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Risk Managing through Contracts Overview

Contracts are a fundamental part of the business burden. The well - written and predefined contracts would protect your business and relationships between contractors, customers and suppliers against troubles, conflicts in addition, all risks could be managed. (Human Equation, 2004) It is the framework of a legal agreement includes a request for proposal, an offer, an acceptance and a payment between parties, it may be written or oral, no doubt that the oral often create problems and the written provide all parties a clear understanding about what they have agreed. However, in many times especially when loss happened that is the indication of misinterpreted has been met, to avoid or mitigate those situations contract risks might be defined, managed and determined roles and responsibilities within our performing organization. (Hartford, n.d cited in Human Equation, 2004) Generally as responsibilities, functional area experts within the performing organization could give an aid to the procurement professionals to reducing risks inherent in the provisions and conditions of the contractual agreement (Brooks, 2010).

Risks, Its mitigation and roles involved


Due to several reasons as; not well-defined scope, under performance contractors, Owner interfaces during the construction changing the scope or management style or unforeseen events leads to the born of risks. As an overview, risks should to be grouped, identified and classified in the earliest stage of the contract drafting phase based on relevance and areas of impact as suggested by IMCA (2006, pp.5) for the main areas of risks to Contractual, Performance, Financial, Political, Technical, Geographical and Operator. I will discuss a risk sample from every main area in the next section supported by practical example. Contractual Risks Variation orders; it is the risk of applying extra work, which not determined within the original contract due to request of the customers, it could be mitigated by clearly defining in the contract what is exactly the contractor obligation to perform it, and indicating clearly how the agreed adjustment to price and schedule will be calculated.

The project manager with the aid of procurement department handles this role. In water tank-proofing contract we established a provision that the contractor obligate to perform all types of proofing not specified in this contract based on prices and time line discussed when needed Performance Risks Scope, natural and work time; it is the risk of delivering of off-specification and contract deliverables delaying due to many reasons as. Insufficient time or information available to the bidder, available wrong information, the bidding scope out of the bidder or the customers experience and the resources could not be determined during the bidding phase because the project depends on new solution during its execution. This could be mitigated as Sollish, et al. (2011, p.226) proposed using the early supplier involvement and the procurement department support the existing suppliers as a consultant to develop new capabilities also as Wysocki (2009) stated the contractor selection should to be as early as possible before the bidding process start Financial Risks Profitability verses quality concern; it is the risk of the conflict between contractors profit margin desired and the quality of customer deliverables which control its lifetime and the value of its positive returns. IMCA (2006, pp.14) this critical risk could be mitigated in the form of cost contingency, and to be certain about the rule clarified by Sollish, et al. (2011, p.222) that Lower prices are not simply a trade-off for reduced or compromised quality for a product or service, quality control group, cost estimator and project manager participate within this risk role. Political Risks Certain contract style required; it is the risk of Local government interfere a certain contract style, I am preparing now bidding for Alkharj treatment plant (300,000 m3), the national water company as a government owner imposed all the local contractors to establish a joint venture contract with specialist foreign company. My organization invite several foreign companies to mitigate the risk of raising the cost of the tender this special role most of the organization top management involved as a work group Technical Risks

Design and build; our company requested to prepare bidding for micro tunneling 800 OD R.C pipes lined internally GRP we are not specialized in this type of works, we invite specialist companies and suppliers, they offer us a technical and financial offer. We had no time for good revision we add our profit, submit the bidding, taking the approval, and start to construct. We were surprised that supplier product not safe in its dimension and we need to go higher specification with higher price, this type of risk could be mitigated with using consultant and the procurement department who is the responsible about this role Reference List
Brooks, L., 2010. The Transaction Review Process: Identifying Risk in Supply Chain Contracts. [Online] Available at: http://www.ism.ws/files/Pubs/Proceedings/2010ProcBD-Brooks.pdf [Accessed 05 March 2011] Human Equation, 2008. Managing Risk Through Contracts. [Online] Available at: http://www.thehumanequation.com/en/news_rss/articles/2004/Managing_Risk_Through_ Contracts.aspx [Accessed 04 March 2011] IMCA, 2006. Identifying and Assessing Risk in Construction Contracts:An IMCA Discussion Document. [Online] Available at: http://www.imca-int.com/documents/contracts/IMCARiskGuideline.pdf#search="identifying and assessing risk in construction contracts" [Accessed 04 March 2011] Sollish, F. Semanik, J. Morris, P.W.G. ed. & Pinto, J.K. ed., 2011. Planning and administering project contracts and procurement. Laureate Education, Inc., custom ed. Hoboken: John Wiley & Sons, Inc. Wysocki, R. K., 2009. Effective project management: traditional, agile, extreme. 5th ed. Indian: John Wiley & Sons, Inc.