IT Projects, Cost Control, Fraud And Contractual Protections – IT and Internet

In recent weeks, news headlines have drawn attention to risks
that businesses, governmental entities and other organizations may
be exposed to when engaging third-party contractors to assist with
IT projects.

This blog is not intended to pass comment on any particular
controversy implicating IT contractors or procurement matters.
However, the broader public conversation about IT project risks may
be prompting organizations to ask themselves about their own
current and future IT engagements. It is in anticipation of these
questions that we have prepared this blog to highlight certain key
risks associated with IT projects and how these risks can be
partially mitigated through effective contracting strategies.

Cost escalation and reputational risk

In the IT contracting context and particularly when preparing
statements of work, IT contractors will often focus on a
project’s end result instead of the path the IT contractor will
take to achieve that result. This can create an unclear picture of
how the work will be performed and what obligations and
responsibilities each of the IT contractor and organization have to
achieve that result.

Unclear or imprecise billing and invoicing practices can also
make it difficult for an organization to understand project charges
and the associated value (if any). When service and payment details
are lacking, it creates uncertainty for the project and may make it
difficult for the organization to hold its IT contractors
accountable. In particular, the absence of these details can create
cost escalation and also delay risks for the organization engaging
the contractor. And, particularly in the case of governmental
entities, poor IT contracting practices may also cause reputational
risk if a project is viewed by the public as having gotten out of
hand.

Risk mitigation in IT contracts

To mitigate IT project risks, contracts can be (and routinely
are) drafted to include protections for businesses, governmental
entities and other organizations engaging IT contractors to keep
the project on-track. Below we will highlight certain contractual
measures that can be used by organizations to help control costs as
well as increase transparency and accountability in relationships
with their IT contractors.

Cost control

There are several ways IT contracts can be drafted to help
control project costs. Choosing a fixed-price contract instead of a
time-and-materials contract, for example, is often a good strategy
for controlling costs. In these arrangements, the IT contractor
commits at the beginning of the project to deliver for a specified
price, creating price certainty. Payment is often tied to the
achievement of project “milestones” that are also defined
at the project’s beginning. This puts the onus on the IT
contractor to make measurable progress towards the project’s
goals before they are paid.

Another way to control project costs – or at least
discover the scope of the costs early on – is to prepare a
detailed statement of work setting out the project specifics before
the work starts. Unfortunately, it is not uncommon for statements
of work to be a single page and describe only the project result,
without giving any insight into the specific tasks the IT
contractor will perform to achieve that result or how long the
project will take. Negotiating a detailed statement of work brings
discipline to the project and can play an important role in
controlling costs. Specifically, the statement of work can be used
as a means of defining the work that the IT contractor is
authorized to perform and will be paid for. If the IT contractor
performs work that is not specifically authorized, then the
organization may not be required to pay for this work. Further, it
is in the statement of work where payment milestones can be
defined, clearly connecting performance of specific tasks and also
serving as a tool for measuring project progress.

Contractor accountability

There are a number of contractual tools that can be implemented
to help ensure IT contractors remain accountable for the charges
they invoice for. One such tool is contractual language setting out
in detail the requirements for IT contractor invoices. For
instance, the contract may specify that all invoices must include
itemized charges and be supported by additional documentation such
as staff time sheets and expense receipts. The contract may also
include a broadly-stated discretionary right for the organization
to request additional information from the IT contractor to support
invoiced charges. These contractual rights can help bring clarity
to IT contractors’ charges and provide the organization the
means to investigate questionable charges where appropriate.

Similarly, IT contracts may be prepared to include audit rights
that gives the organization the right to access and review certain
financial and business information in order to validate charges
that are invoiced.

Additional rights and remedies

By implementing and using the contractual tools described above,
the organization may discover that an IT contractor has
inappropriately charged for work that was not performed or work
that was performed but not authorized. IT contracts can be prepared
to call out these scenarios and specify that this type of conduct
represents grounds for the organization to terminate the
contract.

Further, the IT contract can specify that any limitation of
liability the IT contractor may have negotiated for itself will not
apply if it commits fraud or willful misconduct. This can be
critical if the IT contractor’s conduct has caused the
organization losses in excess of the IT contractor’s limitation
of liability, which might otherwise operate to prevent the
organization from fully recovering all of its losses.

Takeaways for your organization

The contractual measures described in this blog post are just
some of the ways that a well-drafted IT contract can bring
discipline to an organization’s project and empower the
organization to ensure increased transparency and accountability in
its relationship with the IT contractor. It bears noting that
including these contractual measures in your IT contracts is often
only half the battle, and realizing the value of these and other
measures largely depends on an organization’s ongoing internal
care and diligence after the contract is negotiated. Nevertheless,
when wielded by engaged management, operations, accounting and
legal personnel, these contractual tools can be effective in
mitigating delay, cost escalation and reputational risk.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.