Recognizing Contract Risks and Opportunities

INTRODUCTION

Contracts govern many aspects of an organization, from personal service contracts for key personnel to contracts with suppliers and customers. A well-written contract provides protection to both parties while also ensuring that both parties are able to benefit from the contractual transaction. Such contracts can lead to successful long-term relationship. A poorly written contract that favors one party over the other is likely to result in less-than-satisfactory performance, and while the contract may be fulfilled in the near-term, it is difficult to forge long-term relationships that are mutually beneficial. Increasingly, contract managers are called upon to analyze contracts not only for the risks that are presented—this has long been a traditional role for contract managers—but also for the opportunities that might be present in the contract. This research considers the tasks of recognizing the opportunities and risks in a contract, and the consequences when one or both of these functions are ignored.

RECOGNIZING OPPORTUNITIES

Contract managers face challenges when recognizing the opportunities that are presented with a contract. In many cases, the opportunities are explicit with the contract itself, and many contract managers may not look beyond the obvious. A contract to sell a specific number of widgets to a company, for example, may be seen as simply that. A knowledgeable contract manager, however, will recognize the possibility of selling services to support the widgets, or of forming a joint venture with a low-cost partner overseas to produce the widgets as part of a strategic alignment, or arranging financing or payment terms that provide greater flexibility (Garrett, 2005).

Contract managers who learn to look for opportunities may also focus on these specifically when working with government contracts. These contract managers may forge alliances with small business, women-owned businesses, minority-owned business, or some of the subgroups that exist within these larger categories. This can help organizations procure government contracts, although working with these subgroups can require careful monitoring in order to ensure that the subgroup members are fulfilling their responsibilities in terms of receiving all of the government support to which they are entitled, and also ensuring that they are not in violation of government regulation (Schinasi, 2006).

RECOGNIZING RISK

Contract managers have traditionally focused on the risk associated with contracts. Often, this analysis has been on the explicit risk inherent in a contract, such as failure to perform, but less emphasis has been placed on more subtle risk. When there are government regulations involved, the risks associated with a contract can quickly expand so that the contract manager must identify both current and possible risks depending on the regulatory and political environments. In addition, contract managers should be aware of the costs involved with remaining compliant with government regulations as these may place onerous conditions on an otherwise attractive contract. For example, financial institutions may be required to participate in anti-money laundering activities as part of federal regulations under FinCEN, but compliance may have significant costs in terms of time and resources in order to update the institution's information technology infrastructure. Moreover, when regulations are ill-defined or subject to political influence, contract managers are put in the position of monitoring these changes as well in order to keep the organization in compliance ("Information