How contracts really work –
understanding risk transfer in
commercial relationships – an
auditor’s perspective
October 2015
Contact:
Walter Akers, Partner
Contract Risk & Procurement Advisory
Tel: +44 (0)7561 327662
walter.akers@bakertilly.co.uk
www.bakertilly.co.uk
Agenda
How contracts really work – understanding risk transfer in commercial
relationships – an auditor’s perspective
 Different contractual risk transfers between buyers and suppliers
 Pricing strategies – how price changes with different risk models
and why?
 Alignment of contracts to business strategy, risk and governance
 Best practice may not be fit for purpose – understanding how an
entity’s commercial culture, process and controls impacts the choice
of contract structure
 Designing contract management processes that are appropriate for
different risk transfers and contract structures
Page 2
Contracts in the headlines
Tesco drops Irish supplier over
horsemeat scandal
US oil spill: ‘Bad management’
led to BP disaster
Government charged for tags on
dead prisoners. Invoices for
transporting prisoners who never
left prison.
City council claim it has overpaid
its buildings’ repairs contractor
by £19million.
Page 3
Contracts in the headlines
Page 4
Contracts in the headlines
http://www.youtube.com/watch?v=z628SdTCHgs
At 2.40
Page 5
So how does risk transfer work?
Why is this important for the
auditor?
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Delivery
Reward = Input costs +
Advantage Premium
Customer
Supplier
The theory - value flows and risk
Rules:
1. Risk should be allocated to the party best able to manager the risk.
2. As this party offers an “advantage” they should be rewarded accordingly.
3. Profit should ONLY be earned because the supplier delivers an
“advantage” to the customer
4. As contracts & delivery become more complex, risk transfer becomes
more important, the possible “advantage” increases and with it the
supplier’s potential profit
5. “Ultimate” risk can not be transferred
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Risk transfer in contracts
Risk transfer and the scope of services
Risk
Buyer’s Risk
Supplier’s Risk
Outcome
Output
Input
Type of scope
Page 8
Risk transfer in contracts
Risk transfer and the contractual charging
mechanism
Risk
Buyer’s Risk
Supplier’s Risk
Fixed
Price
Type of charging mechanism
Variable
price
Page 9
Risk transfer in contracts
Risk transfer and the T&Cs
Risk
Buyer’s Risk
Supplier’s Risk
Onerous T&C’s in
favour of buyer
The Terms and Conditions
Onerous T&C’s in
favour of supplier
Page 10
Risk transfer in contracts
1. What overall risk transfer do we have ?
Type of scope
Type of charging mechanism
Risk
Risk
Buyer’s Risk
Supplier’s Risk
Outcome
Output
Supplier’s Risk
Input
Fixed Price
Buyer’s Risk
Variable price
The Terms and Conditions
Risk
Supplier’s Risk
Onerous T&C’s in
favour of buyer
Buyer’s Risk
Onerous T&C’s in
favour of supplier
Page 11
Risk transfer in contracts
1. What overall risk transfer do we have ?
Type of scope
Type of charging mechanism
Risk
Risk
Buyer’s Risk
Supplier’s Risk
Outcome
Output
Supplier’s Risk
Input
Fixed Price
Buyer’s Risk
Variable price
The Terms and Conditions
Risk
Supplier’s Risk
Onerous T&C’s in
favour of buyer
Buyer’s Risk
Onerous T&C’s in
favour of supplier
Page 12
Risk transfer in contracts
2. What overall risk transfer do we have ?
Type of scope
Type of charging mechanism
Risk
Risk
Buyer’s Risk
Supplier’s Risk
Outcome
Output
Supplier’s Risk
Input
Fixed Price
Buyer’s Risk
Variable price
The Terms and Conditions
Risk
Supplier’s Risk
Onerous T&C’s in
favour of buyer
Buyer’s Risk
Onerous T&C’s in
favour of supplier
Page 13
Recap and Q&A
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About Contract Risk & Procurement
Advisory at Baker Tilly
For most organisations, contracts and commercial
relationships play a vital role in achieving success.
Businesses that are commercially astute, negotiate
strong contracts and have rigorous contract
management are at a distinct competitive
advantage.
Our specialist team has extensive experience in
helping clients manage commercial contract risk and
to deliver enhanced value from their contractual
relationships. We advise and support organizations
in both the private and public sectors through:
• Building capability in knowledge, processes and
controls to get the most out of procurement and
contractual relationships;
• Recovering value lost from under-performing
commercial relationships; and
• Providing assurance that procurement, contracts
and associated processes and controls are
operating as intended.
Our service offering:
• Procurement & contract
management process
improvement
• Cost savings on existing
contracts
• Strategic sourcing, demand
management and procurement
effectiveness
• Contract cost & performance
compliance
• Contract management training
• Capital projects
• Supply chain risk
• Outsourcing contracts
• In-sourcing projects
• Commercial contract training &
learning solutions
• Contracts for complex projects
• Contract negotiations
• Commercial internal audit
Walter Akers
Partner
walter.akers@bakertilly.co.uk
07561 327662
Baker Tilly Tax and Advisory Services LLP, Baker Tilly UK Audit LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Risk Advisory Services LLP and Baker Tilly Restructuring and Recovery LLP are limited liability partnerships
registered in England and Wales, with registered numbers OC325348, OC325350, OC325347 and OC325349 respectively. Baker Tilly Tax and Accounting Limited, Baker Tilly Revas Limited, Baker Tilly Management Limited, Baker Tilly
Business Services Limited, Baker Tilly Audit Limited and Baker Tilly CF Limited are registered in England and Wales with numbers 6677561, 6463594, 3077999, 04066924, 04045321, 06555639 respectively. Baker Tilly Financial
Management Limited and Baker Tilly Investment Solutions Limited are registered in England and Wales with numbers 03953153 and 02051492 respectively and are authorised and regulated by the Financial Conduct Authority,
Financial Services Register numbers 0192618, and 0116457. All limited companies and limited liability partnerships are registered at 25 Farringdon Street, London, EC4A 4AB.
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