• World Commerce & Contracting
Hi Brian. Liability, indemnity etc are common terms which reflect the inherent deal risk or at least the desire for risk allocation. However, the rubber hits the road when you look at the Statement of Work (SOW) and Service Level Agreements (SLAs). The SOW is where the buyer/supplier either is fully informed about the requirements, roles/ accountabilities, and risks, hence, whether they have to factor in a contingency for risk (which is defined in ISO31000 at 'the effect of uncertainty on outcomes'). The more uncertainty then the more risk and the more contingency the supplier will typically build into the price. Then the SLAs typically attract 10-15% of contract value'service credits' for non-performance (the intent is to reflect the value of the margin). Depending upon how tough or unrealistic these are negotiated will also impact how much contingency the supplier will try to add in to the price. Trust this helps you Brian
Hello Brian. Your question is an interesting one as margin and value can be very different things, and will depend very much on the context of the SOW as Bruce Everett says. However as a supplier, i would say that you must be clear what you want to call success. For example, if you only what cost control, and that a supplier simply performs what you ask, then margin wording about delivering on time and budget are what you should focus on. If on the other hand you have a degree of execution uncertainty and/or want to encourage innovation, you should aim towards a relational contract framework, where you ring-fence and control additional costs, and build a mechanism to evaluate scope changes as a function of meeting your value targets. These could be risk mitigation, safety, or simply achieving a technically challenge project.
All too often we see people trying to get the best of both worlds..ie innovation at low or no scope change cost, and then ultimately failing to get either...hope this helps, Merrick