One to avoid - the Contract trap

In the experience of Pure Projects Consultancy, the failure of projects is noticed late, and then quite suddenly. It even seems to be that failing or troubled projects appear to run better than 'normal' projects and then suddenly make a turn for the worst. There are many reasons that may lead to this suprising behaviour. Assuming that a professional projectmanager continuously is looking for and aware of the risks and always tries to paint a realistic image to its stakeholders, suprises there as less likely. So, the first cause of 'sudden failure' is lack of professional, day-to-day project management, leading the project unwittingly into the danger zone. Combined with a human tendency in the rest of the organisation to ignore signals and keeping up appearances, this will be sufficient for the sudden flash of fear.

Another explanation often found by us in failing or failed projects is what we call the 'contract trap'. It has to do with the perception of project uncertainty and risks, in relation to the arrangements with a supplier or contractor. Let's see how this works.

fig 1. The "sudden" failure of a project

The incipient failure of a project results in a variety of symptoms, but an important indication is the general feeling of 'risk'. Risk can be seen as the probablity of (often unwanted) deviation of a project and the impact it has on the success, the results or the amount of time and money it takes.

At the time that the persons who may know (the project manager, key employees, perhaps the client) are suddenly less sure of the project and start to see more risk, there is something going on, because usually the risk profile of a successful project will remain level over the project life. (Fig. 2)

Fig 2. Risk as the product of uncertainty and impact

There are two variables that change over the course of a project. First off, the total  probability of something unexpected, or project uncertainty. At the beginning of a project we usually just start with a 'good idea'. For the rest we make many assumptions, but we actually know very little. The more we investigate, exclude options and produce more, the smaller the project uncertainty becomes. At the end of the project is the uncertainty is zero - as is the budget, in all probability. On the other hand, the impact or effect of uncertainty on the outcome continues to increase as the project progresses. In the beginning it is not so important if we for instance mess up or ommit a functional definition, because there is enough time to improve on things.

Later in the project, the impact of uncertainty, take the ommitted functional definition, is much more real and costly: the rework  involved is several orders of magnitude higher in size and cost  than before.  At the end of the project we have got maximum impact: if uncertainty still exists, such as in the acceptance of the finished product by the user organisation, then the effects might be disastrous.

Since risk is expressed as a probability (or uncertainty) times impact, the overall risk level over the duration of the entire project is actually quite constant.

But what happens in a troubled project? We think a sudden uncertainty movement occurs in the curve.

fig 3. The mystery factor

Sometime before the manifestation of a project crisis, something happened that has affected the uncertainty curve, so that it shoots up from the normal downward curve. Our belief is that this has to do with the outsourcing and contracting of suppliers.

Why do we outsource? There are several reasons to outsource work and of course these vary depending on the situation, but the predominant purpose is to employ expertise and capacity that do not exist with the client, eg because of the concentration on core activities.

Risk transfer of time and money An additional advantage is that project risk of the client organization is transferred to the supplier. You can draw all kinds of clauses in the contract, such as delivery based on fixed date / fixed price, or working with penalties and rewards. Part of the inherent project risk is thus placed on the shoulders of the supplier, who is compensated by a risk premium in the bid price.

But now on the content.. So far nothing is wrong. But what happens if in the beginning of the project there is still much uncertainty in the project, which goes beyond cost or duration, and has to do with the content? In other words, exactly what should the project deliver and are we actually able to specify those requirements in this stage of the project?

We can not escape uncertainty We think that in those cases perhaps a supplier is contracted too early, or with the wrong brief. We still make frantic efforts to seek assurance, for example through to elaborate tender documents and functional specifications.The point here is that uncertainty goes his own way: the curve that gradually decreases towards the end can not with impunity be 'dented' further down, only because it suits us better.

But we often fail to see clearly the nature of uncertainty : the simple fact that a specification and contract exist (with lots of signatures of important people) combined with the normal human need for security - we actually believe that everything is resolved. But uncertainty is like a steel spring. You can just hold it down for a while, but eventually it will jump back and shoot upwards. Suppliers that find the specifications are not quite right or just incomplete after a while have techniques and  much experience to deal with these situation in their best interest. Unending additional work, repair work, constantly new versions, it can all be effects of the contract trap.

Of course, there are two parties involved, and suppliers may as well be overtaken by the contract trap as the customer is. The point is that the customer needs the project outcome, and has very little use to be repaid a sum of money in the form of a fine. The asymmetry in the relationship will ensure that the customer is always the one that will feel the negative impact of a troubled project the most.

All clear - now what? Realism is the motto here, as far as we are concerned. To consider uncertainty as a law of nature prevents unrealistic expectations on the commitment and contribution of suppliers. You could also through flexible contract forms (such as a blanket contract and partial contracts to be completed later) try to avoid that the first deviation leads to a conflict. But most importantly, know what you know and what you don't. You can hire help to fill in the gaps, but not to build a castle in the sky.

In short, good project and contract management can help avoid the contract trap - better for all concerned and especially for the customer.