How to write a contract to protect you against out of control IT projects?

I recently wrote about research from Oxford University’s Said Business which described how major IT projects are much more likely to fail than other projects. Because many major projects are outsourced businesses need contracts which protect them in the event of projects running out of control

John Worthy, partner in the Technology and Outsourcing Law Group at Field Fisher Waterhouse describes how businesses should create contracts with suppliers to protect themselves when IT projects run out of control.

Safeguarding against failure in major IT projects: coping with “black swan events”

By John Worthy

“Major IT projects are twenty times more likely to fail than other projects, according to the recent major study by Oxford University’s Said Business School, especially when they are affected by unpredictable “black swan” events. This research not only highlights the challenges of major IT projects, but also flags up the need to be prepared.  This is important for companies when negotiating the project contract, so that it provides a robust legal framework for managing both the project and the relationship.

The uncertainty about “black swan events” should not undermine the value of being prepared to deal with them. Even though the precise nature of the “black swan” events cannot be easily predicted, companies are increasingly aware that having a contract in place which addresses how to manage contingencies will significantly help in achieving a successful result. So what does this entail?

As a starting point, the specifications for the project should be set out clearly and built in as part of the contract.  Unfortunately many projects fall short of expectations because this foundation is missing.

In addition, the contract should spell out a clear procedure for managing any changes – evaluating and agreeing the effect on the specifications, timelines and budgets.  The high frequency of cost overruns in bespoke software projects found by the Oxford University research suggests that those projects were not backed by effective change management procedures in the contract.

Well-crafted contracts will also contain mechanisms to provide practical solutions to possible contingencies, including “black swan events”.  For some difficulties, such as a delay in the project, agreed liquidated damages may provide an effective remedy.  However, finding a commercial solution to more deep seated problems may depend on whether the contract provides for a suitable range of practical options.  These would focus on how the project can be brought back on track, if this is achievable, with the least possible disruption.

Aside from damages, contract solutions could include enhanced project management, step-in mechanisms (where a new contractor is appointed to complete the work), and termination procedures, at least as a last resort.  Again, clarity here is vital. Where a contract does not specify how the termination process is worked out in practice, this makes it more difficult for both the supplier and the customer to resolve how to wind down a project smoothly, if this is the best approach.

And throughout the resolution process, companies often find that one of the most helpful features is to include an escalation procedure linked to mediation or alternative dispute resolution mechanism.  This allows both parties to maximise the prospects of an effective solution without the need for litigation.

Adopting these precautions will not avoid a problem arising, but it will provide a solid framework for covering potential contingencies, including black swan events”.

Contact John by email.

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