Risky business: Why you need a risk management plan

All contracts present financial and operational risks. One of the contract manager’s most important responsibilities is to manage the inherent risks and minimise negative impacts while positioning the organisation to take best advantage of opportunities. Learn why failure to have a Risk Management Plan in place is risky business.

Risk is defined as the exposure to the possibility of such things as financial loss or gain, physical damage, injury or delay, as a consequence of pursuing or not pursuing a particular course of action.

So imagine if Joel Goodson, Tom Cruise’s character in Risky Business, had a Risk Management Plan for his parents’ vacation. Agreed this would have made a very boring movie. But perhaps Joel would have thought twice before listening to his friend Miles, driving his dad’s Porsche and risking the wrath of his parents.

What is a Risk Management Plan?

A risk management plan outlines the contract manager’s approach to managing the risks associated with delivering their contract.

A risk management plan should be completed as early as possible in the contract management process. It contains three elements:

1. identification of risks (what might happen)
2. assessment of risks (the likelihood that it might happen and the impact if it does)
3. treatment of risks (the steps that can be taken to manage the risk).

So although Joel might not have been able to avoid all the risks, he probably could have handled the risks much better with a plan and saved himself some stress and expense!

9 risks you need to consider

There are nine risks typically associated with contract management that you should consider when developing your plan:

1. Lack of sufficiently skilled and experienced people assigned to the project to effectively manage the contract
2. Failure to act on supplier under-performance
3. Not consulting or notifying key stakeholders about contract performance or disputes
4. Exceeding agreed budget limits
5. Breaching contract provisions
6. Fraudulent/unethical conduct by the provider
7. Failure to provide contract deliverables on time, to agreed quality standards
8. Not registering contract amendments as contract variations
9. Not reaching agreement on contract variations to accommodate changes.

A changing environment

The contract management environment and that of your organisation can change. New risks will have to be added as they arise. Existing risks should be reviewed regularly to determine whether they should be downgraded, upgraded or removed. Your proposed treatments should also be checked to ensure they are working as envisaged.

It could cost you

Failure to prepare for potential risks, could severly cost contract performance and your organisation. Save yourself and your organisation the unnecessary risk and heartache. Be prepared with a Risk Management Plan as early as possible.

And next time, don’t listen to your friend Miles or drive your dad’s Porsche without his permission.