What’s the Down Side? Managing Risk in Contracting

Managing risk in contracting is about taking the downside into account. Both the agency and the vendor need to have a healthy understanding of what the worst outcomes are for their respective sides and to write the contract to address those outcomes. What happens if the vendor is unable to provide the service? How can the agency operate without it? What happens to the vendor have if the agency cancels the contract? What happens in an emergency? These questions are yet another part of defining the relationship between the agency and the vendor.

Standard agency contracts cover termination, insurance, indemnification and other standard risk management issues, which are very important. For issues covered in your agency’s standard language, no thought is needed, unless there are special circumstances. More importantly, there are always project specific risk issues that need to be addressed in the contract specifications. It is important for the agency and the vendor to think through the risks. Run through scenarios and look for areas where the contract could fail. Examine these possible failure points and think through ways that the contract can deal with them, then write language into the contract to address as many of those issues as reasonably possible. It will never be possible to protect against every possible risk but it is prudent to build in as many protections as possible.

My agency is currently embarking on a project to place most of the aging audio visual infrastructure in our courthouse, a large one-time project. We have 19 courtrooms and 14 hearing rooms which need to be upgraded over the course of 18 months. There are a number of tricky issues. Vendor staff will be in secure areas of the building. They will not be accompanied by County staff at all times due to the length and complexity of the project. Courtroom scheduling will be difficult due to uncertainties in the court schedule. Agency business must take precedence over the vendor’s work but the vendor’s time must be respected. These are all significant issues which will impact the overall success of our project that need to be addressed.

Initially, my end users glossed over these issues, giving a passing nod to their existence. After some prodding, they put the issues on the table in conversations with the vendor, but were nervous about articulating the “rules” around these issues in the contract. When I pushed a little further, I uncovered a hesitation on the part of the end users to 1) commit themselves to a set of rules and 2) set clear rules for the vendor. The end users had decided that by not articulating their needs and expectations for themselves and the vendor in the contract that there would be more room for them to maneuver as they went through the project. The end users are correct; there is more room to maneuver. There is also no contractual language to fall back on if the vendor is not meeting the expectations.

To resolve these issues, we identified three issues as having the most potential for failure 1) access to the secure parts of the building, 2) the importance of the vendor meeting timelines when scheduled to work in particular courtrooms, 3) the requirement that the vendor cease work or reschedule planned work if a courtroom is needed unexpectedly. My end users talked through these issues. Made rules where needed, such as requiring that each member of the vendor’s installation team be subject to a criminal background check, and developed a plan for scheduling that accommodated the predictable and unpredictable ebbs and flows of the scheduling. The addition of this language to the contract provides the safeguards that the agency needs and creates a framework within which the vendor can interact positively with the agency giving the project an even greater likelihood for success.

Carolyn Ninedorf is part of the GovLoop Featured Blogger program, where we feature blog posts by government voices from all across the country (and world!). To see more Featured Blogger posts, click here.