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Managing Contract Risk

May 18, 2011

My friend Henrik Lando recently moderated a discussion at the General Assembly of the IEC on the topic of ‘pre-requisites for success in large infrastructure projects’. He wrote to me to share some of the results.

The workshop offered delegates the chance to identify and then vote on the issues that, in their experience, are most critical to project success. Number one on their list – and the winner by some margin – was ‘clear and reasonable risk sharing’. In second place (again with a large gap to third) was ‘project owners take the management role seriously and secure team work’.

Balance in risk allocation is widely recognised as important in healthy relationships, although part of the risk of an equitable allocation is if the parties do not then behave with a spirit of fairness, because risk balance involves some level of relaxing consequences.

In general, I was happy to see these conclusions, but as I read more deeply into the summary, I had a number of areas that I felt needed clarification.

 1)      Owner. I am not sure whether ‘the owner’ as the same as ‘the sponsor’. I think they may be different. I would also make the point that there must be peer owners within each participating organisation. There is a need for ‘alter-egos’ and similar levels of power and commitment to enable rapid consultation, decision-making etc. So the workshop findings are in my view incomplete. The sponsor may not be the owner, but is the point of recourse – the powerful name (or body eg Board of Directors) that gives the owner authority. In a good project, the sponsor needs nothing more than an occasional briefing, but in my experience a major project will cause contention at various times and needs a ‘big name’ as a potential point of recourse.

2)     In considering risk, there is mention of the importance of defining scope and no mention of goals. I think this is a mistake. Too often the goals lack clarity, or the scope is defined in isolation of the goals (perhaps by functional groups that were not party to the initial decision team that discussed goals). The flow-down from there is then often a disaster, because the scope drives the selection criteria and the selection criteria drive the measurements – and we finish up with a project that misses its original goals.

3)      The owner (and perhaps sponsor) must remain engaged (incomplete contract) because in a complex project, change is inevitable. But again, is the owner / sponsor in this case an individual or a group of the relevant executives? Sometimes such a group is the ‘project steering committee’ or ‘executive committee’.

4)      I am not comfortable with the section on risk. I think it is unrealistic to say that ‘all risks must be identified’. Many of the risks that derail projects are unexpected and could not be forecast, either at all or efficiently. How can you allocate an unknown risk? I think that brings us to a key issue – partner selection criteria. If there are significant probabilities of change or ‘unplanned events’, then selection should be based around characteristics of performance, organizational model and behaviour. Is there evidence of an adaptive capability? Often the cheapest and apparently best qualified partner may also be the most rigid and therefore poorly suited to dealing with the unexpected ….

 I would be very interested to learn your thoughts on the issues that are most critical to success in major projects – and how they should be addressed.

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