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 risk exposure for members.
It's crucial to understand how to manage and reduce risks in local government contracts to avoid unnecessary exposure.
What is a contract?
Contracts may be written or verbal, and are binding and enforceable instruments, between two or more parties (e.g. a local government and suppliers/contractors) that consent to enter into an agreement..
What is contractual liability?
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.
Contractual liabilities include :
- accepting third party risks
- accepting risks that local government cannot control
- excluding contractors' liabilities for losses
- reducing contractors' liabilities
- liability cap
- some liabilities under law:
- negligence
- fraud
- wilful actions and omissions
- consumer rights
Why is this important?
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 wouldn't usually be exposed to.
Contract risks
There is no such thing as a risk-free contract.
Each stage has its own inherent risks, which could include:
- Liability risk – a local government may be found legally liable if it causes a loss.
- Financial risk – delays of a project or delivery of services could result in increase of costs. Lack of preparation in assessing the costs of a project may result in variation to the contract and increased costs.
- Reputational risk – project delays or issues with contractors may result in damages to the reputation of the local government.
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 ensure that a party that caused a loss will have the financial capacity to offer compensation.
Local governments should also monitor and ensure contractors are meeting the KPIs 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 local governments taking on a supervisor role or controlling how a contractor performs work. Doing so may lead to the local government being exposed to liability that it normally wouldn't be.
For each contract, local government should identify the risks involved, assess them (likelihood and consequences), and allocate the risks to the party that can best manage them.
Remember - no contract is risk free, and local governments are usually in a position of having to accept some risks; however, it's crucial to understand the consequences..