The concept of safety nets is essential to preempt problems from occurring during the implementation of a project. Communicating potential issues early into the project will make project owners aware and hence commit to resolving such implementation concerns together with the project company.
These safety nets can be incorporated into the contract, project coverage or non-coverage, financing, and scenario testing of project deliverables.
Basic Contract Safety Nets
(1) Time Freeze
Activities that require responses from government regulatory agencies or the project owner before the project can grow from one action to the next can temporarily stop the project midway through its implementation. It would be prudent to draft a time freeze clause in the project deadline in such responses to ensure that the projects company will not be penalized for delays beyond its control.
Likewise, it would make sound financial sense to include in the time freeze clause when such responses are unusually protracted. The client has to compensate the projects company for losses due to upward changes in minimum wages set by law, increased bank interest rates, or price increases in supplies or equipment necessary to complete the project.
(2) Response Provision
Clients have to receive project deliverables that have been delivered at specific milestones. Since receiving does not always equate to deliverable acceptance, such as software development or architectural or engineering design, any client acceptance provision or approval clause should have a corresponding response provision from the projects company.
The response provision should indicate that when the client receives a deliverable, the said deliverable is deemed accepted or approved after, say, 30 days when the client has not issued a written response within the period. In this regard, Delivery Receipts or Deliverable Acceptance Sign-Off Logs with signed acknowledgments from the client are crucial to minimizing disputes and liabilities.
Basic Project Scope Safety Nets
(1) Modification versus Change Requests
Part of the project communication strategy is to inform the client in writing (contract, inception report, modification template forms, change request template forms) on the big difference between a modification request versus a change request.
A modification request is still in line with the project specification and will not drastically change the project specification, while a change request is the opposite. Also, modification requests are typically undertaken for free, while change requests should feature additional charges or additional payments for extra work previously unspecified. It is because change requests drastically change the project specification or involve other work.
(2) Signed Acknowledgment of Deliveries or Deliverables with Descriptions and List of Specifications
Signed Acknowledgment Receipts with descriptions and bulleted specifications for each deliverable consistent with the project contract texts or project inception report texts are crucial in managing the project scope. Without these signed receipts, the project scope can unnecessarily expand without additional compensation to the projects company and cause unwarranted delays in completing the project.
Basic Project Finance Safety Nets
(1) Bill Factors
Reputable or established international institutions understand the unforeseen or unexpected costs in project implementations, thus accepting bill factors usually not above 3.0 as a standard industry practice to ensure successful project completions.
However, clients who are contracting a project for the first time may not comprehend the rationale behind bill factors. Hence, a project company can apply a billing factor with appropriate footnotes explaining the bid proposal’s motivation or offer a detailed cost structure for such unforeseen or unexpected costs that can affect the project.
(2) Profit Margins and Currency Fluctuation Spreads
Project companies have to ensure sufficient profit margins per project so that company operations can be sustained. Corporate taxes; research, development, and engineering costs that are not directly related to the project. Personnel training costs; market research; offset of unprofitable projects; and other necessary operating expenses should be sufficiently covered with ample project profit margins.
Low-profit margins for commodities that can be sold quickly in the thousands at shorter periods are not applicable to project companies that may have seasonal projects or can only win less than 20 projects a year.
Currency fluctuation spreads should likewise be sufficient; otherwise, a contract clause for extreme currency fluctuations is necessary to protect the projects company with multi-country deployments or global supply chain.
Basic Testing Scenario Safety Nets
(1) Scenario Coverage
Project deliverables should be clear and specific on the scenarios and situations the project warranties and guarantees cover. It is to limit project liability and maintain the project company’s integrity or preserve its good reputation.
Hence, the testing of project deliverables should cover particular transactional process scenarios or testing standards. Transactional processes that have not been subjected to testing should not be covered in any warranty or guarantee.
(2) Third-Party Testing and/or Certification
It makes prudent sense that the project deliverables be tested and certified by reputable government agencies or credible third parties known in their specific industries. Likewise, this safety net ensures that the project managers are accountable for each project they have managed.