Who really bears the risk in a contract for services or works?

We have a serious perspective issue, when it comes to the concept of which party actually bears the risk for any works or services, in the engineering and scientific space.

Similar to those keen folks who believe their contract is “watertight,” an awful lot of time and effort is wasted in ‘…pushing risk down to the Contractor.’

This is a pointless exercise.

Only one party bears almost all the risk within the project.

That is the Client.

Before you get too excited, there is a disclaimer to be made here. We’re not focusing on gross negligence, incompetence or wilful of avoidance of duty. These things are genuinely separate from the context of the discussion, for very clear reason. In short, these outcomes arise from falsifying one’s capacity and/or capability to carry out the works or services in the first place.

But, “why the Client,” you demand?

Quite simply, because it is only the Client who wants to enjoy the resultant business objective, which is the fundamental reason for the project proceeding in the first place.
The Contractor has selfish motive for entering the Agreement, which does not extend to meeting the Client’s driving motivation for the project. The Contractor offers its services and resources to carry out the works in exchange for fair compensation. That’s why they are in the business they are in.

The Client wants the outcome. The outcome can only be achieved when certain activities occur and for that to happen, the Client engages the Contractor to carry out those activities on their behalf. If the Contractor fails due to error, externalities, or dispute with the Client, then there will be contractual process in the Agreement to state how that will be dealt with.
Skipping past the complexities of dispute resolution, if the dispute process fails to satisfactorily deliver the initially intended works, then the Client has still not achieved their business objective. This results in a failed project.

A more fruitful way for the Client to approach the process is to realise early on that they alone stand to forgo achieving their business goals if the project fails and to prepare their Agreement accordingly (noting the above obligation of the Contractor for competently representing themselves.)

If it fails to meet all its contractual expectations, the Contractor may be inconvenienced, but is likely to be compensated, to some degree, for its effort via the terms of the Agreement. The Contractor gets to walk away, remunerated to a certain extent and perhaps its profit target may have been met. It will then turn to the next contract and commence the process of earning its profit in a similar fashion, with a little more experience.

By preparing their Agreement with several points in focus, the Client is more likely to achieve their business objectives in a more rewarding manner. Were the Agreement to be drafted with a focus on measured incentive for the Contractor, rather than an emphasis on ‘threat’ of underperformance, there exists an opportunity for a more cooperative relationship from the outset. This may be a focus of ongoing development between parties. If problem solving was recognised to be a joint effort, rather than solely in the Contractor’s lap, then the cooperative environment would be further supported. If incentive is preferred to punitive action, then a wholly different attitude can be established and employed. Having a more motivated Contractor, via this shift in focus, the Client may then reap the benefits of the Contractor’s willingness to alter the initial execution plan to better serve the Client’s desired outcome.

To summarize, the suggested change in focus toward incentive, rather than threat, does not negate the essential requirement that the Contractor is required to perform and deliver the agreed works or services, within clearly defined expectations, as documented per usual. It is not suggested that an ‘all care – no responsibility situation’ arises. Only a modification in the approach to recognising and allocating the risk to the party most likely to manage that risk. The earlier disclaimer demonstrates the underlying requirement for both parties to enter the Agreement with firm intent to meet the stated requirements, within the defined constraints and for the accepted price.

There are barriers to immediate adoption of this approach.

First, and most difficult, is humans in this field are trenchantly resistant to change.

Secondly, a significant cultural change would need to be implemented across the entire complement of employees for both parties.

Both parties would need to read the differences in the Agreement terms, then act them out with conviction, throughout the contract period. Both parties’ Commercial teams would need to recalibrate their approach from adversarial to cooperation. The Client would need to accept a greater obligation in assisting the Contractor to manage the works or services, to meet the desired outcome. In certain circumstances, such as technical services conducting a study or exploratory service, failure to achieve the initially intended outcome may well be a realistic outcome. This may not be an easy concept for a Client to accept immediately, however it is relevant in developing stronger knowledge of a subject.

The long and widely held view that the Contractor bears the majority of risk in works and services is inaccurate.

This discussion is presented to challenge that view and offer some possible alternate ideas of approaching the drafting of an Agreement which helps the Client achieve their business goals with more effective and cooperative support from the Contractor.

Contact Us

mail icon

Send Message