In WA local governments manage assets in excess of $40 billion and purchase more than $4 billion in goods and services each year. For this reason, contracts are one of the greatest areas of exposure to members, and it’s crucial to understand how to best manage and reduce risks in local government contracts to avoid unnecessary exposure.
Contracts may be in writing or verbal, and are binding and enforceable instruments, between two or more capable parties (e.g. a local government and suppliers/contractors) that consensually enter into an agreement providing for their respective rights and obligations in exchange of a service.
5. End of the contract
Contractual liabilities are the liabilities a party (e.g. local government) accepts as a result of a contract, in addition to those already applicable under law.
Local governments have liabilities under the law that would typically benefit from Scheme cover. However, contracts may create additional liabilities – that is, liabilities that local governments would not have but for accepting the terms of the contract.
Unfortunately, there is no such thing as a risk-free contract. Each stage has its own inherent risks, which could include:
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There are several ways to manage contracts. In order to reduce unnecessary disputes, the parties to a contract should clearly define their rights and obligations, and define terms of relevance
to the scope of the contract.
The parties should also allocate the risks of the contract according to the capability of the parties to manage such risks. Local governments should avoid accepting risks that it cannot control. For example, indemnities, limitation of liability, and liquidated damages clauses are important tools to allocate risks under a contract. Similarly, insurance clauses have the purpose to ensure that a party that caused a loss will have the financial capacity to compensate your local government.
Local governments should also monitor and ensure contractors are meeting the key performance indicators set out during the preparation/negotiation phase. Making sure contractors are meeting KPIs reduces the likelihood of delays in the project, ensures quality of the services, and demonstrates your local government’s diligence in ensuring the appropriate use of public funds.
Of course, this should not be construed as a local government taking on a supervisory role or assuming control over how the contractor performs the work. Doing so may lead to the local government being exposed to liability that it normally would not be.
For each contract, local government should identify the risks involved, assess the risks (likelihood and consequences), and allocate the risks to the party that can best manage the risks.
Remember – no contract is risk free, and local governments will likely be in a position of having to accept some risks; however, it’s crucial to understand the consequences of the risks you accept.