Risk/Reward Contracts

[Terry DeWan, FASLA]

Does anyone have experience in “Risk/Reward Contracts?”  A client has asked us to consider entering into such an agreement.

[Chuck B. Edwards]

Do you mean like when a developer ask for a deal on a site master plan, with so called promised “CD work” for the site in the future? If not, please disregard my future ramblings….

In the good old days I would have to say RUN!  I found that anytime I was promise something if I gave them a good deal – they would just shop it around to the lowest bidder later.

In today’s economy, work is work, so I would say you would have to make the call.

Merry Christmas and good luck!

[nca]

How is a ‘risk/reward’ contract much different from a ‘hard bid’ or fixed quote contract?

With a quick search I found a discussion on risk/reward contracts based on a software vendors perspective at softwareceo.com. A member posted this reply in response to a similar query:

“Having managed many large scale fixed price software implementation projects, some that included upside reward terms, I can definitely tell you that you are talking about dangerous ground.

Above all, from the beginning, you need to have a good definition of scope agreed to with the client and written into the contract otherwise you’ll liable to be eaten alive. From there, you need a strong project manager that is firm with the client and avoids scope creep during the contract. At the point scope creep begins, the project manager, or you, need to re-negotiate the contractual terms. Scope creep is enemy #1.

Enemy #2 are contractual indemnification clauses — contact terms that force you to pay the client if “things go wrong” (sales are not achieved, cost savings are not achieved, etc.). Be extremely wary of any/all such terms.

Like most business, it comes down to how well do you know what needs to be done and to what extent you can work with the client/customer. Many of these contracts go awry — on the one hand the client wants to share the risk but on the other hand if you are successful and the rewards start flowing the client becomes envious. From a client relationship perspective, these type of contracts are more often than not a disaster.”

Seems like really dangerous territory when working with new clients, but maybe something to consider for established clients with which we already have a solid working relationship.

I knwo thats not an answer, but perhaps this will spark some deeper discussion..

Nick

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