“We demand rigidly defined areas of doubt and uncertainty!” – Vroomfondle the Philosopher, in Douglas Adams The Hitchhiker’s Guide to The Galaxy (1979).
In our previous blog, we explored how collaborative management of risks and opportunities can lead to superior outcomes. Whilst issues (known knowns) and risks (known unknowns) can be relatively easy to manage, a more critical challenge arises with uncertainty. Uncertainty can manifest itself as either:
- Unknown knowns. Things we know about, but we may have incomplete information about their likelihood or consequence.
- Unknown unknowns. These are simply things that are not contemplated (sometimes referred to as unfathomable uncertainty).
We previously mentioned that a contract is a tool that is used to allocate risk but how can we manage uncertainty where the risk is simply not contemplated, or risk likelihood or consequence cannot be reliably quantified? This blog explores strategies on how we can effectively craft a commercial model that better deals with uncertainty.
When to Focus on Uncertainty?
Whilst uncertainty is relevant to all commercial dealings, the impact of uncertainty is more likely to arise within certain environments. Remington and Pollack offer a useful framework to help us gauge the level of complexity in a project, and hence where we need to focus our efforts in dealing with uncertainty.
- Structural Complexity. Many interdependent systems or components
- Technical Complexity. New technologies or new ways of business
- Directional Complexity. Many diverse and influential stakeholders with competing needs.
- Temporal Complexity. Unanticipated changes in regulations, law, and environment.
In summary, high complexity often creates an environment where uncertainty is more likely to have an impact of the delivery of outcomes. How then do we create a commercial model to effectively deal with uncertainty?
Crafting a Commercial Model to Deal with Uncertainty.
Traditional arms-length contracts are often underpinned by waterfall development life cycles whereby the principal provides the contractor with a specification, statement of work, and conditions of contract to deliver the contract works. In complex environments, such approaches are often unsuitable as uncertainty introduces change and emergence that is often not contemplated in the contractual risk allocation framework and procurement documentation. We may therefore need to adopt a more exploratory procurement model where we ‘probe, sense, respond’ rather than the traditional ‘sense, categorise, respond’ approach we see in simple procurement activities. There are several ways to achieve this including:
- Contracting for incremental outcomes and exploiting prototypes. An evolutionary approach mitigates many of the challenges associated with uncertainty by allowing us to ‘probe’ the environment, explore the art of the possible, and create ‘early wins’. Incremental approaches also provide natural ‘off-ramps’;
- Maximise tradespace. Providing maximum flexibility and agility to trade off cost, schedule, and performance parameters. This approach allows a collaborative means to realise benefits even when new, significant risks and issues emerge; and
- Create an adaptable organisation and culture that can cope with change. Traditional approaches rely on stable requirements, certainty, and linearity. To effectively deal with uncertainty we need to create an environment where all key stakeholders understand that change is a natural part of the process and we have the right leaders to communicate how change can be an effective tool to achieve the project ‘vision’.
Recognising that there is no pre-ordained path to delivering outcomes will go a long way to helping us deal with uncertainty, but we still need to get into the contractual ‘nitty gritty’ of managing change, implementing suitable risk and reward mechanisms, and dealing with the prospect of cancelling the contract if uncertainty jeopardises the business case.
Change Management Processes
Uncertainty can create significant challenges including increased costs, delays, and force change in delivery methods. Anticipating all possible permutations that may occur throughout the contract lifecycle is a fool’s errand so we must implement robust and fair change management processes. We need to remind ourselves that there is no price competition associated with variations in a contract so we must ensure any change management process balances fairness, timeliness, and value. This is where a culture of collaboration will reap dividends. Where parties work on a best for project basis with shared goals, and shared information; change management will be far more effective. Collaboration also allows opportunities to be recognised and exploited when circumstances change.
Risk and Reward
Traditional fixed price, arms-length contracts are unsuitable for contracts involving high uncertainty. A commercial model is therefore required to encourage parties to fix the problem and not the blame when new risks emerge. A firm fixed price contract where suppliers face unlimited liability for all risks and with no recourse to force majeure will drive the wrong commercial behaviours. Similarly, a cost reimbursement contract where the buyer assumes all risks will unlikely deliver value for money. As we have stated in many previous blogs, a commercial model is needed where buyers and suppliers both have ‘skin in the game’ and are incentivised to work collaboratively to proactively manage new risks and exploit new opportunities.
Where a magnitude of change arising from uncertainty is significant, then this could jeopardise the procurement business case or value proposition. In such circumstances, termination or significant rescope of the project must be considered. Collaboration is necessary to ensure a seamless closure of the project, reduce disputes, and capture lessons learned. Preservation of business relationship is also of critical importance. By adopting collaborative contract principles, we are more likely to effectively manage radical changes in scope. We need to make sure that the commercial framework supports timely exchange of information so that there are ‘no surprises’ for either buyers or suppliers. Termination clauses must also be reasonable, fair and therefore contemplate ‘reasonable de-mobilisation costs’
Dealing with uncertainty is something that is often overlooked in contract management as this is a very hard topic to deal with. Collaboration is a key tool when dealing with complex projects where we anticipate uncertainty. We need to make sure we manage stakeholders effectively, implement robust and fair change management processes and establish a commercial framework where all parties share in risks and rewards.
 Kim, S. D. ‘Characterizing unknown unknowns’ (2012) PMI Global Congress 2012—North America.
 Remington, K., & Pollack, J. Tools for Complex Projects (2007)
 David J. Snowden and Mary E. Boone ‘A Leader’s Framework for Decision Making’ Harvard Business Review (November 2007).
 Gray A. ‘Unfair Contract Terms: Termination for Convenience’  University of Western Australia Law Review 12 (2013) 37(1) 229 at 250.