Contractual Risks

Contractual risks are the risks that come from the terms and conditions of a proposed contract. They include the exceptions or deviations a bidder asks for, such as limits on its liability, restrictions on how the buyer may use intellectual property, and any other change to the prospective contract.

The term is used in proposal evaluation. A buyer reviews the contractual position a supplier proposes and decides whether it leaves the buyer with risks it cannot accept or afford. In a NATO request for proposal, a bid can be disqualified on this basis.

How NATO defines contractual risks in an RFP

The exact heading "Contractual Risks" appears as an evaluation criterion in a NATO request for proposal. It defines the term as the risks associated with the terms and conditions of the proposal and with any exceptions proposed to the prospective contract.

• The proposed contract's terms and conditions.
• Exceptions requested by the bidder.
• Express or implied limitations of liability.
• The permissible scope of intellectual-property use.
• Other express or implied deviations from the solicitation or prospective contract.

NATO may disqualify a bidder if the contractual risks tied to its proposal are unaffordable. The definition is operational: it is written into the evaluation criteria rather than offered as a general dictionary entry.

How Canadian federal rules allocate contractual risk

Canadian federal procurement deals with the same subject through risk allocation, liability, indemnification, insurance and contract clauses. The Treasury Board describes risk management as identifying, assessing, selecting and implementing responses to risks, including adding appropriate clauses to the solicitation and contract. Its procurement training material and related guidance distinguish two kinds of risk:

• Performance risk, which relates to the contractor's performance and is often addressed through performance bonds or insurance.
• Product risk, which is the risk that a contracted good or service causes injury or property damage.

The mandatory procedures state that each party should be responsible for risks under its control and should accept responsibility for risks it can manage or mitigate.

Limits on liability and indemnification

Liability terms are where contractual risk is most visible. Under the Directive on the Management of Procurement, contracting authorities must seek Treasury Board approval to limit a contractor's liability or to indemnify a contractor, in accordance with the mandatory procedures.

The former Treasury Board Contracting Policy states that contractors are responsible for managing and obtaining financial protection against the risks to which they are exposed, especially risks they control. It also sets the general government position: contractors normally indemnify and hold the Crown harmless against claims and damages.

Insurance and inherently risky work

Federal guidance on insurance requirements identifies situations where they are particularly relevant because the work carries inherent risk:

• Most construction contracts.
• Work performed to government specifications.
• Work involving extraordinary danger to the public.
• Work beyond a contractor's normal operations.

In these cases the solicitation and contract can require insurance or other financial protection as a way of managing the risk.

What contractual risks mean for a supplier bidding on Canadian public contracts

Read every proposed term before you bid, because the contract's terms are part of what the buyer evaluates. Price or manage the risks your firm controls, and disclose any exception or deviation clearly rather than leaving it implied. Check how liability, indemnity and intellectual-property provisions affect your position, and secure any insurance the solicitation requires.

Avoid proposing exceptions that make the bid unacceptable or unaffordable to the buyer. The NATO RFP states the disqualification consequence directly. The Canadian sources support the wider duties: managing the risks you control, carrying required protection, and accepting the government's default position on liability and indemnity unless an approved limit applies.