4.5 CONTRACTOR RISK MANAGEMENT
Experience has shown that managing a program's risks
requires a close partnership between the PMO and the prime contractor(s). PMs
must determine the type of support they need from their prime contractor,
communicate these needs through the Request for Proposal (RFP) for each
acquisition phase, and then provide for them in the contract. Preparation of
the RFP and source selection are discussed in subsequent sections.
View of Risk
Contractors treat risk differently from
the Government because each views risk from a different perspective. The PM,
in executing his risk management program, needs to understand the contractor
Contractors typically divide risks into
two basic types: business risks and program risks. Business risk, in the
broadest sense, involves the inherent chance of making a profit or incurring a
loss on any given contract. Program risk involves, among other things,
technical, requirement, and design uncertainties. A contractor's efforts to
minimize business risks may conflict with a Government PM's efforts to lower
While the government and
contractors may have different views on specific cost, schedule, and performance
risk levels/ratings, they generally have (or should have) similar views of the
risk management process. One exception may be the requirements placed by
corporate management-that could conflict with the Government view of program risk. The
similarity, however, does not necessarily lead to the contractor having a
competent internal risk management program. As a Project Management Institute
(PMI) handbook points out, "On most (contractor) projects, responsibility for
Project Risk is so pervasive that it is rarely given sufficient central
attention." As a minimum, it is important that the PMO writes the RFP asking
the contractor to describe its risk management process, including its approach
to managing any specific areas.
The prime contractor's support and assistance is required even though the
ultimate responsibility for risk management rests with the Government PM.
Often, the contractor is better equipped to understand the program technical
risks than the Government program office is. Both the Government and
contractor need to share information, understand the risks, and develop and
execute management efforts. The Government must involve the contractor early
in program development, so that effective risk assessment and reduction can
Therefore, risk management must be a key part of the contractor's
management scheme. Although the Government does not dictate how the contractor
should manage risk, some characteristics of a good Government/contractor
- Clear definition of risks and their assignment.
- Flexibility for assignment of risks and risk management responsibilities
among the teams.
- Strong emphasis on best management and technical practices which, if
followed, avoid unnecessary risks.
Regarding RFP development, discussed later in this section, information is
provided on how these characteristics should be addressed.
The Government/contractor partnership can be forged in at least two ways.
First, the PMO should include the prime contractor(s) in the top-level risk
planning and assessment activities. This includes understanding and factoring
in such issues as user requirements, affordability constraints, and schedule
limitations. Second, the PMO should include in advance specific risk
assessment and handling tasks as key contractual efforts during the concept
exploration and program definition and risk reduction phases.
Forming a joint Government/contractor evaluation team is a good way of
fostering an effective partnership. This is especially true in a program's
early stages when uncertainty is high and both parties must frequently assess
risks. These assessments, properly handled, involve multidisciplinary efforts
requiring subject-matter experts from both the prime contractor and
Government. This joint team should evaluate the proposed program in detail and
explore the inherent program risks, the proposed handling strategies, the
detailed development schedule, and the contractor's developmental resources
(people, facilities, processes, tools, etc.).
A management approach using multiple teams is the best approach to use,
e.g., Sub-Tier IPTs. Joint team(s) should be established at the beginning of
each development phase to assess the risks to be overcome in that phase and to
determine the handling technique(s) to be used.
Requirements for contractor participation on the team(s) should be
identified in the RFP and subsequent contract.