Contract Management 

There are many things involved in a project risk policy. One of them is contract management. Various kinds of contract can have an impact on the success of risk management strategies. As shown in the figure 14.1, the buyer and a seller risk is associated with a variety of contract types. For Example fixed price contracts create risk for the seller, while cost reimbursement contract creates risk for the buyers. Time and materials (T&M) Contracts fall in between.  

Some of the risks can  be tackled when managing contractors who are working on some of the projects. Thus it is vital to choose the right kind of contract type and process to make sure the contractor shares in the risks of completing the work. That the cost of a particular risk  is shared which can impact the project. Four basic types of contract types and their implications for risks are as follows: 

They are: 

• Lump sum contracts:  It encourages the contractor to be more cost effective. If the deliverables is not well defined, the contractor may not produce the project design. It puts all the risk on the contractor.  
• Unit price contracts:  It is based on paying for each unit. This kind of contract has associated risk which encourages the contractor to reduce the cost of volume production. 
• Target cost contracts:  This is a shared-risk contract. Since both the parties estimate a cost and work together to achieve it. This gives a chance for more funding if the target is not achieved. 
• Cost reimbursable contracts: These do not share risk properly. The contractor can repeatedly claim more costs based on continued work to refine the deliverables and cover past mistakes. The project manager is left with the basic risk in a cost-type contract. Negotiation helps to mitigate risks. Financial and costing considerations are vital in sharing risk. The contract relationship helps to clarify the implications of risk and how risks can be avoided.