MANAGING AND MITIGATING

CONTRACT RISKS

TEXAS, OKLAHOMA, ARKANSAS & LOUISIANA

 OBJECTIVES

• DEFINING RISK MANAGEMENT

• UNDERSTANDING RISK
• IDENTIFYING AND PREPARING FOR RISKS
• RISK SAFEGUARDS
• ONGOING PREPARATION AND RESPONSE TO RISK
LEARNING OUTCOMES

• UNDERSTAND RISKS ARE INHERENT TO ANY

PROCESS
• DEVELOP A COMMON UNDERSTANDING OF
RISKS
• QUALIFYING, PLANNING FOR, ELIMINATING
AND/OR MITIGATING RISK
• ESTABLISHING AND BUILDING RISK SAFEGUARDS
• ENSURING CAPABILITIES FOR PREPARING FOR
AND RESPONDING TO RISK
 UNDERSTANDING RISK

CONTRACTING HAS THE “INHERENT” POTENTIAL TO CREATE MANY

RISKS. MANAGING RISKS PROTECTS THE INSTITUTION FROM LOSS.
THEREFORE, IT IS STRONGLY RECOMMENDED ALL INSTITUTIONS HAVE
WRITTEN POLICIES REGARDING RISK MANAGEMENT IN
CONTRACTING.
 DEFINING RISK MANAGEMENT

WHETHER POSITIVE OR NEGATIVE, RISK MANAGEMENT IS

THE IDENTIFICATION, ANALYSIS, ASSESSMENT, CONTROL
AND AVOIDANCE, MINIMIZATION, OR ELIMINATION OF
UNACCEPTABLE RISKS.
DEFINING RISK MANAGEMENT

POSITIVE RISK IS THE CHANCE A

PROJECT’S OBJECTIVES WILL
PRODUCE TOO MUCH OF A GOOD
THING AND IS DETERMINED TO BE AS
UNDESIRABLE AS A NEGATIVE RISK.
 PURPOSE OF RISK MANAGEMENT

THE PURPOSE OF RISK MANAGEMENT IS TO:

• IDENTIFY AND LIST POTENTIAL RISKS
• ASSESS AND EVALUATE THE RISKS
• PLAN HOW TO REDUCE, MITIGATE,
ELIMINATE, SHARE OR INCORPORATE
RISKS
 IDENTIFYING & PREPARING FOR RISKS
WHY WE NEED RISK ASSESSMENT

TO PROTECT THE UNIVERSITY AND IT’S INTERESTS, WE NEED TO BE

PROACTIVE IN ASSESSING CONTRACT RISK. THEREFORE, WE SHOULD
CONSIDER PERFORMING A CONTINUOUS ASSESSMENT BY
REVIEWING CONTRACTS TO MITIGATE RISKS THAT WILL IN TURN
ENHANCE THE BUSINESS WHILE INCREASING REVENUES AND
REDUCING COSTS.
 HOW DO YOU IDENTIFY RISKS?
COMMON (INHERENT) RISK CATEGORIES

• BUSINESS RISKS • INTERNAL &

• FINANCIAL RISKS EXTERNAL RISKS
• PRODUCT RISKS • SECURITY RISKS
• SCHEDULING RISKS • PERSONNEL RISKS
• RECORDS RISKS • UNIVERSITY RISKS
• TRAINING • JURISDICTION
HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

BUSINESS RISK: COMPLIANCE

(LEGAL); OPERATIONAL; STRATEGIC
(PLANNING, ORGANIZING,
IMPLEMENTING); START-UPS;
ENTERING NEW MARKETS
 HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

FINANCIAL RISKS:
INACCURATE BUDGET
ESTIMATES; PAYMENT
METHOD; AVAILABILITY OF
FUNDS; CASH FLOW; PROFIT
OR LOSS
HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

PRODUCT RISKS: QUALITY;

ENVIRONMENTAL;
AVAILABILITY; DELIVERY;
OBSOLESCENCE
 HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

SCHEDULING RISKS: TIME

CONSTRAINTS; IMPACT TO
PERFORMANCE; IMPACT ON
BUDGET; WEATHER
HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

RECORDS RISK: ACCESS;

RESTRICTIONS; SECURITY;
RETENTION (MONITORING
AND MAINTAINING)
 HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

TRAINING RISKS: INITIAL AND

ON-GOING; MANUALS;
TRAINERS; ELECTRONIC ACCESS;
TOOLS AND EQUIPMENT; COST;
INTERRUPTION TO BUSINESS;
APPLICABILITY OF CONTENT
(CURRENT OR OBSOLETE)
HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

INTERNAL AND EXTERNAL RISKS:

IMPACT TO CAMPUS (HOW WILL
THIS AFFECT OTHER DEPARTMENTS,
STUDENTS OR SERVICES); HOW WILL
THIS AFFECT VENDOR RELATIONS,
PUBLIC PERCEPTION, COMMUNITY
OR OTHER BUSINESSES OR
MUNICIPALITIES
 HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

SECURITY RISKS: ACCESS (PHYSICAL

AND ELECTRONIC); LOCATION;
TECHNOLOGY; DATA RECEPTION
AND TRANSMISSION; RECORDS,
CREDIT CARDS; STUDENT AND
PERSONNEL INFORMATION (FERRPA,
HIPPA)
HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

PERSONNEL: SECURITY;
LIABILITY (INJURY, DEATH OR
DISABILITY); LOSS; HAZMAT;
PHYSICAL REQUIREMENTS
OR CONSTRAINTS
 HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

UNIVERSITY RISKS:
PRODUCTS, PROPERTY,
SERVICES, STUDENTS,
PERSONNEL AND
EQUIPMENT
HOW DO YOU IDENTIFY RISKS?
COMMON RISK CATEGORIES DEFINED

JURISDICTION RISKS:
GOVERNING LAW
(FEDERAL, STATE, LOCAL
AND/OR FOREIGN)
 HOW DO YOU IDENTIFY RISKS?
A CRADLE TO GRAVE PROCESS

At the beginning or initiation of the contract process the

Contracting Team Lead and the Contract Specialist need to
conduct a preliminary risk assessment. And, to determine the
level, the type and amount of management, oversite and
resources required to implement, plan and procure the
products or services.
 HOW DO YOU IDENTIFY RISKS?
A CRADLE TO GRAVE PROCESS

NOTE: The Risk Management process is

ongoing, from cradle to grave, to ensure the
contract is fully performed, the final payment
is made and the contract is closed out. In other
words, those involved with the contract must
understand the risk assessment process involves
reviewing and evaluating the contract on a
continual basis. The more long term the
contract, the more oversite is needed.
 HOW DO YOU IDENTIFY RISKS?
THE IDENTIFICATION PROCESS

• FROM PAST EXPERIENCE

• BY REVIEWING OLD CONTRACTS / OTHER CONTRACTS
• BRAINSTORMING
(BUSINESS, FINANCIAL, PRODUCT, SCHEDULING, RECORDS, TRAINING,
INTERNAL & EXTERNAL, SECURITY, PERSONNEL, UNIVERSITY, JURISDICTION)
PREPARATION FOR RISK

• UNDERSTAND THE ENVIRONMENT

• IDENTIFY THE RISKS
• ANALYZE THE RISKS
• EVALUATE THE RISKS
• RESPONSE TO RISKS
 PREPARATION FOR RISK

UNDERSTAND THE ENVIRONMENT – IN ORDER TO DEAL WITH RISK

IT IS IMPORTANT TO UNDERSTAND THE CONTEXT IN WHICH IT EXISTS.
THEREFORE, YOU MUST IDENTIFY THE RELATIONSHIP OF THE RISK TO
THE ENVIRONMENT IN WHICH IT OPERATES.
 PREPARATION FOR RISK

IDENTIFY THE RISKS – WHAT

COULD GO WRONG? WHAT IS THE
LIKELIHOOD IT WILL GO WRONG?
WHAT ARE THE CONSEQUENCES IF
IT DOES GO WRONG?
PREPARATION FOR RISK

ANALYZE THE RISKS – WHAT

IS THE LIKELIHOOD AND THE
CONSEQUENCES OF THE RISK?
WHAT IS THE RISK (PRIORITY)
LEVEL? WILL IT REQUIRE
ONGOING MONITORING?
 PREPARATION FOR RISK

EVALUATE THE RISK – PRE-ESTABLISHED RISK CRITERIA AND THE RISK

ANALYSIS HELP DETERMINE WHETHER THE RISKS CAN BE ACCEPTED,
ELIMINATED, MITIGATED OR BUILT INTO THE PROCESS
 RESPONSE TO RISK

THE RESPONSE TO RISKS IS TO DEVELOP STRATEGIC ACTIONS TO

DETERMINE WHAT OPTIONS ARE REQUIRED TO REDUCE, MITIGATE,
ELIMINATE, SHARE OR INCORPORATE RISKS
 RESPONSE TO RISK
EVALUATE AND ANALYZE

LIKELYHOOD POTENTIAL IMPACT

RATING CATEGORY RATING CATEGORY
1 CERTAIN 1 CATASTROPHIC
2 LIKELY 2 MAJOR
3 POSSIBLE 3 MODERATE
4 UNLIKELY 4 MINOR
5 RARE 5 NOMINAL
 RESPONSE TO RISK
EVALUATE AND ANALYZE
IMPACT
5
4 3 2 1
CATAS-
MAJOR MODERATE MINOR RARE
TROPHIC
5 EXTREME EXTREME MAJOR MAJOR MEDIUM
CERTAIN 2 1 3 3 3
4 EXTREME EXTREME MAJOR MEDIUM MINOR
LIKELYHOOD

LIKELY 1 2 3 4 2
3 MAJOR MAJOR EXTREME MEDIUM MINOR
POSSIBLE 3 3 2 4 2
2 MAJOR MAJOR MEDIUM MINOR MINOR
UNLIKELY 3 3 3 2 2
1 MEDIUM MEDIUM MINOR MEDIUM MINOR
RARE 4 3 2 3 2
 RESPONSE TO RISK
EVALUATE AND ANALYZE

Highly probable, potentially serious risks that are likely to

EXTREME
happen that require immediate, urgent attention.
Very likely to arise, potentially major risks that are likely to
MAJOR
happen that require immediate, urgent attention.
Very likely to arise, potentially major risks that are likely to
MEDIUM
happen that require attention.
Minor, low consequence risks that are manageable by
MINOR
standard methods and procedures.
 RESPONSE TO RISK

• ACCEPTING THE
• TRANSFERRING THE
RISK
RISK
• AVOIDING THE
• RETAINING THE RISK
RISK
• FINANCING THE
• REDUCING THE
RISK
RISK
 RESPONSE TO RISK

ACCEPTING RISK – DETERMINING THAT THE POTENTIAL

LOSS OR COST OF A RISK IS NOT GREAT ENOUGH TO
WARRANT THE TIME, MONEY AND EFFORT TO ELIMINATE
 RESPONSE TO RISK

AVOIDING RISK – THE ELIMINATION OF IDENTIFIED

CONTROLLABLE RISKS THAT CAN COMPROMISE THE
PROJECT.
 RESPONSE TO RISK

REDUCING RISKS – IS THE PROCESS OF REDUCING THE

LIKELIHOOD OR THE SEVERITY OF A POSSIBLE LOSS
 RESPONSE TO RISK
A RISK TRANSFER IS A RISK MANAGEMENT AND CONTROL STRATEGY
(A SAFEGUARD) THAT INVOLVES THE CONTRACTUAL SHIFTING OF A
PURE RISK FROM ONE PARTY TO ANOTHER. ONE EXAMPLE IS THE
PURCHASE OF AN INSURANCE POLICY, BY WHICH A SPECIFIED RISK OF
LOSS IS PASSED FROM THE POLICYHOLDER TO THE INSURER.
RISK SAFEGUARDS
DEFINED

A RISK SAFEGUARD IS A CLAUSE IN

A CONTRACT THAT ENSURES
PROTECTION AGAINST PROBLEMS
(TRANSFER OF RISK); A
PRECAUTIONARY OR COUNTER
MEASURE THAT ENABLES AN
ORGANIZATION TO PROTECT ITSELF
FROM THREAT OR THE
INFRINGEMENT OF AN AGREEMENT.
 RESPONSE TO RISK

FINANCING RISK – DETERMINING THE MOST EFFECTIVE,

EFFICIENT AND THE LEAST COSTLY WAY TO PAY FOR THE
NEGATIVE IMPACT OR, THE COST TO ELIMINATE, RISKS.
RISK SAFEGUARDS
RISK TRANSFERS

INDEMNIFICATION (HOLD
HARMLESS) – OBLIGATES ONE
PARTY TO COMPENSATE THE
OTHER PARTY FOR LOSSES OR
DAMAGES (PHYSICAL OR
MONETARY)
 RISK SAFEGUARDS

RISK TRANSFERS

LIMITATION OF LIABILITY – LIMITS THE AMOUNT

PAYABLE IN DAMAGES FOR BREACH OF CONTRACT

WAVER OF SUBROGATION – OCCURS WHEN AN

INSURANCE COMPANY PAYS THE INSURED AND THEN
SUES THE PERSON OR ORGANIZATION RESPONSIBLE.
 RISK SAFEGUARDS
RISK TRANSFERS

INSURANCE - ASSET (FINANCIAL) PROTECTION

BONDS (SURETY, PERFORMANCE, PAYMENT); AUTO;
WORKERS COMP; LIABILITY; ETC.

PENALTY CLAUSES - PERFORMANCE; COMPLETION;

COMPETENCE; BREACH OF CONTRACT; ETC.
WORTH REPEATING
 THE ONGOING GOAL:

IDENTIFY EVERYTHING THAT

CAN, WILL OR MAY HAPPEN

IDENTIFY, ASSESS, EVALUATE, RANK

AND PLAN FOR ALL SIGNIFICANT

RISKS AND OPPORTUNITIES

PREPARATION FOR RISK

• UNDERSTAND THE ENVIRONMENT

• IDENTIFY THE RISKS
• ANALYZE THE RISKS
• EVALUATE THE RISKS
• RESPONSE TO RISKS
 COMMON (INHERENT) RISK
CATEGORIES

• BUSINESS RISKS • INTERNAL &

• FINANCIAL RISKS EXTERNAL RISKS

• PRODUCT RISKS • SECURITY RISKS

• SCHEDULING RISKS • PERSONNEL RISKS
• RECORDS RISKS • UNIVERSITY RISKS
• TRAINING • JURISDICTION
 RESPONSE TO RISK

• ACCEPTING THE RISK • TRANSFERRING THE RISK

• AVOIDING THE RISK • RETAINING THE RISK
• REDUCING THE RISK • FINANCING THE RISK
QUESTIONS
CONTACT INFORMATION

CHARLIE BROOKS, MBA; CTCM; CTPM

SR. CONTRACT SPECIALIST
THE UNIVERSITY OF TEXAS AT ARLINGTON
OFFICE OF PROCUREMENT SERVICES
219 W. MAIN ST.
ARLINGTON, TX 76054
CHARLES.BROOKS@UTA.EDU
817-272-2140
 CITATIONS

1. PUBLISHED ON PROCUREMENT JOURNEY (HTTPS://WWW.PROCUREMENTJOURNEY.SCOT)

2. NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY; “RISK MANAGEMENT GUIDE FOR INFORMATION TECHNOLOGY SYSTEMS”
GARY STONER, ALICE GOGUEN AND ALEXIS FERINGA

3. SMALL BUSINESS ASSOCIATION (U.S. SMALL BUSINESS ASSOCIATION); “RISK MANAGEMENT FOR A SMALL BUSINESS” 09-2016

4. PROSIDIAN CONSULTING, LLC; © COPYRIGHT, 2011; “THE INCREASED IMPORTANCE OF CONTRACTS AS A RISK MANAGEMENT TOOL”

5. DR. J. GORDON MURRAY; “EFFECTIVE CONTRACT MANAGEMENT”; HTTPS://WWW.SLIDESHARE.NET/DRGORDONMURRAY

6. HARVARD UNIVERSITY; RISK MANAGEMENT AND AUDIT SERVICES; “BASIC GUIDELINES FOR CONTRACTS AND CONTRACT RISK”; 1033
MASSACHUSETTS AVE., 3RD FLOOR, CAMBRIDGE, MA 02138

7. MIKE GRIFFITHS; LEADING ANSWERS INC.; “COLLABORATIVE GAMES FOR RISK MANAGEMENT”; © COPYRIGHT AUGUST, 2012; LEADING
ANSWERS, INC.

8. STATE OF TEXAS PROCUREMENT AND CONTRACT MANAGEMENT GUIDE; VERSION 1.0; TEXAS COMPTROLLER OF PUBLIC ACCOUNTS;
PUBLICATION #96-1809; JUNE 2018