the baseline

In any project prime contract it is necessary for the technical baseline to be estab-
lished. This may be done through the following example documents:
Document type Purpose
Performance A definition of what the end result does
Technical A definition of what the end result is
Acceptance A definition of the method of proof of compliance
Statement of Work A mostly qualitative description of the activities involved
The more such documents are included the better the definition of the require-
ment. However, if there is more than one document then the potential problem
is introduced of mutual exclusiveness, inconsistency or ambiguity between the
documents. This must be overcome by including a statement saying which
document has precedence in the event of conflict. The choice of specification
type can have the effect of allocating risk between one side and the other. For
example if the client contracts against a performance specification then the risk
of failure in the utility of the project output must lie with the prime contractor.
The inclusion of a statement of work can both help and hinder the situation. A
statement of work can confuse the position if full compliance with the technical
specification requires additional work to that stated in the statement of work.
Who then carries the liability for the cost of the extra work? On the other hand
the statement of work may indeed help in the understanding of what is to be
done and so may have a place in the scheme of things. If an acceptance speci-
fication is used to define the method of proof of compliance then the status of
individual requirements of the technical specification which are not explicitly
to be proven (for cost or practicality reasons) under the acceptance specifica-
tion must be made clear.
Clarity, therefore, can be improved by incorporating appropriate specifications

in the prime contract and by stating an order of precedence in the event of conflict
between them. Further clarity can be gained by including a compliancy state-
ment which, for example, lists every paragraph of each specification against which
is put a statement of compliance. This can be a simple ‘yes’ or ‘no’, or a quanti-
tative statement can be given for partial compliancy.

4 TECHNICAL RISK
7. Requirement creep
In any project there is a risk that the client’s generalised expectations are different
from those of the prime contractor. In non-contractual and non-technical terms
the client wants the greatest value from his expenditure and the prime
contractor wants to complete at minimum cost. There can be a mismatch between
maximising value and minimising cost with respect to the same understanding
of a project. On either side a degree of mismatch may be realised. The client
can perhaps see a requirement the full implications of which have not been realised
by the prime contractor. The prime contractor may have certain understand-
ings about the limitations of certain features that have not dawned on the client.
Neither side wants to expose the realised mismatches for fear of consequences.
The prime contractor may want more time or money. The client might go
elsewhere. Although logic demands that any such realised mismatches should
be cleared up before the prime contract is let, not infrequently both sides may
hold back. Of course some mismatches may not appear to either side until work
is underway. Whether mismatches are realised or not they represent a require-
ment gap between client and prime contractor. As work under prime contract
proceeds the client is motivated to close the gap by pulling the prime contractor’s
performance up to his preferred interpretation. This is called requirement creep.
Requirement creep tends to be upwards in the direction of the client’s inter-

pretation, not downward towards the prime contractor’s interpretation. This
is for two reasons. Firstly, the client has control over payments to the prime
contractor and this can cause a certain influence to come to bear. Secondly, the
prime contractor’s personnel, especially at the working level interface, are
naturally inclined to want to please the client by adopting his preferences.
Sometime the reverse may apply. The client’s desire for progress may incline
him towards the prime contractor’s more minimal interpretation, but generally,
requirement creep is towards the client.
To resist requirement creep, personnel so involved must always put the minimum
interpretation on the requirement, understand the commercial implications of
going beyond what was anticipated and keep written records of meetings and
other avenues through which the client attempts to make the requirement creep.
Once engineering staff understand that innocently concurring with the client’s
view can lead to the prime contract running into a loss or being terminated (i.e.
because the extra work cannot be completed in the prime contract timeframe)
then they soon take a more commercial view of life. This may sound an obvious
statement (and injurious to commercially aware engineers!) but it must be remem-
bered that 99% of most engineers’ primary professional training is to do with
‘volts, amps and ohms’ and not with the commercial realities of business.

4 TECHNICAL RISK
8. The changing requirement

Having established a sound technical baseline in the prime contract the client’s
ability to alter the specification can arise either because the prime contract gives
him the right to vary the requirement or he seeks the agreement of the prime
contractor to modify the prime contract. The latter gives the prime contractor
a much stronger bargaining position since it is not obliged to accept any varia-
tion. For this reason the client may seek a contractual right to issue variation
notices. It is important to be clear as to which parts of the prime contract require-
ment are subject to this unilateral right of variation. The right may be limited
to matters of pure technical specification or may extend to quantity and timeframe.
In any event the prime contract should define strict procedures for controlling
changes to the technical baseline. The procedures should require that proposals
for prime contract change examine:
• The effect on price (the particular prime contract and other related
contracts).
• The effect on performance.
• The effect on time.
• The date of implementation.
• Before and after implications (e.g. backwards compatibility).
• Effect on operation, maintenance, spares holdings.
The prime contractor should be clear about whether it would recommend partic-
ular changes and take responsibility for their success or not recommend particular
proposed changes and leave the risk of their success with the client. Both sides
may wish to have the right to propose changes with, in most cases, only the
client having the right to decide. The prime contract should also provide for
liability for proposal preparation costs. Most importantly the prime contract must
prescribe that the requirement changes do entitle the prime contractor to revisions
to price, time for performance and adjustment of other affected features of the
prime contract.
Prime contract changes although potentially disruptive are nevertheless an oppor-

tunity in several senses. More work means more order book and turnover. More
work means price increases with a chance to improve profits. More work usually
means more time which may be helpful. Similarly the urgency with which changes
must be introduced can be a powerful bargaining tool in the process of re-negoti-
ating the price and other aspects of the prime contract.

4 TECHNICAL RISK
The right of the client to change the prime contract should be echoed in the terms
of subcontracts so that changes dictated by the client that affect subcontract
work do not leave the prime contractor powerless to obey and thus in breach
of contract. There is a delicate balancing act to perform here that as subcon-
tract price revisions should not be agreed prior to equivalent revisions being
negotiated to the prime contract price.
The main thrust of the bargaining advantage to the prime contractor is in

avoiding the obligation to introduce changes prior to agreeing a price revision.
To do otherwise runs the risk of negotiation being left until the prime contract
is finished. This situation hands the bargaining advantage back to the client
who has the goods and the money. Thus the prime contractor should hold out
for agreeing changes prior to going ahead. This is also important from a cash
flow point of view. To proceed without prior adjustment to price and payment
arrangements runs the risk of real extra cost being incurred beyond the limits
of the prime contract payment scheme exposing the risk of negative cash flow
and financing difficulties.
Whilst changes are an opportunity for the prime contractor since, in the words
of the client, ‘the price only ever goes up’ the prime contractor should be wary
of changes which reduce the scope or the scale of the prime contract to the point
where the prime contract is no longer commercially attractive, or of changes
which are unrealistic or impossible to implement. Changes which are uneco-
nomic of achievement or which may be unrealistic (e.g. halving the timeframe)
are wholly undesirable and it can be as well to put lower boundary conditions
on the client’s right to vary the prime contract.
9. The work takes longer than expected

Technical difficulty and delay are obviously inter-linked. Technical difficulty is
only one reason that can cause delay. The pure technical issue is the one where,
notwithstanding prudent and professional estimating and adequate resourcing,
there emerges a problem beyond the expectation of the reasonable man and
therefore beyond whatever allowances were made in cost and time for contin-
gent events. This situation must be tackled judiciously with the client. The
emergence of an unpredicted technical issue may generate loss of confidence
by the client triggering a chain reaction that could culminate in termination.

4 TECHNICAL RISK
The resolution of technical problems is inherently a part of any prime contract

involving complex work but the emergence of that special category of problem,
if it should be of a significant scale, could well be the event that brings down
rack and ruin. The usual reaction of the prime contractor is to concentrate on
the time factor with a view to persuading the client that all will be well, if only
a little more (and a little more, and a little more) time could be allowed. This
makes good sense in many cases but there is a risk that soldiering on can become
an indefinite process with an indeterminate end. The prime contractor should
very carefully examine the situation to see if this is likely to be the case and, if
so, consider an early attempt to re-negotiate the prime contract not just to extend
the time but to reduce the requirement in such a way that the issue is effec-
tively removed. It can be better to reduce the scope and the price by 10% than
to overrun the price by 20% in order to achieve 100% of the scope.
The consequences and difficulties of re-negotiating the prime contract should

not be under-estimated. The client is not obliged to go down this path. The require-
ment giving rise to the technical problem may be an absolutely mandatory feature
in the client’s eyes and if, to get it removed, the client wants a 30% reduction
in price for a 5% reduction in performance then the decision for the prime
contractor is certainly not an easy one. However, the point is that re-negotia-
tion should be given early consideration, even if it is not raised with the client
until later, rather than flog on regardless. Part of the equation will be the respec-
tive bargaining positions of the two sides and their relative negotiating
strengths and weaknesses. Certainly if the approach is attempted it must be
properly planned and executed with the prime contractor being sure of its ground
at each step. For example it is nothing short of foolish to confess that ‘we cannot
meet 100 db but we can achieve 98 db’ only later to find, after the client has
accepted that 98 db will do, that only 95 db can be attained.

4 TECHNICAL RISK
10. The never-ending contract

The difference between the risk ‘the work never finishes’ and ‘the work takes
longer than expected’ is perhaps a little obscure. The latter covers the situa-
tion where a substantial problem occurs which may be utterly insoluble or not
soluble within a cost or timeframe which is remotely comparable with the prime
contract as agreed. The risk of the work never finishing is more to do with the
attitude of the people in both the client and prime contractor organisations.
Sometimes the work drags on because the prime contractor’s engineers ‘won’t
stop engineering it’ or the client’s people are excessively pedantic and refuse
to confirm that the work or stages are complete.
Thus, if this distinction is accepted, the issue becomes one of ensuring that the
engineering team is disciplined to meet the requirement. The other issue here
is the application of Pareto’s law. The final 5% of the work or the last ounce of
performance may soak up a degree of time and money which is hugely dispro-
portionate to the ostensible intrinsic value or to the true worth to the client.
Notwithstanding that the last drop of performance may be entirely incidental
to the real needs of the client he is nevertheless perfectly entitled to insist upon
100% performance. Therefore it can be extremely useful for the prime contract
to include a provision allowing concessions to be granted against the prime
contract requirement. Provisions might be drafted so that the client is bound
to approve concessions, perhaps limited in some qualitative or quantitative way
to marginal or non-serious deficiencies only. The disadvantage is that the client
may wish an entitlement to some price reduction but concurring with such unrea-
sonable demands may well represent the best compromise!
The other risk to achieving a tidy and timely close to the prime contract is the
situation in which completion or acceptance requires positive action by the client.
From the prime contractor’s viewpoint the prime contract should be so
constructed that discharge of the prime contractor’s obligations can be a matter
of objective determination. Thus clauses which, for example, specify that the
prime contractor ‘must work to the satisfaction of the client’ or that require
the ‘client to issue an acceptance certificate’ introduce an unacceptable degree
of subjectivity which is both unnecessary and wholly undesirable given that
the client is not necessarily under any incentive to confirm that the prime
contractor has discharged its obligations.

4 TECHNICAL RISK
11. Failure of performance

The phrase performance failure may usually be taken to mean that some require-
ment of the specification has not been met. However, from a commercial
perspective, the meaning is wider. Any failure, including some technical
deficiency, is a failure to perform the prime contract for which there may be
contractual remedies (or ‘penalties’ as seen by the seller) and other legal rights
available to the buyer. Thus a failure of performance would in strict terms only
be absolutely apparent at the due date for performance (i.e. completion) of the
prime contract or at some stage after delivery. However, it is covered here on
the basis that the essential technical obligation is fixed at the outset of the prime
contract and the extent to which that obligation represents a risk to the seller is
determined by the terms of prime contract. Thus we return to the nature of the
prime contract. Different stages of a project might be subject to different terms:
Project Stage Type of prime contract Risk to seller

(expressed very loosely)
Study/research Do the best you can Nil
Development Produce a design that Medium

should work
Manufacture Make what’s been designed Medium
Support Keep it working Medium
Many projects are, however, subject to turnkey type arrangements, where the
whole design, build, implement and support responsibility is handed to the prime
contractor as a package. Here the risk is much higher.

4 TECHNICAL RISK
12. Buyer initiated problems

Where performance of the prime contract depends on information, material or
facilities to be provided by the client, it’s obligation to do so by certain dates
and for certain periods should be stated.
Failure against these obligations may give rise to delay. Delay may also be caused
by the dates being achieved but the information, material or facilities proving
inadequate. The client’s liability for the risk of the time and cost effects of delay
are covered in Section 5. However, it is not inconceivable that lateness or inade-
quacy of these things does not delay the performance of the prime contract but
does increase its costs through nugatory and diverted effort expended prior to
the realisation that, for example, the client-provided information is inadequate
and the consequent expense incurred in having to work around the problem.
For these reasons it is important to state that client-provided information will

be in a specified format and that the client warrants that it is ‘complete, up to
date and fit for purpose’. Similarly client-provided material and facilities should
be subject to equal rigour in definition and warranty. The prime contract must
expressly provide the prime contractor with the entitlement to revise the price
and other affected features of the prime contract in the event that any client
obligation is not properly discharged.
If the prime contract has been concluded on the basis of the client providing
information, material or facilities then that obligation should not be disturbed
by a clause that transfers the risk in that provision to the prime contractor. For
example, clauses which require the prime contractor to satisfy itself that client-
provided information is fit for purpose should be avoided.

4 TECHNICAL RISK

• The prime contract is the vehicle by which specifications move from
the realm of engineering interest into a new role as legal documents.
Specifications should not only be expressed in clear unambiguous terms
for reasons of engineering rigour (actually some engineers like to leave
specifications on the ambiguous side) but also because they will form
the basis for measuring contractual performance. Engineers should
encourage commercial colleagues to review and comment upon
specifications with this second, but fundamental, purpose in mind.
• Requirement creep is a great danger where projects are concerned.

The slide towards increased cost and lateness must be avoided. Require-
ment creep makes the contractual performance hurdle higher. If the
hurdle can not be surmounted the contractual and other penalties will
follow. It is too late to turn to the buyer and say ‘we were only doing
what you wanted’
• In many projects the onus on the buyer can be of the same order of
magnitude as that on the seller. It is always important to make sure
that both sides’ obligations are fully delineated in the prime contract.
In such balance situations both parties will be trying to avoid require-
ment creep on their own obligations. The total mismatch can get wider.
This situation must be managed very carefully and the prime contract
re-negotiated from time to time as necessary.

4 TECHNICAL RISK
Checklist
Risk: The requirement is ill defined

DO
• Ensure that specifications are included in the prime contract.
• Include a statement of precedence.
• Include a compliancy statement.
• Adopt the minimum interpretation of the requirement.
• Consider the commercial implications when ambiguities are resolved.
• Keep a proper record of decisions made or directions given by the client.
DON’T
• Agree that the client is always right!
Risk: The requirement keeps changing.

DO
• Operate strict prime contract change control procedures.
• Include a contractual entitlement to price revisions etc.
• See fluidity as an opportunity.
• Use urgency as a bargaining tool.
• Include ‘back to back’ provisions with subcontractors.
DON’T
• Implement changes prior to price agreement.
• Ignore cash flow implications.
• Accept unrealistic changes.
Risk: The work takes longer than expected

DO
• Handle the client relationship carefully.
• Consider re-negotiating the prime contract.
DON’T
• Give ill-considered promises.

4 TECHNICAL RISK
Risk: The work never finishes

DO
• Define completion and acceptance.
• Seek entitlement to concessions.
DON’T
• Wait for client approval per se.
Risk: Performance Failure

DO
• Avoid ‘turnkey’ obligations.
• Avoid certifying ‘fitness for purpose’.
DON’T
• Hold the prime contractor out as an expert.
Risk: Client-provided information, material

or facilities are inadequate
DO
• Include an obligation on the client to provide the information, material

or facilities by a certain date and for certain periods.
• Include a definition or specification of client-provided information,

material and facilities.
• Include a client warranty that information, material and facilities are

fit for their intended purpose.
• Include an entitlement to revise the prime contract if the client’s obliga-

tions are not met in full.
DON’T
• Assume responsibility and risk for the client’s obligations.

THOROGOOD
PROFESSIONAL
INSIGHTS
Section 5
Timeframe risk
1. Bidding compliant delivery
2. The timeframe obligation
3. Time is of the essence
4. Consequences of delay
5. Liquidated damages
6. Force majeure
7. Delivery incentives
8. Client delay
9. Subcontractor delay
10. Prime contractor delay
11. The threat of termination
12. The threat of damages
Checklist
Section 5
Timeframe risk
1. Bidding compliant delivery

The risk of not completing the prime contract on time arises either before prime
contract award and/or during prime contract performance:
Sources of timeframe risk
Pre-contract award Requirement not fully understood

Resources underestimated
Elapsed time for performance underestimated
Resources planned to be free do not become available
Post-contract award Loss of key resources

Work proves more difficult than expected
Client delays the work
Subcontractors delay the work
Extraneous factors delay the work
The key question of resources ought to be the one area in which the prime contractor
can exercise the greatest control because the recruitment and deployment of
resources is virtually entirely within the prime contractor’s control. However, the
build up of resources for a project remains a typical problem (figure 15).

5 TIMEFRAME RISK
Resources Planned
Actual
Trailing tail
Time
Contract Contract Actual

award completion completion
Figure 15: Project Resources
This shows the typical position whereby an early, steep build up of resources
is planned, with a relatively short peak and a steady run-down as the prime
contract is completed on time. In practice the build up starts late and does not
grow as steeply as required leading perhaps to a higher peak and possibly a
trailing tail as completing the entire prime contract proves more complicated
and demanding than expected.
In theory these problems can be avoided. Perfect management of resources will

prevent this resource allocation problem. Perfect estimating will ensure the
requirements are fully understood. Perfect planning, project management and
programme risk management will ensure that the prime contract is completed
on time and within budget. However, life is not perfect and unexpected things
do arise to interfere with prime contract performance.

5 TIMEFRAME RISK
Nevertheless the prime contractor ought to be as clear as possible at the bid

stage as to the likely turn of events:
Probability of meeting Bidding Expected Risk of

desired project time scale posture outcome lateness
High Compliant On time Low
Low Offer later On time to offered Low

timescale timescale
Low Compliant Late High
So bidding compliant delivery with a high expectation of completing on time

should not be a problem either in terms of bid adjudication or prime contract
performance. Bidding non-compliant on delivery to eliminate risk of delay in
prime contract performance is sound so that client and prime contractor are
both clear as to the position and the risk of prime contract penalties are avoided.
However, this runs the risk that the prime contractor may be ruled out at the
bid stage for non-compliance and this leads to the decision to adopt the final
option which is to bid compliant having a high expectation of lateness. This
approach can be said to be unethical but in the hard commercial world it can
be a key tactic in securing business. The client’s own risk analysis at the bid
stage may draw him to his own conclusions about the viability of individual
bids on timeframe matters but, at the end of the day, the prime contractor is
entitled to take the view that winning the prime contract and then working to
eliminate delay or to persuade the client that some delay is tenable is a legiti-
mate approach. The unavoidable and unfortunate point is that sometimes
circumstances force companies to bid on whatever basis it will take to win the
prime contract. The real risk to all concerned is in sorting the mess out later.

5 TIMEFRAME RISK
2. The timeframe obligation

The prime contractor’s obligation to complete the prime contract by a speci-
fied date is a fundamental one. If the contract does not specify a completion date
then the Sale of Goods Act comes into operation and obliges the prime contractor
to complete within a reasonable period. However, the rule implied by the Sale
of Goods Act does not usually apply to commercial contracts as it is rare for a
commercial contract not to indicate the required completion date in some way.
The complication is that many large contracts specify many dates on or by which
things are supposed to be done and so the question must arise as to whether
all such dates are equally important insofar as the fundamental obligation is
concerned.
Both client and prime contractor have a dichotomy to answer on this point. On
the face of it the client wants to have it absolutely clear that he has not accepted
any part of the work until the whole is complete and that the whole must be
complete by no later than one specified date. On the other hand key events or
milestones along the way for which the prime contract mentions date can be
critical to him in assessing progress of the work and perhaps in deciding to release
interim payments. Thus he does not want these dates to be of secondary impor-
tance. The prime contractor would not wish to have any dates carry great
significance in case he runs into trouble and yet he would like to have the contract
constructed so as to permit partial performance which provides that the work
can be completed and accepted in stages so that early stages, once accepted by
the client, are forever accepted even if the entire contract is never completed.
This construction implies that individual stages could well have specified dates
the meeting of which individually carry the weight of fundamental obligation.
To bring this sharply into focus it must be said that failure to complete on time
normally allows the client the remedy of termination. Thus it must be made clear
in the contract whether only the final date or milestone dates as well allow the
termination remedy if it, or they, are missed. The prime contractor must try to
avoid milestone dates carrying this penalty and careful drafting of the contract
can still permit partial performance and staged irrevocable acceptance by the
client. Regardless of the status of milestone dates, if progress is patently slow
or other evidence (such as progress reports by the prime contractor) exists as
to indicate the contract to be most unlikely to be performed on time, the client
can anticipate the breach of contract and terminate immediately.

5 TIMEFRAME RISK
3. Time is of the essence

‘Time is of the essence of the contract’ is a statement which clients are tradi-
tionally recommended to include in the prime contract and prime contractors
are urged to avoid. The truth of the matter is that in business contracts time is
usually considered to be of the essence, provided dates are specified, whether
or not this expression is included. The effect of it is therefore only to empha-
sise the implied condition. To be sure of avoiding the duty to meet particular
dates the contract should state that time is not of the essence. This defeats the
general assumption about the nature of business contracts. It is not as peculiar
as it sounds. Despite the general assumption, timeliness is not invariably impor-
tant in an absolute sense. By including the negation of the general principle the
prime contractor thus avoids the risk of the client later deciding that absolute
timeliness is of the essence. As with most things it is important for the contract
to be clear one way or the other.
4. Consequences of delay
Whilst unplanned delay is bad news for the prime contractor in terms of
additional costs, delayed payments, negative cash flow and other such effects
that impact its operation, potentially the biggest risk is the client taking action
beyond exercising those provisions of the contract which are aimed at focussing
the prime contractor’s attention e.g. suspending payments. The two ultimate
remedies available to the client are termination of the prime contract and
damages.
The law expects the contracting parties to keep to their bargain. If the prime
contractor fails to complete on time then the client is not expected to wait even
a reasonable time. If the delay is one day or one hour or minute beyond the due
time the client can terminate summarily for default. The client may want to re-
enforce this right by having a contract clause to the same effect. This gives the
prime contractor some opportunity to open out a debate at the time of contract
regarding periods of notice or core principle, but essentially the client will be
looking for a simple contractual statement of what is his legal right. In the event
of default the client is entitled to recover damages from the prime contractor
to the extent necessary to compensate him for any financial loss suffered. In this
context compensate means recovery of loss suffered and the loss suffered is strictly
financial loss. In damages of this kind there is no sense of payment to compen-
sate for upset or injured feelings and the loss must be real and not notional.

5 TIMEFRAME RISK
Damages that can be recovered are those which flow directly from the default
and are not those consequent upon it. There is no good definition of direct and
consequential damages since the distinction is not absolute, it depends upon
the particular circumstances. This is because the core principle is one of foresee-
ability. That is, the defaulting prime contractor is liable for those damages suffered
by the client which were reasonably foreseeable by the prime contractor at the
time the contract was made. Thus in the absence of the client having explicitly
told the prime contractor of the potential consequences of delay the degree of
foreseeability would be circumstances dependant.
The most obvious example of client direct damages flowing from a prime
contractor’s default is the possible additional cost of purchasing elsewhere. This
is in principle true whether the object in question is a television or a billion pound
power station. Again, the preference of many clients is to include the ‘purchase
in default’ remedy as an express contract condition. It can be as well for the parties
to decide how far the liability for damages should go and determine a list of
potential categories of potential damages for inclusion in the contract. However,
neither side is usually disposed towards this clinically correct approach beyond
trying either to include or exclude everything generically consequential.
The client’s right to recover damages arises whether or not he elects to termi-
nate the contract. He may choose to continue with the contract if it remains the
best opportunity to acquire the goods in an acceptable timeframe. In contin-
uing with the contract he does not lose his right to damages. However if he does
continue he can lose his right to terminate. After all it can be said to be unfair
to the prime contractor for the client to let him continue, thus increasing his
expenditure against the possibility of termination, and so a termination should
be executed promptly following default. The client might think otherwise. He
may consider it both fair and prudent to give the prime contractor another chance
but not indefinitely so. In this situation the prime contractor hopes that by contin-
uing, the client has impliedly waived his right to terminate. The client may notify
the prime contractor of his intention to continue and in so doing seek to reserve
his rights including those of termination. It is certainly unsatisfactory and risky
for the prime contractor to carry on spending money with the threat of termi-
nation hanging over his head.

5 TIMEFRAME RISK
5. Liquidated damages
Generally the prime contractor’s liability for damages is unlimited and, in the
ultimate, a court would fix the amount of damages following presentation of
arguments regarding foreseeability and having seen evidence of real financial
damage suffered by the client. However, it is open to the parties to fix this sum
themselves when they make the prime contract. This ‘liquidated damages’ is
thus a reasonable pre-estimate of the likely level of damage potentially to be
suffered by the client in the event of delay. Having agreed the sum and fixed
it within the contract the damages are then payable in the event of delay whether
or not the client actually suffers any damage nor does he have to offer any proof
of damage being incurred. Thus each party takes a risk. The client takes the
risk that the amount so fixed would indeed cover his actual loss but gains in
return a much more ready means of securing payment for damages. The prime
contractor takes the risk that if he is late he will almost certainly have to pay
whether or not the client is harmed, but in return his liability is limited to the
amount pre-determined.
Since delay in most cases will cause a client to suffer increasing damage as time
goes by, liquidated damages clauses generally provide for a certain amount (or
percentage of the price of the goods in delay) to be paid per week (or other period)
to a maximum period and/or maximum amount or maximum percentage. To
be effective liquidated damages clauses must be properly constructed and must
satisfy the rule of reasonable pre-estimation. Liquidated damages which are set
so high or that cut in so rapidly that their effect is obviously penal rather than
compensatory will not be enforceable (at least not by the courts) nor will penalty
clauses which masquerade as liquidated damages.
6. Force majeure
If the prime contractor is late he is liable for damages and his contract is open
to termination by the client. Lateness is not performing the contract by the due
date. Thus one way to avoid these risks is for the due date to be extended. It
can be extended by agreement or by some automatic mechanism. If the contract
is late the prudent client is unlikely to simply agree to an extension as in doing
so he waives his rights to damages and to terminate. He may do so in return
for some valuable consideration but in the normal course of events there is nothing
in it for him to extend. Thus agreement by the client should not be seen as having
much chance of success if the contract runs into delay. Much better is to have
an automatic mechanism. This is the concept of force majeure or excusable delays
clauses which automatically entitle the prime contractor to more time if delay

5 TIMEFRAME RISK
is caused by events which the parties could not have intended to be within his
risk when the contract was made.
This concept indeed is a form of risk sharing. One side or the other will carry
the risk of delay caused by particular events. Ostensibly the entire risk lies with
the prime contractor. A force majeure clause moves part of the risk to the client.
Therefore the parties must agree which force majeure events lie with the client.
There are two approaches. The first is to say that the prime contractor is entitled
to more time if delayed by any event beyond his reasonable control. The second
is to list the particular events. The advantage of the former to the prime contractor
is that it appears wide embracing, the disadvantage is that because it is vague
it is inevitably open to dispute which compromises the principle of risk sharing.
If a list is given, at least there should be no question as to the application or not
of the clause to the particular event. The list typically includes fire, flood, war,
riot, insurrection and industrial action (i.e. inaction!). It should be remembered
that the effect of a force majeure clause is usually to allow only more time, not
more money. This is legalistically sound, as to allow more money would be
inappropriate since many of those risks are insurable in terms of financial conse-
quence and the opportunity of more money would not motivate the prime
contractor to avoid these risks or to mitigate their effect in practice.
Two special categories of force majeure are delays caused by subcontractors

and the client himself. The prime contractor may well feel that the acts or
omissions of suppliers which delay the work are outside his control but it would
be risky to assume that force majeure includes supplier problems unless the clause
specifically says so. As far as delays caused by the client are concerned it is as
well not to treat this as force majeure as such. This is because force majeure
offers only more time. If the client is in default he should be obliged to grant
the prime contractor more time and more money.
Whether or not force majeure relief can be implied into the prime contract, it
is always far better to have an express provision which gives the widest possible
definition so as to allow the maximum degree of contractual protection. It is impor-
tant to observe any terms that relate to the availability of that protection, such
as a duty to report events within a specified time of their occurrence and to
estimate their likely effect. It is also important to ensure that people working
on the project understand that this relief is available, that prompt reporting is
essential and that the definition of force majeure will be limited in some way so
as to exclude many things which might otherwise be thought covered. Force
majeure relief does not give carte blanche to sit back while delay mounts. It is
a fundamental duty to ensure that steps are taken to eliminate the cause of delay
and mitigate its effect.

5 TIMEFRAME RISK
7. Delivery incentives
This Section has so far concentrated on exploring ways of avoiding, or limiting
the effect of, the risk of delay, it being taken as read that, from the commercial
perspective, the prime contractor is bound to see a firm contractual commitment
to meet a specified timeframe as inherently bad news, albeit that consistently deliv-
ering on time is very good for client satisfaction and prime contractor reputation.
However, every cloud has a silver lining and the requirement to hit a particular
deadline can be an opportunity as well as a threat (figure 16).
THREAT OPPORTUNITY
• Termination • Bonuses
• Damages • Customer satisfaction
• Reputation • Reputation
Figure 16: Delivery Commitment
Convincing the client that meeting urgent delivery requirements implies special
measures, greater cost and more management attention can be converted into
higher prices or a bonus arrangement of some sort. A bonus might be fixed or
variable amounts or percentages of the price which are linked either to hitting
an exact deadline or to achieving performance within a specified timeframe band.
A delivery incentive scheme can also be combined with the cost incentive scheme
described in Section 3 as shown in figure 17.

5 TIMEFRAME RISK
Fee
Target
fee
MOC Target MCP Cost

cost
Figure 17: Delivery Incentive Scheme
Thus, in addition to the cost risk sharing principle, the prime contractor would
be entitled to earn delivery bonuses perhaps (as in the scheme shown) as a per-
centage of the cost fee earned. This is very similar to the technical performance
bonuses described in Section 4 and again allows the prime contractor to carry
out cost benefit trade-offs between efficiency and timeframe of performance.
8. Client delay
It is important to ensure that the prime contract specifies clearly all of the obliga-
tions of both sides to the bargain. It is easy to fall into the trap of thinking that
the prime contract records a long list of duties on the prime contractor whilst
the client’s obligation is limited to paying. As remarked earlier, the client frequently
has obligations over and above this. Typically these might include obligations
to provide materials, facilities, information and data.
It is essential that the prime contract specifies such things in detail including
the date(s) required, the periods over which they are to be provided, their state
and location, responsibility for transport or transmission, a general warranty
from the client that the items are fit for purpose, and any financial details including

5 TIMEFRAME RISK
insurance. Patently any failure in a contractual duty on the part of the client in
complying with these detailed obligations can give a right to the prime
contractor for an extension in time for prime contract performance and
possibly an increase to the price. This right is best expressed as a definite prime
contract clause as it is generally easier to rely upon an express remedy than an
implied one. Beyond the obligation to provide things, the client may well be
required to do things such as commenting upon or approving/rejecting
designs, data, documents, stage completion certificates, plans, specifications,
deliveries and invoices. Again, every such obligation must be precisely stated
including the timeframe within which the obligation must be discharge.
Similarly if the client seeks the right to vary the work or otherwise direct the
prime contractor as to the method of performance then that right should be
stated including any limitations (e.g. that the client cannot vary the work so as
to cause a reduction in prime contract value of more than 10%) and the circum-
stances within which the right can be exercised (e.g. in the event of ambiguity
between different specifications or other documents incorporated in the prime
contract). The consequences of exercising that right must be stated which, surprise
surprise are more money, more time for the prime contractor.
As with all claims, the events giving rise to the claim and any resultant claim
must be brought promptly to the attention of the client. Apart from the prime
contractor’s general duty to mitigate the effect of delay, the prime contract clauses
which provide these remedies for the prime contractor may place obligations
to report such problems and there may be time limitations within which claims
may be brought.
Clearly it would be unwise to accept prime contract clauses which absolve the
client from liability for his own acts or omissions and yet such clauses are used.
The justification for which is that the prime contractor is on notice that it carries
the entire responsibility for and risk in performing the prime contract. Taken
to the extreme this would be absurd. If the client issues a stop work order (a
common provision in US contracts) then the supplier can hardly be expected
to complete the work according to the original timeframe. On the other hand
the prime contractor should not be entitled to more money and more time every
time the client expresses some view about the scope or progress of work. Hence
the need for a balanced approach as to the extent to which the prime contractor
can claim for more time/money as against the client being reasonably liable for
its acts and omissions.

5 TIMEFRAME RISK
Notwithstanding any contractual provisions, the prime contractor must avoid

absolving the client from liability for its acts and omissions as they arise in the
everyday course of dealings between them. For example, the prime contractor’s
project manager on hearing that the client is going to be late in discharging
one of its obligations should not say ‘don’t worry, we were going to be late
anyway’!
9. Subcontractor delay
Delivery performance by subcontractors is a major risk in many projects. Some
are suited to Just in Time procurement strategy where the business operation
is relatively repetitive and the immediate benefits (low/zero stock, reducing inven-
tory costs in the balance sheet, no storage space required for materials/
components) outweigh the obvious risk. Just in Time procurement is usually run
hand in hand with partnership sourcing resulting in a small number of (hopefully)
reliable suppliers. The risk to the prime contractor may be assessed as high impact,
low probability and therefore the risk is taken provided effort is devoted to the
sound management of the chosen suppliers. In this context management does
not mean controlling and directing but liaising, problem solving, mutual
quality assurance etc. Whether Just in Time, Partnership sourcing or otherwise,
subcontractors are at risk which demands that the contractual terms and manage-
ment of subcontractors must be appropriately addressed. This is examined in
Section 6.
10. Prime contractor delay

If the prime contractor delays the work it is only for one of two reasons. Either
it wants to delay or it cannot help delaying. It might want to delay for a variety
of reasons:
• In order to divert materials, goods or personnel to more urgent or more

profitable orders.
• In order to take advantage of forthcoming falling material prices.
• In order to absorb personnel coming free from other projects who might
otherwise leave.
• In order to keep the project team together pending receipt of a follow-

on prime contract.

5 TIMEFRAME RISK
• In order to release deliveries, sales or profits in line with business

requirements.
• To conceal problems allowing more time for their resolution.
The very best way to have this flexibility without exposing the normal risks conse-
quent upon delay or default is to build into the prime contract the right to deliver
or perform at the prime contractor’s discretion. This will be totally unaccept-
able to the client in many, but not all, cases. It is always worth trying.
In the absence of a clause which allows the prime contractor to vary the perform-
ance then all delay, in the client’s eyes, is down to the prime contractor regardless
of it being desire or event that produces the delay. Thus a force majeure clause
offers some protection. More pragmatically, or deviously depending upon point
of view, blame may be attributable directly to the client through his default or
indirectly to him by his having given direction to the prime contractor or been
involved in decision making or otherwise embroiled in events which, it can be
said, show the client approving or concurring with delay or of condoning failures
or omissions of the prime contractor.
Of course delay and phrases such as ‘of the essence’ are only meaningful expres-
sions if the prime contract specifies dates at or by which performance is to have
occurred. If the prime contract is silent, ambiguous or vague then it is hard for
the client to demonstrate delay. Provided there is no other relevant material,
such as a price quotation giving delivery information, which would indicate the
intent of the parties, then the client must rely on the ‘reasonable period’ of the
Sale of Goods Act. If this line is to be followed then care must be taken as, for
example, the ambiguity must be clearly ambiguous! A delivery date expressed
only as a ‘target’ may perhaps be ambiguous. The prime contractor might feel
that a target is only something at which to aim, there being no great penalty
for missing by an inch or a mile. The client or a court might think otherwise,
that hitting the target is indeed the fundamental purpose and a miss means trouble.
Thus a difference of interpretation is not as good as a clear ambiguity such as
the prime contract referring to different delivery dates for the same thing.
The giving of delivery promises that cannot be met has already been discussed
as being sometimes the only way to be considered for a prime contract. Whilst
in the tough commercial world the legitimacy of this can be justified it must be
seen as a measure of last resort as it takes the prime contractor into a prime
contract with 100% probability of being late. However the ‘double whammy’
with such a prime contract, or indeed any prime contract which runs into time
difficulties, is the risk of termination for anticipatory breach. Thus care must
be taken in providing progress reports and similar material which forecasts delay.

5 TIMEFRAME RISK
There is a fine balance to be struck between silence which avoids this risk and
the need to apprise the client for the purposes of good relationships and to allow
the client the opportunity to mitigate the effect of the delay on himself.
As part of the process of managing delay it is sometimes assumed that clients

will agree to concessions or relations against the prime contract requirement
on the basis of a preference to have 90% on time rather than 100% six months
late. This can be a dangerous assumption unless the prime contract can be made
so as to oblige the client to approve relaxations. This is an acceptable approach
particularly if the extent of such ‘mandatory’ relaxations is bounded in some
way. Thus the risks consequent upon time delay might be reduced although there
is then the risk that the client will want some financial consideration for approving
the relaxations.
Another question of balance is the desirability or otherwise of contractual penal-

ties such as liquidated damages. If the client can be managed into accepting delay
then it is better not to have liquidated damages in the prime contract. The presence
of such a clause (regardless of its original purpose – penalty or compensation
for real anticipated damage) creates a psychological hurdle in persuading the
client to accept late performance. On the other hand a combination of certainty
of lateness and hostile client can argue for the inclusion of liquidated damages
as a means of limiting liability for lateness.
11. The threat of termination

The first measure of protection against termination is to have the prime contract
require the client to give notice and permit a period of cure in which the problem
can be fixed or proposals made. This should ensure that a termination cannot
come completely out of the blue.
However, if the prime contract is in delay either by due dates for performance
having passed or by it being obvious through lack of progress, then unless some
relief is available (i.e. force majeure if the delaying events are covered by such
a clause or some act/omission of the client provided such risk is not within the
prime contractor’s liability) it is the case that the client is entitled to terminate
either by law or under an express prime contract condition. The risk of termi-
nation may be high impact but low probability if the client’s requirement continues
to exist and cannot be met more quickly elsewhere. However, that is no reason
not to react immediately by approaching the client to discover his real inten-
tions, his reasons and what might be done to placate him if he is serious and

5 TIMEFRAME RISK
the threat cannot be nipped in the bud. Indeed seizing the initiative may be enough
in itself to dissuade the client since immediate, positive pro-active action demon-
strates the kind of client care the apparent lack of which possibly being a motivator
for the client having contemplated termination in the first place.
Nevertheless the threat of termination is most serious and it is prudent to take

early legal advice so as to be sure of the formal situation should the client deter-
mine to proceed with such drastic action. Since litigation may ensue it is important
to ensure that all communication with the client whether oral or written is handled
extremely carefully in case friendly negotiations do deteriorate into legal action.
Whilst bluff plays its part the conduct of commercial negotiations, calling a threat-
ened termination as a bluff can only be considered if there is 110% certainty
that it is indeed a bluff. Do not take the risk.
12. The threat of damages

If the prime contractor is late in performance and cannot pass the responsibility
to someone else then it does face the prospect of a claim for damages from the
client. Thus it should treat all hints of a prospective claim seriously and aim to
nip them in the bud. This can be attempted by:
• Pointing out to the client that he was wholly or partly to blame (some-
times the thinnest of information can be enough to frighten the client
off).
• Hinting at the possible consequences, e.g. further delay and disrup-

tion as key resources are pulled off the work to assist in defending the
claim.
• Highlighting the possibility of a major counter-claim.
The objective is to prevent a formal claim being made. Once someone has put
a claim on the table it must be assumed that he is serious, believes he can support
the claim and intends to see it through. None of these may be true but on the
other hand once a claim is made the claimant is unlikely to simply withdraw it
if, for no other reason than loss of face. If a claim is made then simple rebuttal
and the making of a formal counter-claim can be enough to kill the claim off. A
tough, firm but well considered rebuttal may make the client realise the mountain
he must climb in order to succeed and the sheer scale of it with its implication
of bad feelings; diversion of resources to pursue the claim and the cost may be
enough to cause the client to back off particularly if it can be made obvious that

5 TIMEFRAME RISK
notwithstanding his degree of resolve, the facts themselves show less than 100%
probability of winning. Thus, if the rebuttal can draw out facts or opinions not
realised by the client when he formulated his claim, this can be a big disincen-
tive for him to press on.
Similarly, a seriously made, well presented counter-claim may have the same
effect. However, whether rebuttal or counter-claim, care must be taken not to
reveal all of the prime contractor’s defences and arguments against the possi-
bility that the client cannot be dissuaded resulting in the claim possibly becoming
a dispute leading to litigation. The prime contractor must keep some of its powder
dry.
The immediate harm to the prime contractor in prime contract termination may
include:
• Return of monies paid
• Write-off of costs incurred
• Unsellable stock
• Loss of profits
• Loss of overhead recovery
• Redundancies
• Loss of related business
• Loss of confidence and reputation
This list is bad enough but after this initial shock wave a second hit may arrive
in the form of a damages claim from the client. As been seen such a claim can
be on the basis of damages flowing directly or consequentially from the prime
contractor’s default. The primary example of the former is any additional cost
suffered by the client in having to purchase elsewhere. Frequently clients will
seek to include purchase in default clauses which prima facie are unattractive
(to say the least!) but since they only provide a contractual prescription for what
the law allows anyway the introduction of such a clause can be an opportunity
to limit these purchase in default rights, for example by specifying a time limit
within which the rights must be exercised and by requiring the client to demon-
strate the reasonableness of his actions in purchasing elsewhere and in
containing his own costs in pursuit of that end. Since consequential costs such
as the client’s own loss of business are only claimable from the prime contractor
if an express prime contract condition conveys that liability, or if such loss was
reasonably foreseeable by the prime contractor, then the prime contractor must
avoid those clauses and also avoid allowing itself to be put into a position where
the client could argue that its damages were foreseeable by the prime contractor.

5 TIMEFRAME RISK
When a claim is made, the first question in the claimant’s mind is how easily he
can get the money from the other side. Thus the prime contractor should have
it in mind when negotiating the prime contract in the first place to avoid the
client having a simple means to take its money. There are three main clauses to
watch out for. Firstly, if the issue is one of liquidated damages, avoid clauses
which allow payment of liquidated damages to the client to be made automat-
ically following lateness by deduction against outstanding or future invoices.
Ideally the method of settlement should be left to the prime contractor allowing
it to choose how and when to pay if it were ever in the position of conceding a
liquidated damages claim. Secondly, prime contract clauses which allow the client
to set off one alleged debt against another liability (i.e. by reducing payment on
another prime contract in the sum of the claim to which it feels entitled) should
be avoided. Finally there is danger in those payments clauses which allow the
client, at his discretion, to reduce or suspend payments in the event of his not
being satisfied with the progress or performance of the prime contract.

• On the face of it the array of project management tools available today
should prevent projects from overrunning a stipulated time. But they
still do. The classic problems of underestimation of complexity, undue
optimism in the build up of project resources, client delay and supplier
delay remain problematic. Mechanisms for limiting or eliminating the
damage can be built into contractual arrangements.
• Contractual arrangements by definition are set at the outset of the

project. To ensure that arrangements are in place and effective requires
a high degree of understanding between project risk managers and
commercial risk managers. It is too easy for each to assume that the
other has a potential situation under control. Such assumptions are
themselves a major risk in project risk management.
• If delay bubbles up during the life of the project, two linked princi-
ples are essential. Firstly there must be the earliest possible discussions
between project and commercial risk managers to decide the right
course of action. Secondly, once delay is likely then the project has
drifted into the arena of contractual rights and remedies. It is very easy
at this stage for these rights and remedies to be seriously prejudiced
by well-meaning, but misplaced actions, statements and promises. At
this stage it is essential for project managers dealing with client and
supplier interfaces to tread extremely warily.

5 TIMEFRAME RISK
Checklist
Risk: The Client delays the work

DO
• Use the prime contract to identify all the obligations on the client.
• Include a provision to modify the prime contract in the event of client

default.
• Specify the periods within which the client must give relevant approvals.
• Ensure that any right of the client to direct or alter the work is provided
for in the prime contract.
• Promptly report any client-caused delay to him.
• Pursue claims against the client if he causes delay.
DON’T
• Accept clauses which absolve the client from liability for his own acts
and omissions.
• Agree that acts or omissions of the client are without consequence.
Risk: Suppliers delay the work

DO
• Select subcontractors on the basis of proven reliability and perform-

ance as well as cost.
• Give purchasing/subcontract management high visibility and status

within the prime contractor.
• Ensure that subcontract management is involved in bidding/winning/

performing the prime contract.
• Identify key suppliers at the outset and accord them special attention.
• Make suppliers aware of the full consequences of lateness.
• Make subcontractors contractually liable for consequential damages.
• Include subcontractor default expressly or impliedly in any force

majeure clause with the client.
• Include the right to terminate for default or delay for convenience.
DON’T
• Accept limitations of liability from suppliers.
• Direct subcontractors.

5 TIMEFRAME RISK
Risk: The Prime contractor delays the work

DO
• Include the right to vary the time for performance.
• Include force majeure.
• Involve the client in the work.
• Avoid clear commitments to delivery dates.
• Avoid ‘of the essence’ commitments.
DON’T
• Give promises that can’t be met.
• Give advance notice of delay.
• Assume concessions will be granted.
• Necessarily accept liquidated damages or other ‘penalty’ clauses.
Risk: Force majeure delays the work

DO
• Ensure that an adequate force majeure clause is included.
• Ensure that force majeure delays are reported promptly.
• Ensure that the definition of a force majeure event is understood.
DON’T
• Forget the duty to mitigate
Risk: The threat of termination

DO
• Include a period of notice for termination rights
• Take all threats seriously
• React immediately
• Seize the initiative
• Take legal advice
• Exercise care in all communications
DON’T
• Assume its just a bluff

5 TIMEFRAME RISK
Risk: The threat of damages

DO
• Treat all potential claims seriously
• Consider a counter claim
• Rebut the claim
• Limit purchase in default rights
• Avoid consequential damages
• Create a financial provision
DON’T
• Agree to liquidated damages payments by deduction
• Agree to set-off clauses
• Agree to ‘discretionary’ payments clauses

THOROGOOD
PROFESSIONAL
INSIGHTS
Section 6
Subcontractor risk
1. For the want of a nail
2. Subcontracting: Benefit, risk and strategy
3. Subcontractor lateness
4. Subcontractor failure
5. Subcontractor work unfit
6. Monitoring subcontractors
Checklist
Section 6
Subcontractor risk
1. For the want of a nail

Many projects rely on the performance of subcontractors. To rely on somebody
else in any endeavour is to take a risk. On the other hand it is said that placing
part of the work, and thereby implicitly delegating responsibility for that work,
with subcontractors is to spread the risk around. So is risk taken, or spread or
both and if the latter where then does the balance lie?
If the battle was lost for want of a nail then was it lost because the subcontractor
of nails failed to supply, was late in supplying or supplied on time but his product
failed? If the product failed did it fail against its specification, did it fail against
the user’s reasonable expectation or did it fail because it was subjected to abnormal
and unforeseeable stress in its use? In any event the king said the battle was
lost for want of a nail. Did the subcontractor accept this allegation? Did it go
to court? If fault lay with the subcontractor, how far was he liable, as opposed
to being merely responsible? Did he just replace the nail, or was he sued for the
loss of kingdom and crown? Perhaps it did not matter because everybody was
dead anyway or, to drag the analogy back to the real world, perhaps the subcon-
tractor and/or his client went out of business as a result.
It is not difficult to see how analogous questions arise in a projects environment

where a subcontractor failure of some sort has led to conflict between the prime
contractor and its client. These questions could only be answered by reference
to the contract between the prime contractor and subcontractor. There is no
doubt, however, that subcontracting has both risk and potential benefit to the
prime contractor.

6 SUBCONTRACTOR RISK
2. Subcontracting: Benefit, risk and strategy

In subcontracting, a number of questions of principle are usually considered
in determining strategy. Provided it seems like a good idea and the market can
probably provide the required quantity, quality and specification then the three
questions are selection method, pricing regime and contract strategy. It is not
the task of this Report to explore all the aspects of subcontracting strategy but
an outline appraisal of the balance of risk in each of the three points of principle
(figure 18) is appropriate. So if the decision path towards subcontracting is
perhaps as shown at figure 19 then the risk appraisal can be seen at Steps 3
and 6 (figure 19).
Out-sourcing strategy
Procurement type Pricing regime Contact strategy
– Non-competitive – Cost re-imbursement – Service only

(sole source)
– Cost incentive – Design only
– Non-competitive
(non-monolopy) – Fixed price – Make only
– Partnership sourcing – Firm price – Turnkey
– Competitive arms-length
Figure 18: Three Strands of Subcontracting Strategy

Step 1
Initial cost/ Are quality, quantity,
benefit analysis Step 2 specification available?
Market survey
Is it likely to
be worthwhile?
Step 3
Outline
out-sourcing
strategy
Decide the ‘shape’
Step 4
Market testing
Cost/benefit
review Is the market
responsive, willing?
Step 7 Take the plunge Step 5

Implement in principle Cost/benefit
decision
Take the plunge Step 6
Final strategy
Decide details
Figure 19: Deciding to Subcontract
Taking these three principles in turn it is possible to visualise where the balance
of advantage lies. In each of figures 20, 21 and 22 the relationship is shown
between prime contractor control of the subcontractor and the level of risk which
the prime contractor delegates to the subcontractor.

BUYER
CONTROL Partnership sourcing
Non-competitive
(non-monopoly)
Non-competitive
(sole source)
Competitive
Arms-length
BUYER RISK
Figure 20: Procurement Type
Figure 20 illustrates the wisdom of partnered subcontracting against compet-

itive arms-length buying. In partnered subcontracting the prime contractor has
greater control through communication, openness and cooperation which are
the principles of that philosophy. In competitive arms-length procurement, control
is much more limited as the nature of the transaction militates against it. In
partnered subcontracting there is time to talk to and influence the subcontractor,
in competitive arms length there is not. However, partnered subcontracting does
not mean that the prime contractor has reduced his subcontractor risk to zero.
Apart from the fact that things can and do go wrong no matter the nature of
the transaction, partnered subcontracting in itself is not a perfect answer. Partner-
ships in subcontracting, just as in all other partnerships, can suffer from
complacency and over familiarity. The aim must to be to ensure that the commer-
cial objectives of the two sides to the bargain are as much in harmony as possible
and partnered subcontracting is certainly an improvement over the tough but
simple alternative of arms-length contracting where the respective objectives
can easily come into conflict. Sound partnered subcontracting however retains
a competitive element either as a ‘threat’ that the work could go elsewhere when
the subcontract is due to be renewed or by maintaining two or more sources
for the same work area.

The generally much less desirable alternative to both partnered subcontracting

and arms length competitive sourcing is the selection of a non-competitive subcon-
tractor. The term non-competitive in this sense is used to mean selected without
competition rather than un-competitive, as in unattractive on price or other
grounds. Non-competitive sourcing is used where there is only a single source
of supply, where urgency precludes the time taken by competitive selection or
where constructing the basis for a competition is too difficult or impracticable.
Whatever the reason the end result for the prime contractor is the same. Less
control and more risk as the subcontractor, who essentially enjoys a captive client,
is not motivated to heed the wishes of the prime contractor or to perform in
such a way as to minimise risk to the prime contractor. After all if things do not
work out quite right, the prime contractor has little alternative but to stick with
the subcontractor until things come good.
This is perhaps too black-and-white a picture. The advantage of a non-compet-

itive subcontractor is that he may feel much more motivated to provide a long
term commitment to support the prime contractor’s needs and it is in his interest
to grow his business with this particular captive prime contractor which, in the
final analysis, is still best achieved by delivering quality product on time at good
prices and responding to the prime contractor’s needs.
Nevertheless, before deciding on a procurement strategy it is as well to consider

the general shape of the illustration at Figure 20 and determine where within
that general envelope the optimum strategy lies taking heed of the particular
situation.

BUYER Cost re-imbursement

CONTROL
Cost incentive
Fixed price
Firm price
BUYER RISK
Figure 21: Pricing Regime
Similarly figure 21 shows that the choice of pricing regime also has no perfect
solution. The prime contractor must make the choice as to which pricing regime
best suits the particular circumstances. These alternatives are the same as defined
in Section 3:
Governing principle
Firm Price A price which is not variable for any reason (other than
change in specification, quantity or time for performance).
Fixed Price A price the final value of which is fixed by reference to some
variable parameter such as an inflation index or currency
exchange rate
Cost Incentive A price based on the subcontractor’s actual costs but with
prime contractor and subcontractor sharing overspends or
underspends against a pre-agreed target cost.
Cost Re-imbursement A price based on the subcontractor’s actual costs plus a

pre-determined amount or percentage by way of profit.

A firm price often most suits the prime contractor as it offers him maximum
protection against cost increases no matter what the cause, whether the cause
is simply the effect of inflation or merely poor estimating by the subcontractor
in the first place. On the other hand if the work is so incapable of proper estima-
tion it could be as well for the prime contractor to swallow the bitter pill of a
cost re-imbursement arrangement (subject perhaps to a maximum price) with
his subcontractor than to face an endless stream of claims for price increases
resulting from inevitable changes in the requirement.
BUYER Service only

CONTROL
Make
Design
Turnkey
BUYER RISK
Figure 22: Contract Strategy
Similarly with contract strategy the prime contractor must make his choice as
to the degree of control he seeks to exercise over the subcontractor and the
risk he is prepared to take. Figure 22 provides in some ways the best example
of the principle which is being made here. It may very well be that the prime
contractor considers that, overall, risk to his project is minimised by retaining
maximum control of subcontractors by purchasing only a service or by allocating
segments of the work at a time (e.g. feasibility, project definition, design, make
etc). However, in doing so he has in the contractual sense retained also a degree
of risk of failure. It is his decision to use or not use the advice of a consultant
(acquired under a service subcontract). It is his decision that the design is mature
enough to proceed to the make or do phase. The turnkey approach in which

the subcontractor is responsible for everything has the effect, in that contrac-
tual sense, of passing risk to the subcontractor. So in the context of delegating
risk to the subcontractor the choice must be made between maximum control,
which equals retaining the contractual risk, and minimum control which equals
delegating the risk. On a case by case basis the former may mean the lower
overall risk or it may not.
The same point can be seen in figures 20 and 21. In the first of these the prime
contractor’s risk (of poor subcontractor performance) increases more as he moves
away from the partnership approach although it must be said that the distinc-
tion is less clear since it all depends on the terms and conditions agreed between
the prime contractor and subcontractor. The distinction is once again quite clear
with regard to the pricing regime. The more the prime contractor wishes to control
the subcontractor the more he must move towards a cost re-imbursement basis
which leaves him with both the risk of cost over-runs and of the utility of the
subcontractor’s output.
Returning to the question, does the prime contractor want to take the risk at
all? Figure 23 puts the question into perspective. The advantages of subcon-
tracting not only provide the opportunity to share or delegate risk but also there
is the chance to gain additional skills and experience in working with outsiders
in areas for which the prime contractor has little knowledge. Additionally the
prime contractor and subcontractor in partnership may well be qualified in terms
of resources, capacity and skills base to bid for work for which neither by itself
would be qualified or otherwise likely to be in a strong position.
On the down-side subcontracting means working with an organisation which

may be geographically remote, which may have different priorities from those
of the prime contractor and which is not susceptible to local management action
by the prime contractor (in the same way that the prime contractor’s internal
activities are subject to control) in the event of problems. All of these things do
cause the prime contractor a burden of management over subcontractors which
can be costly and on any serious scale at all requires a dedicated, expert resource.
Putting work out can mean providing jobs for subcontractors at the expense
of the prime contractor’s own personnel. Finally, no matter how good the contract
terms, a subcontractor can suffer a catastrophic failure causing serious problems
for the prime contractor.
Great thought must be given whenever the prime contractor arrives at its
‘make/buy’ decision to ensure that all the risks, advantages and disadvantages
are taken into account.

BENEFIT/ADVANTAGES RISK/DISADVANTAGES
Gain knowledge No local control
Exploit synergy Differing priorities
Risk sharing Employment for others
Catastrophic failure
Management overhead
Geographically remote
Figure 23: Subcontracting: Benefit v Risk
3. Subcontractor lateness
If a subcontractor runs late, or shows signs of running late, good project risk
management will have detected this, opened discussions with the subcontractor
(and possibly with the client), triggered mitigation actions , and all parties will
work to solve the issue and move forward. The commercial perspective is entirely
different. Commercial analysis will include the following considerations:
• What is the root cause of the subcontractor difficulty and who has the
liability (subcontractor, prime contractor, client, no-one!)?

• What are the knock-on effects: additional/nugatory costs, loss of profits,

loss of opportunity suffered by the prime contractor, other subcon-
tractors, and the client?
• Who carries the liability for these knock-on effects?
• What penalties (e.g. suspension of payments, contract termination, liqui-

dated damages) might be levied against the subcontractor or might
be suffered at the hands of the client?
The answers to these questions will not be standard. They will depend upon
the terms of the prime and subcontracts. But whatever the terms are, they amount
to rights and remedies available to one party against another. These rights and
remedies can be reinforced, prejudiced or eliminated by innocent or misguided
word or deed. So a first reaction of commercial risk managers is to ascertain
the relevant and respective rights and remedies and move to ensure that the
prime contractor’s position is not compromised in any way. This has to be done
in real time, whilst others try to solve the problem, in the doing of which matters
may be made worse – at least from the commercial angle.
4. Subcontractor failure
A subcontractor may get into such difficulty that he is rendered unable to perform
at all. That is, he will never deliver or complete the work or the delay is so exten-
sive as to amount to the same thing. In this situation the prime contractor may
have no alternative but to terminate the subcontract. Provided that the problem
is attributable to the subcontractor under the terms of the subcontract and that
there is a clearly defined time obligation upon him and that nothing has been
done by the prime contractor to disturb the clarity of the time obligation, then
the prime contractor will have the right to terminate. The right to terminate and
any relevant arrangements should be specified in the subcontract. There will
be knock-on effects and as described above these must be examined and the
consequences of different courses of action analysed. If the subcontracted work
is of technical or time criticality to the prime contract then there is, theoreti-
cally at least, also the risk of a prime contract termination by the client. Again,
all the commercial stuff must be exercised in parallel with the doers trying to
sort things out.

5. Subcontractor work unfit

Setting aside the question of timeliness, and assuming that the subcontractor
delivers something, the next question is whether the subcontract work as deliv-
ered (or more accurately, as offered for delivery) conforms to the requirements
of the subcontract. Acceptance testing of the subcontract product by the prime
contractor should reveal any patent non-conformances. These amount to a failure
to perform the subcontract and then the same set of questions as mentioned
above arise again. It is of course no argument at all for the subcontractor to say
that he delivered on time if the product does not (even in part) work properly.
The time obligation relates to the obligation to deliver on time something that
conforms to the requirements of the subcontract. Latent defects that emerge
only later, perhaps after integration with the prime contractor’s work or the work
of another subcontractor, or even later after onward delivery to the client may
lead to claims against the subcontractor (and also from client to prime
contractor) under breaches of contract, express warranty, implied warranty or
for breach of terms implied by the Sale of Goods Act.
6. Monitoring subcontractors
Good relationships with subcontractors should bring about openness and visibility
of progress and problems. Rights of access to reports, meetings and facilities
are often secured under the terms of subcontracts. Such monitoring is of the
essence of good project risk management, but again the commercial perspec-
tive is somewhat different.
From the subcontractor’s point of view, such openness can reveal actual and
potential breaches of the subcontract that may bring about penalties from the
prime contractor, the most serious of which could be subcontract termination.
In this situation the interests of the two parties are both common and opposing.
In the first instance both will want to find a solution to the problem and move
on. However, if the problem is serious and not easily remedied, then the subcon-
tractor’s aim will remain the same, but the prime contractor must start to think
of risk mitigation actions, such as switching to an alternative source. This would
or might be in his interests and in the interests of the client, but not, or not neces-
sarily, in the interests of the subcontractor.
From the prime contractor’s perspective, active monitoring of subcontractors

has enormous benefit but also risk. If the prime contractor can maintain a role
of monitoring only, then all is well, but if the prime contractor is drawn into

exercising influence or control or gives decisions or approvals (other than those

required of him under the subcontract) then he risks transferring risk and liability
to himself, as well as causing prejudice to rights and remedies that he may enjoy
with regard to subcontractor failure of performance.
One important feature of prime contractor monitoring is that it enables the prime
contractor to keep track of where the subcontractor work is being done. Project
subcontracts usually include provisions to prevent a subcontractor assigning
the subcontract to another prime contractor or further subcontracting without
the prime contractor’s approval. Again these provisions create tension between
prime contractors and subcontractors. The prime contractor sees a need to limit
the subcontractor’s freedom of movement whilst the subcontractor sees any such
restriction as potentially hazardous to his ability not only to get the work done
but also to his ability to manage his business in the best interests of his share-
holders.

• Subcontracting is both an opportunity and a risk. Project risk manage-
ment must address the issues of potential subcontractor failure –
lateness, complete non-performance or defective performance.
• Project risk management must recognise that, in the event of subcon-

tractor difficulty, the immediate considerations of project progress may
be in conflict with the needs of commercial risk management. The trade-
off between fixing a problem and possibly interfering with carefully
constructed and balanced contractual arrangements is not easy.
• The day-to-day management of the working interface between prime

contractor and subcontractor is strewn with commercial pitfalls. There
is no easy answer to this, but awareness of the issues amongst those
managing the interface is essential.

Checklist
Risk: Consequences of subcontractor failure

DO
• Make the subcontractor aware in writing pre-contract of the criticality

of his work.
• Re-enforce this by putting ‘preambles’ or ‘recitals’ in the subcontract

identifying the purpose of the subcontract and the consequences of
failure.
• Remind the subcontractor in writing from time to time of the impor-

tance of his work once the subcontract is underway.
• Create a relationship with the subcontractor at senior management

level as well as at the working level.
• Include express contract conditions covering the subcontractor’s liability

for consequential damages.
DON’T
• Agree to clauses excluding subcontractor’s liability for special or conse-

quential damages.
• Agree to a financial limit on the subcontractor’s liability.
Risk: Subcontractor is late

DO
• Specify delivery dates in the subcontract.
• Emphasise the importance of timely delivery by including ‘time is of

the essence in the contract’ in the subcontract.
• Require progress reports/forecasts from the subcontractor.
• Consider including liquidated damages.
• Remind the subcontractor from time to time of the importance of timely

delivery.
• Include a termination for default clause.

DON’T
• Allow submission of progress reports etc to have the effect of gaining

acquiescence to late delivery.
• Allow liquidated damages to eliminate the right to terminate for default.
• Delay in reserving rights or taking action against the subcontractor

in the event of his lateness.
• Allow ‘force majeure’ or excusable delays clauses.
• Be the cause of the subcontractor’s delay.
Risk: Subcontractor’s products are ‘unfit’ after delivery.

DO
• Require conformance to a performance specification.
• Specify examples of the purposes to which the product will be put.
• Include an acceptance clause which delays acceptance until the

products are proven in use.
• Include an express warranty.
• Say that the subcontractor’s skill and judgement is being relied upon.
• Retain payment of part of the price until post-delivery obligations are

discharged by the subcontractor.
DON’T
• Agree to exclusions of implied undertakings such as fitness for purpose

or satisfactory quality.
Risk: The Subcontractor goes out of business.

DO
• A financial health check on the subcontractor beforehand.
• Require (if appropriate) a parent prime contractor guarantee under-

writing the subcontractor’s obligations to perform the contract and
underwriting the financial liabilities arising there under.
• Require a bond or guarantee from a bank or other third party covering

the financial liabilities of the subcontractor.
• Include a clause to vest ownership of parts and materials in the buyer

as they are allocated to the contract.

• Include a right of termination exercisable in the event of actual or

prospective insolvency, winding-up or bankruptcy.
• If appropriate, require the subcontractor to enter into an ESCROW

agreement whereby details of his designs are held confidentially by
a third party and made available to the buyer in the event that the
subcontractor is unable complete the subcontract or to provide product
support in the future.
DON’T
• Be persuaded by a financially insubstantial or shaky subcontractor that

everything ‘will be alright on the night’.
Risk: You don’t know what the subcontractor is doing

DO
• Require the subcontractor to provide plans, reports and appropriate

documentation and data to provide reasonable visibility of progress.
• Hold progress-review meetings.
• Use Quality Assurance surveillance to check on progress.
• Employ an expert in the field of the subcontractor’s work to monitor

and advise on progress.
• Include a ‘no waiver’ clause.
DON’T
• Allow that receipt, approval or acceptance of any document abrogates

the liability of the subcontractor to fully perform the contract.
• Allow that progress meetings or the minutes thereof have the effect
of altering or varying the subcontract or of condoning non-compli-
ances or lateness by the subcontractor.
Risk: The subcontractor fails to accord the subcontract any

priority
DO
• Motivate the subcontractor by paying on completion only or, if interim

payments are to be made, by suggesting that his cash flow can be
improved by adherence to a sound milestone payment scheme.
• Motivate the subcontractor with expectations of future business, client

awareness of his success etc.

• Ensure the senior management interface between buyer and subcon-

tractor is exercised to retain the subcontractor’s attention.
• Involve the subcontractor in the planning and progressing of the activity

into which his products merge.
• Remind the subcontractor of the contractual and legal remedies avail-

able in the event of his default and, as appropriate, invoke those remedies.
DON’T
• Delay in taking steps to encourage a slow subcontractor to perform.
Risk: The subcontractor damages prime contractor property

DO
• Include a clause making the subcontractor liable for physical loss or

damage to prime contractor property which he causes.
• Require the subcontractor to carry adequate insurance cover.
DON’T
• Be talked into carrying the risk because ‘your own insurance must cover
it’.
Risk: Subcontractor puts the work elsewhere

DO
• Include a ‘no assignment’ clause.
• Reserve the right to approve his subcontractors.
• Reserve the right to visit or inspect his subcontractors.
• Require the subcontractor to ‘flow down’ (i.e. include in his purchase

subcontracts) those terms and conditions which protect prime
contractor interests.
DON’T
• Take any liability with regard to the selection or performance of his

subcontractors.

Risk: The subcontractor ‘causes’ breach of the prime contract

DO
• Include all the ‘mandatory flow down’ conditions.
• Negotiate with subcontractors pre-contract.
• Include all other relevant prime contract conditions.
DON’T
• Forget to secure adequate intellectual property rights.
Risk: The subcontractor’s products are no longer wanted

DO
• Include a cancellation for convenience clause.
DON’T
• Agree to pay anticipated profits.

THOROGOOD
PROFESSIONAL
INSIGHTS
Section 7
Project completion and beyond
1. Life after completion
2. Key contractual milestones
3. Residual obligations and risks
5. Acceptance
6. Products rejected
7. Title does not pass
8. Products lost or damaged in transit
9. Failure after delivery/acceptance
10. Warranty
11. The hand over of technical data to the client
12. Third party intellectual property rights
13. Account management
Checklist
Section 7
Project completion and beyond
1. Life after completion

The prime contractor wants to deliver, take the money and run. The client wants
the products, doesn’t want to pay and hopes to have a stranglehold on the prime
contractor forever! Somewhere between these two extremes there is a reason-
able position regarding post delivery obligations. In a clinical sense both sides
should be seeking certainty as to the point at which the prime contract has been
wholly performed in return for which the full prime contract price is payable.
There may well be residual obligations on the prime contractor after this point
in terms of supporting the delivered products but the real risk lies in the question
as to whether all liability in the material work has or has not passed to the client.
2. Key contractual milestones

There are several key contractual milestones on the way to confirmation that
the prime contract is complete:
Milestone Principle
Inspection The opportunity for the client to verify that products offered in
the performance of the prime contract comply with the require-
ments of the prime contract
Delivery The point at which the prime contract is performed (regardless

of the passage of title and risk) whether by physical movement
of products or handover following installation or by paperwork
transaction
Passing of Title The transfer of legal title in the products from prime contractor
to client
Passing of Risk The transfer of liability from prime contractor to client for loss
or damage to the products

7 PROJECT COMPLETION AND BEYOND
Milestone Principle
Rejection The right of the client to reject products which do not comply
with the requirements of the prime contract
Acceptance The point at which the client concurs that the prime contract
has been performed, forever extinguishing his right to reject the
products or terminate the prime contract
Warranty A period after delivery during which the prime contractor has
express or implied liability to the client for defects in the
products
Payment Settlement of the prime contract by the client in return for the
prime contract having been performed
Not surprisingly client and prime contractor have, in principle, exactly opposing
views with regard to the timing of these events (figure 24).
WARRANTY
REJECTION
INSPECTION
Contract Delivery Acceptance Payment

award
Property
Risk
passes
passes
Figure 24: Client’s Preference

REJECTION
INSPECTION
PAYMENT
Contract Delivery
award
Risk
passes
Property
passes
Figure 25: Prime Contractor’s Preferences
The client likes the ability to inspect the work throughout the period of the prime
contract exposing a risk of rejection even before the prime contractor has offered
performance. He wants early title to parts, materials and finished products and
only wants to pay way after delivery, having delayed acceptance and adoption
of loss/damage risk as long as possible. The prime contractor, on the other hand,
sees performing the prime contract as his private business until he offers perform-
ance where transfer of title and risk should transfer simultaneously with
acceptance happening immediately thereafter (if not concurrently with) and,
having enjoyed payment over the life of the prime contract, achieving 100% of
the price on or before delivery.
These things must all be worked out in the detail of the prime contract negoti-
ation. Probably the most important event from the prime contractor’s perspective
is achieving contractual acceptance. This is because where products are legit-
imately rejected and unless compliant products can be offered within the period
allowed, the prime contractor is in fundamental breach and risks the prime
contract being terminated for default. Once acceptance has occurred and the
right to reject has disappeared, the risk of termination has evaporated and the
client can only pursue the prime contractor under express or implied warranties
if there are any problems with the products.

3. Residual obligations and risks

Depending on the construction of the prime contract, primary, post delivery
risks to the prime contractor may therefore include:
• Rejection of the products
• Products lost or damaged
• Deficiencies discovered under warranty
• Payment not made
However, the question remains as to what other risks remain with the prime
contractor even once the primary risks identified above have been eliminated.
Such residual obligations typically cover:
• Supply of additional products under prime contract options.
• Delivery of technical data and licences for the use thereof.
• Settlement of outstanding purchase orders, prime contracts, rental

agreements, lease agreements etc.
• Disposal of residual material within the terms of the prime contract.
• Resolution of outstanding claims and disputes.
• Disposal of client-owned property made available for the purposes of

the prime contract.
• Cancellation/closure of outstanding bonds, guarantees, credit facilities.
• Termination of teaming, collaboration, consortium agreements.
• Final negotiation and conclusion of any special pricing arrangements

(e.g. cost risk-sharing schemes, variation of price adjustments).
• Establishment of contractual, management and procedural arrange-

ments to provide support services and maintenance of technical skills
and data.
• Application for patents and other forms of intellectual property

protection in respect of the work of the prime contract.
Secondary duties such as these, which are not at the heart of the prime contract
but nevertheless form part of the entire set of prime contract obligations, are
very important. Where they relate to obligations owed directly to the client or
to other parties they can be easy to overlook. The arrival of a letter from the
client two years after the prime contract is finished legitimately exercising a
prime contract option for more products which the prime contractor had entirely

forgotten about can be an alarming experience. This is particularly so if the

products are no longer in production or no longer capable of economic produc-
tion. Similarly a late but proper invoice from a subcontractor which arrives after
the books have been closed on the prime contract and the profit released to the
profit and loss account can be disappointing!
Just as it is important to plan the start up and execution of a prime contract, so

it is important to plan the closure. Good administrative procedures should ensure
that these residual obligations are not forgotten and positive action should be
taken to discharge or eliminate them. For example, the prime contract option
which survives completion of the main work should be examined for viability
and, if there is a risk that the option could not be performed at all or not at a
profit, early action should be taken to persuade the client to agree that the option
right is deleted or perhaps to reduce the length of the period during which the
option can be exercised.
In business as in life there are more people who are good at starting things than
there are people who are good at finishing things. This is a characteristic which
is also true of companies. Great attention must, therefore, be paid to ensuring
that residual obligations are effectively dealt with one way or another.
5. Acceptance
In all contracts it is as well to have an express clause on acceptance. It is such
an important milestone that the prime contract must make it absolutely clear
when, where and how acceptance occurs. The best approach is to hang accept-
ance onto a key event or series of events which are objective and susceptible
to clear yes/no, pass/fail criteria. For example, a prime contract for a complex
system could specify a set of acceptance tests the successful completion of which
conveys contractual acceptance. The tests may be of a representative sample
of the features demanded in the technical, performance or other specifications
which establish the basic requirements of the prime contract or they may test
every feature.
Testing is expensive and, in some situations, 100% testing is not feasible. Hence,
once again, the principle of risk sharing applies. In the situation just described
the client takes the risk that in accepting the work of the prime contract in the
absence of 100% testing, some shortfalls against the prime contract may exist
which are not detected at the acceptance testing stage. Once the work has been
accepted, his bargaining power and remedies against the prime contractor are

much weaker, although in taking that risk he will have had the benefit of a lower
price and perhaps quicker completion and hence the bargain is balanced.
If acceptance testing or something similar is not appropriate, the best approach

to acceptance is for it to be conveyed upon the elapse of a stated period of time
from physical delivery or handover or commissioning or whatever seems the
most appropriate signal of the ostensible end of project implementation. This
simple approach is objective and the length of the period can be negotiated on
a case-by-case basis. A balance will always be struck between the two extremes
where the prime contractor would want acceptance to occur concomitantly with
delivery whilst the client would want to suspend acceptance for several years!
If the prime contract is so constructed as to allow for partial performance, then

it is important that acceptance is conveyed in stages. It is important to spell out
in the prime contract the acceptance arrangements for every item of the prime
contract or every stage of the work. From the prime contractor’s perspective
the lightest burden of acceptance is clearly preferable and he should look for
the simplest approach, certainly as far as an opening position is concerned. For
example he might suggest that acceptance occurs on delivery provided he has
submitted a certificate of conformity with the products.
To back up an objective approach to acceptance it is crucial that the events upon

which acceptance depends are thoroughly documented so as to prevent
disputes as to whether acceptance has or has not occurred. The goal of objec-
tivity is completely frustrated if acceptance is effectively left to the client’s discretion
and yet this is the effect of clauses which say ‘the prime contractor shall complete
the work in accordance with the prime contract specifications and to the satis-
faction of the client’.
Acceptance should be capable of determination without any element of judge-

ment on the part of the client or anybody else. Nor should a special piece of
paper be needed such as an ‘acceptance certificate’ from the client. If an accept-
ance certificate is required to complete, confirm or formalise acceptance then
the implication is that the certificate is an essential component of the process
or act of acceptance without which acceptance cannot have occurred. Hence
the client is hardly going to be motivated to issue a certificate since it is in his
interests to delay acceptance for as long as possible.
The uncertainty of the client ‘saying so’, is matched by the uncertainty of clauses
which provide for acceptance when the products are taken into use or the elapse
of a ‘reasonable’ period from delivery. Although in the former case, if it is certain
that the products will go into use very quickly (probably so), it would then be
beneficial and safe for the prime contractor to agree to acceptance on that basis.

In any other circumstance the uncertainty represents a risk. Similarly, references

to a reasonable period are inherently risk and only guarantee disputes between
the two sides regarding what may be considered a reasonable period in the
prevailing circumstances.
The client’s wish to delay acceptance can sometimes be manifested as a clear

policy as opposed to a natural instinct. He may specify that acceptance can only
take place following extensive use of the products so that their true utility or
performance can be assessed. Clearly this would represent a much greater risk
to the prime contractor and one which should be avoided if at all possible.
Finally it is preferable to avoid the prime contract linking acceptance to payment.

If the arrangements for acceptance are well defined, resistant to dispute and
the criteria represent no major hurdle then such a linkage is perfectly fine.
However, if the burden is onerous it is better that clearing the hurdle does not
have the additional complication of cash flow issues surrounding it. However,
at the fundamental level, if acceptance is not attained due to some deficiency
on the part of the prime contractor then the prime contract has not been
performed and the client can hardly be expected to pay although the question
of actual remedies (termination, damages) must depend on the circumstances
and the terms of the prime contract.
6. Products rejected
In the prime contractor’s ideal world the client is obliged to accept the work
and has no opportunity to reject, hence the correct if somewhat fanciful sugges-
tion that the client should have no right of rejection. Assuming, therefore, that
rejection rights must apply the question is how to limit this risk. The concepts
of acceptance and rejection go hand in hand and the prime contract should
re-enforce the general principle that acceptance extinguishes any right of rejec-
tion. Any period within which rejection is allowed should be stated, limited and
triggered by some event such as physical delivery. If rejections are allowed then,
sensibly, there should be a right of appeal as, presumably if the prime contractor
was confident that he delivered conforming products, there must be some chance
that the client’s purported rejection is invalid. Incidentally it should be stated
that the right of rejection relates only to a belief that the products genuinely
do not conform to the requirements of the prime contract. There should be no
ability to reject the products on some general grounds of dissatisfaction. A rejec-
tion is potentially a very serious situation for the prime contractor and good
practice and protocol demand that it is notified formally and in writing within
the period allowed.

The consequences of rejection can range from termination of the prime contract
to delay in payment and the additional cost of investigating the rejection. It is
therefore reasonable that if rejections are found invalid the client should be
required to compensate the prime contractor for the effect of these consequences
some of which will have occurred by the time the invalidity is established.
Whether a rejection is ultimately shown to be valid or not there is a danger that

the products are in a contractual limbo in terms of where lies title and risk and
so it is important to make provision for this so that, amongst other things, one
side has the loss/damage risk insured. As a corollary the prime contract should
also nominate the party which is to have responsibility for moving rejected
products around.
Sometimes rejection clauses specify a timeframe within which appeals have to

be lodged. The prime contractor should ensure that he has in place the proce-
dures to trigger the lodging of an appeal very swiftly after receiving notice of
a rejection with which he disagrees. It is no good for rejected items to be returned
by the client and left lying in goods inwards for several months before anybody
notices! Procedures should also exist for handling rejected products so that they
do not accidentally (or deliberately!) become re-mixed with other good products.
7. Title does not pass

The key question in the passage of title is the point or time at which it is conveyed
and where the balance of advantage lies. On the one hand, retaining title in the
products until payment has been made in full gives the prime contractor security
insofar as if payment is not made it still owns the products and thus its remedy
for non-payment would include recovery of the products for sale elsewhere. On
the other hand, if the products are consumable, are inaccessible or likely to have
deteriorated since delivery such a remedy is not that helpful and, if title has passed
to the client, then a clearer case exists for legal action in respect of payment of
the prime contract price. So the choice inevitably depends on the nature of the
products and the characteristics of the client.
Part of this equation is the degree to which it is reasonable for title to pass to
the client prior to delivery under vesting arrangements. These are usually sought
by the client in return for granting the facility for advance or interim payments.
There is sense in the argument that his security for advancing monies is title in
the products or material parts thereof as they are purchased or allocated to the
prime contract. However, it can be argued that if he has already enjoyed the

advantage of a lower price in return for promising advance payments why should
he have the additional benefit of early passage of title in such products or materials.
Setting aside the principle there are two main difficulties with vesting clauses.
Firstly there is the problem of identifying materials or products in respect of
which title has passed to the client. This is because of the limitations of accounting
systems to provide this sort of facility are complicated by the fact that the prime
contractor may purchase the same items for many contracts and may have several
contracts with many different clients all of which include vesting clauses. Perhaps
the best advice is that, if a vesting clause has to be accepted, it should be made
clear that it does not allow the client any rights to verify compliance! The second
concern is that care should be taken to ensure that title only passes if advance
payments are actually made rather than just promised.
8. Products lost or damaged in transit

There is the simple risk of loss or damage to the products somewhere between
acquisition of the component parts and materials by the prime contractor through
to the point of physical delivery to or acceptance by the client. Each party normally
wants the risk to be carried by the other side and so when the point has been
negotiated the key issue is to ensure that insurance cover is arranged for the
period and scope of the risk and that any other arrangements to safeguard the
physical security of the material are in place. Although insurance policies may
cover the risk of loss or damage caused other than by the prime contractor’s
own acts or omissions it is always prudent to have the prime contract state that
the acts or omissions of the client are within his own responsibility and liability.
9. Failure after delivery/acceptance

The primary objective is to avoid any liability once the prime contract is complete.
Prime contract completion can mean many different things but here it is used
to convey the idea that performance of the prime contract has been achieved
insofar as delivery is complete and acceptance has been attained. Whilst residual
obligations may remain, the primary objective has been secured. Setting aside
any residual obligations (e.g. to maintain the manufacturing drawings) the
question is what liabilities arise regarding the delivered products? If the client
can be persuaded by a lower price or other valuable consideration to accept all
the risk once the prime contract is complete so much the better. To avoid any

risk the prime contract must achieve three things. Firstly there should be a clear
and comprehensive statement on acceptance. Secondly there should be an express
exclusion of implied warranties and undertakings including those stipulated under
the auspices of the Sale of Goods Act. Finally there must be no express warranty
of any sort. Exclusions of liability must be carefully worded but failure to expressly
exclude the SOGA implied undertakings as to satisfactory quality and fitness
for purpose mean they do apply unless convincing argument (such as the client
having specified in detail his requirement and how the prime contractor should
achieve it) can be mounted to the contrary. These undertakings are ill-defined
in scope and time frame and, if only for the sake of certainty, are best excluded
in favour of an express warranty if the client is not willing to carry all the post-
delivery risk himself.
10. Warranty
The warranty clause in any contract, but particularly in a contract for a project,
is like a contract within a contract. That is to say that it is a vehicle for identi-
fying and allocating risk between the parties. As in any other contract each party
may want to assign the maximum possible risk to the other. This creates tension.
Warranty clauses can be amongst the most difficult clauses to negotiate. The
client may think that by insisting upon (and paying for) an express warranty
that he is acquiring some special benefit. In fact he may be doing no more than
signing away or diluting rights he would otherwise have at law anyway – and
paying for the privilege of doing so. The prime contractor may think that a
warranty clause, by excluding certain categories of problem, may protect him
against uncertainty. This may be true but at the same time he may caught for
quite onerous liabilities, such as rolling obligations. The one main advantage
common to both sides – provided the clause is worded properly – is that it brings
certainty as to post-completion liabilities. In almost every circumstance certainty
is to be preferred to uncertainty.
The warranty period and the event (preferably physical delivery or contrac-
tual delivery if earlier (e.g. ex-works) and not acceptance) that starts the warranty
clock ticking should be stated and the clause should list all the exclusions of which
the following are possible examples:
• Products not covered by the warranty.
• Problems for which no warranty claim is received within the warranty

period.

• Products not returned within the warranty period.
• Products exhibiting defects other than those which are a demonstrable

failure against the prime contract specification.
• Products where the alleged defect is not remediable by the prime

contractor.
• Products exhibiting defects likely to be attributable to wear and tear;

improper use, maintenance or storage; defective components.
The warranty should also be clear as to whether design and manufacture are
both covered. A warranty on manufacturing workmanship and materials means
that one product exhibiting such a defect would be covered by the warranty, but
a warranty covering the design may require the prime contractor to remedy a
defect in an entire consignment even though only one unit may exhibit the defect.
Thus the difference between a manufacturing warranty and a warranty covering
design as well is the scope and the scale of the risk. If the prime contractor is to
be liable under warranty then he must seek to have the choice of remedy within
his control. The option to repair or replace or refund money should be his.
The prudent prime contractor will carefully scrutinise all warranty claims and
never assume that it (the product) must be wrong just because the client says
it is wrong. The wary client will have his own views on warranty obligations
and one way for him to impose his view is to demand a warranty retention or
bond. The warranty retention means that some part of the prime contract price
will not be paid until the client is satisfied that all post-delivery problems have
been satisfactorily ironed out. The warranty bond allows the client to call upon
a third party to impart money in his direction if the prime contractor fails to
discharge warranty liabilities notwithstanding that the prime contract price may
have been paid in full.

11. The hand over of technical data to the client

Intellectual Property Rights (IPR) are the greatest asset any prime contractor
owns. The prime contractor’s unique ideas, skills and reputation are what gives
it its products, profits, position in the market place and its competitive advan-
tage. More so than any other asset it should be jealously guarded. Tangible assets
such as plant and machinery which are stolen, damaged or destroyed by fire
can be replaced albeit with possibly disruption to business operation. By contrast
the full value of the intangible asset of intellectual property can never be restored
once it is lost either to the client, who might otherwise have come back for more
work which he feels able to do himself if he acquires the prime contractor’s IPR,
or to a competitor, who may well be able to make use of the information without
actually infringing the IPR.
Any grant of rights by the prime contractor should be as limited as possible.

The first step is to restrict the rights to data which is actually deliverable under
the prime contract and then to limit the definition of what is deliverable. Then,
when it is time to deliver the data, the detail put into the deliverable material
should be as sparse as possible so as to be minimally compliant with the least
onerous interpretation of the definition. In any event, every effort should be made
to grant rights only in that IPR generated under the prime contract. Any pre-
existing IPR brought to the prime contract by the prime contractor should be
excluded from the grant.
If possible any grant of rights should be in principle only and an express state-
ment should be included in the prime contract that detailed terms will be agreed
later. Apart from the fact that agreements-to-agree are difficult to enforce both
legally and in practice, this leaves the door open for future negotiations on the
terms (both fees and further restrictions) at a time when the client has much
less bargaining power than at the pre-prime contract stage when the full heat
of competition is bearing down on the prime contractor.
A further restriction is to limit the rights to the client only, denying him the
right to sublicense or assign the benefits or otherwise so as to prevent him from
passing the information outside of his organisation and potentially into the hands
of competitors.
Whatever the extent of the rights granted, the prime contractor should ensure
that the recipient, whether just the client or third parties, is bound by obliga-
tions of confidentiality. Confidentiality agreements or non-disclosure agreements
primarily bind the recipient not to disclose the information without written permis-
sion, to safeguard it and to use it only for a specified purpose. This last point

provides another opportunity to restrict the rights being granted. To enhance

the degree of protection the prime contractor might consider requiring
individual recipients as well as the client to enter into such agreements. Whether
the information is actually disclosed under the terms of the prime contract subject
to conditions of confidentiality or whether it is disclosed under a full licence agree-
ment the two over-riding aims are to restrict and protect. Restrict the rights.
Protect the information.
In some ways the greatest danger is that, despite the terms of the prime contract,
many personnel working on the prime contract who may either be ignorant of
or not understand the IPR provisions of the prime contract may just give the
information away anyway in the naive belief that if the client is paying he must
automatically own all the IPR. Allowing this risk to exist is unforgivable and it
can be avoided by including a clear briefing on the IPR position at the prime
contractor’s contract launch meeting.
Finally it should be remembered that in addition to protecting the information

by the terms of the prime contract and any supplementary confidentiality or
licence agreements, consideration should be given to statutory forms of protec-
tion (e.g. patents and design registration) and to practical measures such as the
use of bold copyright legends on documents and software, procedures to prevent
unintentional release and an awareness campaign centred on the abiding first
principle of IPR: It’s ours, they can’t have it.

12. Third party intellectual property rights

If protecting the prime contractor against the risk of its IPR being compromised
is a big enough challenge then equally demanding is dealing with the risk of
infringement of third party IPR.
In many projects the IPR situation is a minefield of conflicting interests and require-
ments (figure 25).
Licensors End customer
Sub-contractors End user

Data required
Company Customer
Data delivered
Own information Other contractors
Information held Other organisations
Figure 26: Data Flow
For these purposes the word data is used very generally to describe any infor-
mation which may be protected or protectable by an intellectual property right.
This might range from copyright material (e.g. drawings, specifications, comp-
uter software) through design information (e.g. the unique shape or appearance)
to patent details (the essence of an invention) and even the use of trade marks/
names (e.g. product names and logos).
Coming into the prime contractor will be data from licensors, other contrac-
tors and perhaps teaming partners each of whom may be providing data which
they own, have licensed from someone else or have stolen (intentionally or in
innocent ignorance of a proprietor). The prime contractor’s own data may be
a combination of that which is genuinely the product of its own efforts, that
which it happens to possess (i.e. where the original source is obscure) and that
which it possesses as a result of other contracts. Data produced under other
contracts may have intellectual property rights vested in the relevant client(s),
the prime contractor, third parties or combinations thereof. Data delivered to

the client may be destined for his own use or to third parties under licence or
prime contract each of whom may have further needs beyond their own use.
Each link in the chain may need rights to possess, use, copy, merge or modify
the data which it handles. Each may need the right to sublicense, assign, sell
or otherwise dispose of the data. Each may wish to secure intellectual property
right protection for its part or parts of the whole work. Each may want exclu-
sive rights in jointly created data. All data transmitted may be governed by
confidentiality agreements. Data may have come into the possession of
individual parties legitimately, by breach of some restrictive agreement by that
party, by breach of some restrictive agreement by another party or because
the public domain now includes that data.
Thus if, for the purposes of this discussion, the first and second parties are the
prime contractor and the client then all the other parties shown (i.e. which may
have a contractual relationship) with client or prime contractor) plus any others
remote from or not ostensibly linked to the chain are the third parties in whom
lies the risk of allegation of breach of intellectual property right. Any such third
party may allege a breach of intellectual property right. On the basis that preven-
tion is better than cure, the lowest risk approach for the prime contractor is
to ensure that the entire IPR picture is clear and that all necessary licences and
permissions are in place in writing. The sooner this is done the better. It is hardly
ideal to supply the client under prime contract with copies of prime contractor
copyright work only then to find that the prime contractor had no right to make
such copies.
Lack of time and impracticability sometimes prevent full researches being done
and the proper measures being put in place prior to bidding or prior to making
a contractual commitment to the client. In these circumstances the prime
contractor is exposed to the risk of alleged breach of intellectual property rights
and, following the principles of good commercial risk management, if a risk is
carried then opportunities should be sought to pass to someone else the conse-
quences of the risk materialising. The best approach is to seek indemnities from
both ‘providers’ of data (i.e. licensors, prime contractors etc) and ‘consumers’
of data (i.e. the client). The logic to use with the providers is that they are the
experts in the genesis of their products and data and must easily be able to offer
an indemnity unless there is something to hide! With the client the logic is surpris-
ingly similar. Only the consumer can know to whom and for what reason data
may be disclosed. Hence he too can surely provide an indemnity unless there
is something to hide! Notice that the prime contractor appears to know nothing
about anything! This position of innocence is a good one, but for the fact that
in most cases of breach of intellectual property rights, innocence is no defence.

Hence the importance of the prime contractor being protected by indemnities,

from both data providers and data consumers, that pass to them the responsi-
bility for defending claims and the liability for the cost of defence, the cost of
settlement and, in the perfect case, the cost of any consequential effects such
as the disruption to the prime contractor’s operation.
If avoiding the risk is not feasible and if passing the consequences elsewhere
is not an option, for example because the providers and consumers do not agree
to offer indemnities, then the last option is to insure the risk. Indeed this is a
common policy for companies to adopt but nevertheless it should not be seen
as a soft option. ‘We needn’t worry because it’s covered by insurance’ is a wholly
unacceptable and dangerous ethos.
This essay should be sufficient to show that the greatest risk lies in simply ignoring
the problem. Education of all concerned within the prime contractor as to the
principles of intellectual property rights is in many ways the best form of practical
protection. The subject is seen as a black art for obscure experts and whilst the
legal, statutory, procedural and international dimensions of intellectual property
matters should not be under-estimated for a nanosecond, the rules of simple
self-protection should be understood by all.
Returning momentarily to the issue of indemnities, there is a straightforward

rule which says that if it is good to be the beneficiary of an indemnity it must
be bad to be the benefactor. The only possible benefit to the prime contractor
in giving an indemnity would be to limit the scope and monetary value of a liability
which might otherwise be by implication an open ended liability.
13. Account management

Every risk is an opportunity. The primary and residual risks that lie at the tail
end of the prime contract are very real and need to be carefully managed. Elimi-
nating the risks, for example, of late delivery and deficient products means not
only a greater chance of completing the prime contract at the anticipated level
of profit but it also means a satisfied client. Needless to say, satisfied clients are
more likely to come back for more and the prime contractor’s reputation will
have grown in the marketplace. Thus the prime contract should not only be seen
as the mountain of obligations and risks but as the opportunity to make profit
and secure further orders. This much is a blinding glimpse of the obvious but
many companies fail to take the opportunity at the start of the prime contract,
or even before hand, to work out how the particular prime contract can be used

to generate more business. A product plan may look at the technical evolution
of a product, how and when it will come to the market, the investment needed,
the likely client base, target selling prices and margins, the volume, timeframe
and phasing of orders and particular major potential orders may feature as key
milestones but this is inevitably a little bit too general. What is needed is a specific
plan for the exploitation of the particular prime contract which looks at the tactics
and timing of introducing to the client ideas for improvements, enhancements,
upgrades, maintenance and other support services. Indeed these opportunities
may grow out of problems and risks encountered during the prime contract or
anticipated to emerge post-delivery.

• It is all too easy for those working under contract on a project to assume
that they know what project or contract completion means. This is
particularly so when the project is of long duration. The contractual
aspects of completion and the contractual milestones of transfer of
risk and title and the gaining of acceptance are of equal importance
to a physical description or understanding of completion.
• Post-completion obligations should be described in an explicit

warranty clause which is stated to stand in place of all other liabili-
ties. In a project of long duration the warranty phase may seem too
far away to attract much interest but every care must be taken in estab-
lishing the warranty obligations. Amongst other things, a problem
fixed under warranty may cost much more than having got the thing
right in the first place.
• Just as with project or contract completion, project staff may jump to

the wrong conclusions as to what is covered by warranty. This is hardly
surprising. People assume that the sort of thing covered by warranty
in consumer transactions would also apply to a business contract or
they may make assumptions based on what seems reasonable. Both
are very dangerous premises. Staff should be quite clear on the extent
and limit of the prime contractor’s warranty obligations.

Checklist
Risk: The products are not accepted

DO
• Ensure the prime contract has an acceptance clause.
• Ensure acceptance occurs on a specific event or the elapsing of a stated

period of time from delivery.
• Seek acceptance in stages.
• Ensure that events are clearly documented to evidence acceptance.
DON’T
• Agree to acceptance occurring when the client says so or when the

products are taken into use or the elapsing of a ‘reasonable’ period.
• Agree to ‘delayed’ acceptance.
• Agree to acceptance being linked to payment.
Risk: The products are rejected

DO
• Avoid the prime contract giving rights of rejection.
• Link rejection with acceptance.
• Limit the period within which a rejection can be made.
• Provide a right of appeal against rejection.
• Require notice of rejection to be in writing.
• Seek a right to compensation for invalid rejections.
• Make sure that title and risk in rejected products is specified.
• Prescribe responsibility for returning/redelivering rejected products.
DON’T
• Forget to lodge appeals.
• Fail to challenge rejections and interrogate the rejection closely.

Risk: Title does not pass

DO
• Ensure the prime contract has a clause on passage of title.
• Retain title until the last possible minute.
DON’T
• Agree to vesting clauses.
Risk: The products are lost or damaged in transit

DO
• Ensure the prime contract has a clause on passage of risk.
• Seek the earliest possible transfer of risk.
• Arrange appropriate insurance.
DON’T
• Carry risk in the acts or omissions of the client.
Risk: The products fail after delivery/acceptance

DO
• Avoid any post-delivery liability.
• Exclude the provisions of the Sale of Products Act.
• Limit the extent and scope of express warranties.
DON’T
• Assume client dissatisfaction equates to a contractual liability.
• Agree to warranty bonds or retentions.
Risk: Technical Data must be handed over

DO
• Avoid any clause granting rights in Intellectual Property.
• If unavoidable, deal with the issue with an eye to the future.
• Grant rights only in deliverable data.
• Limit the amount of deliverable data.
• Grant rights only in that work required under the prime contract.
• Grant rights in principle only, leaving terms to be negotiated later.

• Grant rights in the following order: use; use and copy; use, copy and
modify
• Limit rights to the client only.
• Include express provisions regarding confidentiality.
DON’T
• Fall into the trap that because the client has paid he must own all the
IPR.
• Forget to maximise IPR protection by patents etc.
Risk: Breach of third party IPR

DO
• Identify all IPR issues at the bid stage.
• Secure comprehensive licences from licensors/other contractors.
• Grant specific licences to the client
• Secure indemnities from data providers/data consumers.
• Secure indemnities from the client.
• Insure against the risk.
DON’T
• Ignore IPR
• Give indemnities

Other specially commissioned reports
BUSINESS AND COMMERCIAL LAW
The commercial exploitation of intellectual The Competition Act 1998: practical

property rights by licensing advice and guidance
CHARLES DESFORGES £125.00 SUSAN SINGLETON £149.00
1 85418 285 4 • 2001 1 85418 205 6 • 2001
Expert advice and techniques for the identification Failure to operate within UK and EU competition rules
and successful exploitation of key opportunities. can lead to heavy fines of up to 10 per cent of a business’s
total UK turnover.
This report will show you:
• how to identify and secure profitable opportunities
• strategies and techniques for negotiating the best Insights into successfully managing the
agreement in-house legal function
• the techniques of successfully managing a license BARRY O’MEARA £65.00
operation.
1 85418 174 2 • 2000
Negotiating the fault line between private practice and

Damages and other remedies for breach
in-house employment can be tricky, as the scope for
of commercial contracts conflicts of interest is greatly increased. Insights into
ROBERT RIBEIRO £125.00 successfully managing the In-house legal function discusses
and suggests ways of dealing with these and other issues.
1 85418 226 X • 2002
This valuable new report sets out a systematic approach

for assessing the remedies available for various types of
breach of contract, what the remedies mean in terms of
compensation and how the compensation is calculated.
Commercial contracts – drafting

techniques and precedents
ROBERT RIBEIRO £125.00
1 85418 210 2 • 2002
The Report will: For full details of any title, and to view sample
extracts please visit: www.thorogood.ws
• Improve your commercial awareness and planning
skills You can place an order in four ways:
• Enhance your legal foresight and vision 1 Email: orders@thorogood.ws
• Help you appreciate the relevance of rules and 2 Telephone: +44 (0)20 7749 4748
guidelines set out by the courts 3 Fax: +44 (0)20 7729 6110
• Ensure you achieve your or your client’s commercial 4 Post: Thorogood, 10-12 Rivington Street,
objectives London EC2A 3DU, UK
t +44 (0)20 7749 4748 e info@thorogood.ws w w w w. t h o r o g o o d . w s

The legal protection of databases Email – legal issues
SIMON CHALTON £145.00 SUSAN SINGLETON £95.00
1 85418 245 5 • 2001 1 85418 215 3 • 2001
Inventions can be patented, knowledge can be What are the chances of either you or your employees
protected, but what of information itself? breaking the law?
This valuable report examines the current EU [and so The report explains clearly:
EEA] law on the legal protection of databases, including • How to establish a sensible policy and whether or
the sui generis right established when the European not you are entitled to insist on it as binding
Union adopted its Directive 96/9/EC in 1996.
• The degree to which you may lawfully monitor your
employees’ e-mail and Internet use
Litigation costs • The implications of the Regulation of Investigatory
MICHAEL BACON £95.00 Powers Act 2000 and the Electronic Communications
Act 2000
1 85418 241 2 • 2001
• How the Data Protection Act 1998 affects the degree
The rules and regulations are complex – but can be to which you can monitor your staff
turned to advantage.
• What you need to watch for in the Human Rights Act
The astute practitioner will understand the importance 1998
and relevance of costs to the litigation process and will • TUC guidelines
wish to learn how to turn the large number of rules to
• Example of an e-mail and Internet policy document.
maximum advantage.
International commercial agreements

REBECCA ATTREE £175
1 85418 286 2 • 2002
A major new report on recent changes to the law and

their commercial implications and possibilities.
The report explains the principles and techniques of

successful international negotiation and provides a
valuable insight into the commercial points to be consid-
ered as a result of the laws relating to: pre-contract,
private international law, resolving disputes (including
alternative methods, such as mediation), competition law,
drafting common clauses and contracting electronically.
It also examines in more detail certain specific interna-

tional commercial agreements, namely agency and
distribution and licensing.
For full details of any title, and to view sample

You can place an order in four ways:

1 Email: orders@thorogood.ws
2 Telephone: +44 (0)20 7749 4748
3 Fax: +44 (0)20 7729 6110
4 Post: Thorogood, 10-12 Rivington Street,
London EC2A 3DU, UK
S e e f u l l d e t a i l s o f a l l T h o r o g o o d t i t l e s o n w w w. t h o r o g o o d . w s
HR AND EMPLOYMENT LAW
Employee sickness and fitness for work – How to turn your HR strategy into reality
successfully dealing with the legal system TONY GRUNDY £129.00
GILLIAN HOWARD £95.00
1 85418 183 1 • 1999
1 85418 281 1 • 2002 A practical guide to developing and implementing an
Many executives see Employment Law as an obstacle effective HR strategy.
course or, even worse, an opponent – but it can contribute
positively to keeping employees fit and productive.
Internal communications
This specially commissioned report will show you how
JAMES FARRANT £125
to get the best out of your employees, from recruitment
to retirement, while protecting yourself and your firm 1 85418 149 1 • July 2003
to the full.
How to improve your organisation’s internal commu-
nications – and performance as a result.
Data protection law for employers There is growing evidence that the organisations that ‘get
SUSAN SINGLETON £125 it right’ reap dividends in corporate energy and enhanced
performance.
1 85418 283 8 • May 2003
The new four-part Code of Practice under the Data Protec-

tion Act 1998 on employment and data protection makes
Mergers and acquisitions – confronting
places a further burden of responsibility on employers the organisation and people issues
and their advisers. The Data protection Act also applies MARK THOMAS £95.00
to manual data, not just computer data, and a new tough
enforcement policy was announced in October 2002. 1 85418 008 8 • 1997
Why do so many mergers and acquisitions end in

tears and reduced shareholder value?
Successful graduate recruitment
This report will help you to understand the key practical
JEAN BRADING £69.00
and legal issues, achieve consensus and involvement at
1 85418 270 6 • 2001 all levels, understand and implement TUPE regulations
and identify the documentation that needs to be drafted
Practical advice on how to attract and keep the best.
or reviewed.
Successfully defending employment

New ways of working
tribunal cases
STEPHEN JUPP £99.00
DENNIS HUNT £95
1 85418 169 6 • 2000
1 85418 267 6 • 2003
New ways of working examines the nature of the work
Fully up to date with all the Employment Act 2002 done in an organisation and seeks to optimise the working
changes. practices and the whole context in which the work takes
165,000 claims were made last year and the numbers place.
are rising. What will you do when one comes your
way?

Knowledge management • changes to internal disciplinary and grievance
procedures
SUE BRELADE, CHRISTOPHER HARMAN £95.00
• significant changes to unfair dismissal legislation
1 85418 230 7 • 2001
• new rights for those employed on fixed-term contracts
Managing knowledge in companies is nothing new. • the introduction of new rights for learning
However, the development of a separate discipline called representatives from an employer’s trade union
‘knowledge management’ is new – the introduction of
recognised techniques and approaches for effectively This specially commissioned new report examines each
managing the knowledge resources of an organisation. of the key developments where the Act changes existing
This report will provide you with these techniques.
provisions or introduces new rights. Each chapter deals
with a discreet area.
Reviewing and changing contracts
of employment
Email – legal issues
ANNELISE PHILLIPS, TOM PLAYER
SUSAN SINGLETON £95.00
and PAULA ROME £125
1 85418 215 3 • 2001
1 85418 296 X • 2003
360,000 email messages are sent in the UK every
The Employment Act 2002 has raised the stakes. Imper-
second (The Guardian). What are the chances of either
fect understanding of the law and poor drafting will now
you or your employees breaking the law?
be very costly.
The report explains clearly:
This new report will:
• How to establish a sensible policy and whether or
• Ensure that you have a total grip on what should be
not you are entitled to insist on it as binding
in a contract and what should not
• The degree to which you may lawfully monitor your
• Explain step by step how to achieve changes in the
employees’ e-mail and Internet use
contract of employment without causing problems
• The implications of the Regulation of Investigatory
• Enable you to protect clients’ sensitive business
Powers Act 2000 and the Electronic Communications
information
Act 2000
• Enhance your understanding of potential conflict
• How the Data Protection Act 1998 affects the degree
areas and your ability to manage disputes effectively.
to which you can monitor your staff
• What you need to watch for in the Human Rights Act
Applying the Employment Act 2002 – 1998
crucial developments for employers • TUC guidelines
and employees
• Example of an e-mail and Internet policy document.
AUDREY WILLIAMS £125
1 85418 253 6 • May 2003
The Act represents a major shift in the commercial

environment, with far-reaching changes for employers
and employees. The majority of the new rights under the
family friendly section take effect from April 2003 with For full details of any title, and to view sample
most of the other provisions later in the year. extracts please visit: www.thorogood.ws
The consequences of getting it wrong, for both employer You can place an order in four ways:
and employee, will be considerable – financial and 1 Email: orders@thorogood.ws
otherwise. The Act affects nearly every aspect of the work 2 Telephone: +44 (0)20 7749 4748
place, including:
3 Fax: +44 (0)20 7729 6110
• flexible working
• family rights (adoption, paternity and improved London EC2A 3DU, UK
maternity leave)
SALES, MARKETING AND PR
Implementing an integrated marketing Tendering and negotiating for

communications strategy MoD contracts
NORMAN HART £99.00 TIM BOYCE £125.00
1 85418 120 3 • 1999 1 85418 276 5 • 2002
Just what is meant by marketing communications, or This specially commissioned report aims to draw out the
‘marcom’? How does it fit in with other corporate main principles, processes and procedures involved in
functions, and in particular how does it relate to business tendering and negotiating MoD contracts.
and marketing objectives?
Defending your reputation

Strategic customer planning
SIMON TAYLOR £95.00
ALAN MELKMAN AND
PROFESSOR KEN SIMMONDS £95.00 1 85418 251 • 2001
‘Buildings can be rebuilt, IT systems replaced. People

1 85418 255 2 • 2001
can be recruited, but a reputation lost can never be
This is very much a ‘how to’ Report. After reading those regained…’
parts that are relevant to your business, you will be able ‘The media will publish a story – you may as well
to compile a plan that will work within your particular ensure it is your story’ Simon Taylor
organisation for you, a powerful customer plan that you
can implement immediately. Charts, checklists and diag- ‘News is whatever someone, somewhere, does not
rams throughout. want published’ William Randoplh Hearst
When a major crisis does suddenly break, how ready will

Selling skills for professionals you be to defend your reputation?
KIM TASSO £65.00
1 85418 179 3 • 2000 Insights into understanding the financial

media – an insider’s view
Many professionals still feel awkward about really
selling their professional services. They are not usually SIMON SCOTT £99.00
trained in selling. This is a much-needed report which
1 85418 083 5 • 1998
addresses the unique concerns of professionals who wish
to sell their services successfully and to feel comfortable This practical briefing will help you understand the way
doing so. the financial print and broadcast media works in the UK.
‘Comprehensive, well written and very readable…
this is a super book, go and buy it as it is well worth
European lobbying guide
the money’ Professional Marketing International
BRYAN CASSIDY £129.00
Corporate community investment 1 85418 144 0 • 2000
CHRIS GENASI £75.00 Understand how the EU works and how to get your
message across effectively to the right people.
1 85418 192 0 • 1999
Supporting good causes is big business – and good

business. Corporate community investment (CCI) is the
general term for companies’ support of good causes, and
is a very fast growing area of PR and marketing.

Lobbying and the media: working with Managing corporate reputation
politicians and journalists – the new currency
MICHAEL BURRELL £95.00 SUSAN CROFT and JOHN DALTON £125
1 85418 240 4 • 2001 1 85418 272 2 • June 2003
Lobbying is an art form rather than a science, so there ENRON, WORLDCOM… who next?
is inevitably an element of judgement in what line to take.
At a time when trust in corporations has plumbed new
This expert report explains the knowledge and techniques
depths, knowing how to manage corporate reputation
required.
professionally and effectively has never been more crucial.
Strategic planning in public relations

Surviving a corporate crisis
KIERAN KNIGHTS £69.00 – 100 things you need to know
1 85418 225 0 • 2001 PAUL BATCHELOR £125
Tips and techniques to aid you in a new approach 1 85418 208 0 • April 2003
to campaign planning.
Seven out of ten organisations that experience a
Strategic planning is a fresh approach to PR. An approach corporate crisis go out of business within 18 months.
that is fact-based and scientific, clearly presenting the
arguments for a campaign proposal backed with evidence. This very timely report not only covers remedial action
after the event but offers expert advice on preparing every
department and every key player of the organisation so
that, should a crisis occur, damage of every kind is limited
as far as possible.
FINANCE
Tax aspects of buying and selling Practical techniques for effective project
companies investment appraisal
MARTYN INGLES £99.00 RALPH TIFFIN £99.00
1 85418 189 0 • 2001 1 85418 099 1 • 1999
This report takes you through the buying and selling How to ensure you have a reliable system in place.
process from the tax angle. It uses straightforward case
Spending money on projects automatically necessitates
studies to highlight the issues and more important
an effective appraisal system – a way of deciding whether
strategies that are likely to have a significant impact on
the correct decisions on investment have been made.
the taxation position.
Tax planning opportunities for family

businesses in the new regime
CHRISTOPHER JONES £49.00
1 85418 154 8 • 2000
Following recent legislative and case law changes, the

whole area of tax planning for family businesses requires
very careful and thorough attention in order to avoid the
many pitfalls.
MANAGEMENT AND PERSONAL DEVELOPMENT
Strategy implementation through project

management
TONY GRUNDY £95.00
1 85418 250 1 • 2001
The gap
Far too few managers know how to apply project
management techniques to their strategic planning. The
result is often strategy that is poorly thought out and
executed.
The answer
Strategic project management is a new and powerful
process designed to manage complex projects by
combining traditional business analysis with project
management techniques.
For full details of any title, and to view sample

You can place an order in four ways:

1 Email: orders@thorogood.ws
2 Telephone: +44 (0)20 7749 4748
3 Fax: +44 (0)20 7729 6110
London EC2A 3DU, UK

Commercial Risk

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Commercial Risk

Uploaded by

Copyright:

Available Formats

THOROGOOD

A SPECIALLY COMMISSIONED REPORT

A SPECIALLY COMMISSIONED REPORT

Other Thorogood 10-12 Rivington Street

Professional Insights t: 020 7749 4748

Successful Competitive Tendering All rights reserved. No part

The Legal Protection of Databases system or transmitted in any

This Report is sold subject to the

The Commercial Exploitation prior consent in any form of

Printed in Great Britain

1 TOTAL RISK MANAGEMENT 1

THOROGOOD PROFESSIONAL INSIGHTS

THOROGOOD PROFESSIONAL INSIGHTS

7 PROJECT COMPLETION AND BEYOND 113

THOROGOOD PROFESSIONAL INSIGHTS

Project Risk Management is a well established doctrine supported by many tools

THOROGOOD PROFESSIONAL INSIGHTS 2

A project management plan may ascribe responsibilities between the parties.

THOROGOOD PROFESSIONAL INSIGHTS 3

TECHNICAL RISK COMMERCIAL RISK TOTAL RISK

It worked We got paid Happy company

We finished it We didn’t get sued Happy customer

Cost within budget We made a profit Happy shareholders

Figure 1: Total Risk Management

THOROGOOD PROFESSIONAL INSIGHTS 4

TRM STAGES THE KEY QUESTION

Tender preparation What is the probability that the emerging

Prime contract negotiation What is the probability of securing a ‘safe’ deal?

Bid/no bid An initial view

Can we complete the

Figure 2: Maturing View of Risk

THOROGOOD PROFESSIONAL INSIGHTS 5

Consider these issues presented somewhat differently:

Bid risk management

Request for Bid Contract Project

Figure 3: Risk Management Transition

In the pre-contract stage two risk management activities should be underway.

THOROGOOD PROFESSIONAL INSIGHTS 6

There are many other considerations in business risk management from

THOROGOOD PROFESSIONAL INSIGHTS 7

2. The bid/no bid decision

4. Pricing for risk

5. Risk review board

7. The priced list of risks

8. The caveats register

11. Contract launch

12. Pointers for project risk management

1. The risk – risk scenario

2. The bid/no bid decision

THOROGOOD PROFESSIONAL INSIGHTS 9

Pre-bid: Predict and prevent

In-bid: React and mitigate

Post-bid: Pro-act and manage

Figure 4: Phases of Risk Management

THOROGOOD PROFESSIONAL INSIGHTS 10

In the examples given it might be possible to predict the possibility of an overseas

WORTH BIDDING AXIS

Figure 5: Progress of confidence in winning

THOROGOOD PROFESSIONAL INSIGHTS 11

Pre-IFB: Early confidence may be very high because the initial

IFB Received: Confidence recovers as it is realised, perhaps, that the

Bid submitted: Confidence level is high as the bid team congratulates

However, the prime contractor should be clear at what level of confidence it is

THOROGOOD PROFESSIONAL INSIGHTS 12