InEight Global Capital Projects Outlook 2021: Optimism and Digitization

Top 5 legal responses to project risks

Rolf Howard
March 18, 2015

As a project manager, you certainly appreciate the importance of assessing risk carefully, assigning it to the party that is most likely to control it, and getting regular feedback so that no unexpected contingency remains undiscovered for long.

With those processes in place, there is a great deal a solicitor can do to further reduce the financial impact of project risks. Most of these involve contractual provisions that confirm risk assignment, add indemnity clauses, require insurance, condition payment on performance and call for non-judicial resolution of disputes. Every risk is a little different, though, so let us look at the legal tools available to manage the top 5 riskiest aspects of project management.

1. Financial risk

The bane of every project manager’s existence is the risk of cost overruns or overspending. This may simply be the inevitable result of an insufficient budget to begin with, but it can also be the result of the financial instability of the business or funding cuts.

The process of identifying financial risks and allocating responsibility for the control of specific costs can clarify whether a projected budget is realistic at the beginning. It’s the sunshine principle (where potential conflicts which may cause bias are made public from the outset) at work. But because cost overruns can have so many possible causes, the full range of legal responses, including contractual incentives for on-budget performance may come into play.

2. Information security risk

Individuals may gain unauthorised access to confidential or competitive information or systems, and sensitive corporate data may be lost or stolen.

It is important to distinguish between the inadvertent compromise of information, as in the case of an employee who shares a bit too freely over social media, and malicious misappropriation. The former situation may be addressed through the development and publication of a social media policy or the imposition of internal discipline. The latter, on the other hand, may call for legal action, even criminal charges in extreme situations.

3. Personnel change

If the success of the project depends on the time and talents of a particular team member or group of team members, what will happen if they leave?
Of course, it’s good to keep your talent happy through compensation and benefits schemes, but it may also be wise to consider requiring non-competition agreements as a condition to participation in very sensitive projects.

4. Commercial impracticability or impossibility of performance

What if you were unable to get necessary components at the agreed-upon price because of manufacturing delays, labour disputes or international strife? What if vital shipping arrangements or communications systems were affected by natural disaster?

This is a situation in which contractual agreements about assignment of risk could be very important, as well as insurance and indemnity provisions. These are the ‘act of God’ provisions included in most contracts that may also simply excuse performance.

5. Regulatory change

If the end product of the project is no longer commercially viable because of a change in law or regulations, what can you do?

Many commercial contracts include provisions relating to change of law risks. However, these changes are rarely unforeseen. One of the benefits of working with a firm of solicitors who are familiar with a particular industry will be that they are also tracking likely changes in law.

The best defence to risk is a careful and thorough risk assessment, but even the best project manager cannot be asked to be prescient. In those situations where the process of assessing and assigning likely risk is not enough, contractual provisions and insurance may lessen the financial impact of the unforeseen.

Author avatar
Rolf Howard
Rolf Howard is managing partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage legal responsibilities and opportunities to achieve competitive advantage. Rolf concentrates on business planning and formation, directors’ duties, corporate governance, fund raising and business succession. His major interest is to assist business owners and their financial advisers plan and implement strategies to build and exit from successful businesses.
Read more