SMART CONTRACTING OVERVIEW
On a daily basis, the city enters into a multitude of contracts. Protecting the city from damages, or liabilities that arise from these contracts is a constant challenge for everyone involved.
Bureaus should always start with a process of evaluating the risks of the contracted service or activity. Do this at the inception of an idea. A risk assessment can help you get to the best information about your risks. This assessment will identify and analyze loss exposures and determine who should pay for any loss that occurs. A decision should be made whether or not you want to do the contracted service or activity. Consider the following issues in your assessment:
- What is the contracted service or activity?
- What can go wrong, or who could be harmed?
- What is the likelihood that the loss will occur?
- How bad can the loss be, or what could it cost?
- Who might blame the city?
- What city property, or operations might be damaged?
- What if the Contractor can’t pay for what goes wrong?
Determine the level of risk for each loss exposure. Use the likelihood and severity of each exposure to determine necessary actions to address the risk.
Next, contractually transfer risk through the use of appropriate contract language backed by insurance and bonds. Appropriate contract language includes indemnification clauses and other clauses that address non-insurance risk transfer. This type of risk transfer is planned and arranged before a loss and comes into play after a loss occurs.
- Use indemnity language to clarify the Contractor’s responsibilities. Keep in mind that indemnity may be broader than what insurance covers. In addition, an indemnity clause is only as effective as the assets or insurance of the entity. If the Contractor has no assets or insurance, the indemnity clause will not provide any protection from losses.
- Use Independent Contractor language to make it clear that the Contractor is not an agent, or employee of the city.
- Don’t rely on insurance or bonds to cover all of the risks associated with your contract. In many cases, outcome based statements of work, contract administration, and supervision are far better risk control measures to protect the city’s interests than insurance or bonds. Insurance and bonds should be thought of as the safety net that catches us when everything else goes wrong.
Review each contract. Risk transfer language is generally contained within Purchasing Contract Templates. However, it is important that you work with your City General Counsel in analyzing the risks specific to your contract, and in considering appropriate contract clauses or wording. Some other examples of non-insurance risk transfer clauses that you and your City Attorney Counsel may consider include:
- Provisions for liquidated damages in the event the job is not finished on time or per the specifications and the damages will be difficult to measure.
- Retention of a portion of the contract amount until the contract is completed to your satisfaction.
- Warranties that ensure the Contractor will stand behind the work, product, or service.
- Language giving the city ownership of the work product after the project is finished.
- Specialized language based on individual risks, to protect the city’s interests, clients, confidentiality, release of information to the media, etc.
Don’t forget to follow-up to insure compliance with the insurance and bonding requirements.
This Smarting Contracting Toolkit is designed to help city bureaus make good decisions regarding risk and insurance when contracting.
For further information contact: Risk Management Division at (503) 823-5387.