How to manage the risks of a new IT contract

There’s bound to be a few independent IT business owners who defy the current albeit anecdotal trend of sticking with their existing clientele. August was a ‘hot’ month for new IT contracts; public sector opportunities are on the horizon and turnaround specialists at trusts are already sought-after. Maybe you found that new client after reading that developing on an hourly basis is increasingly lucrative.

You’ll no doubt be pleased at this boost to your business’s future prospects. Likewise, if you’ve just secured a new supplier for materials, parts or services, which will improve your business’s offering to your customer, then similarly, ‘Congratulations’ are in order.

But when the initial euphoria has worn off and before you get down to work, with this new client or supplier, heed the following advice on managing the potential risks which are intrinsic from any such new contracts:

Interoperable terms

Check that the terms on which you obtain products or services from your suppliers dovetail properly with the terms on which you supply your customers.

So, with a new customer or client, make sure that your existing supply contracts enable you to meet all the obligations you are undertaking. Likewise, with a new supplier, make sure that the terms on offer will enable you to meet all your obligations to your existing customers and will not cause any problems for your business.

Contracts fit

If you have drafted all the contracts, or you are working on your own standard documentation, then your contracts with both customers and suppliers should already fit together properly.

But if you are faced with having to work on documentation provided by the new customer or supplier, you should check carefully for any inconsistencies which might lead to difficulties for your business.

Paying Peter to pay Paul

A supplier will typically want paying earlier than a customer will want to pay. If you are working on your documentation, then you will have made sure that at least the payment terms match, or even better, you get paid by your customer before you have to pay your supplier.

But if you are working on documentation provided by your customer or supplier, you will need to watch out for any mis-match in the timing of payments – discrepancies could cause serious cashflow problems for your business.

Warranties must be warranted

We increasingly notice that customers seek extensive warranties about the products or service an independent business plans to provide to them, sometimes backed up with indemnities and other protections. As before, make sure that these are mirrored by corresponding support from your suppliers.

Who’s liable?

Clients will turn to your business if there is any problem with the product or service you provide to them. Meanwhile your suppliers will seek to limit their liability so far as they can.

Apart from doing what you can to make sure that you do not give your customer cause to claim against your business by performing all your obligations in accordance with the contract, having appropriate insurances in place can help make sure that your business is not the one to get caught in the middle of any potential dispute over liability. Ideally such cover, which may be mandated in your contract, will work by minimising the difference between your potential legal liability to your customers and the extent to which you may be able to claim against your supplier.

A cautionary note…

This article offers only a handful of examples of issues where any inconsistency in contracts between your business and its suppliers, on the one hand, and its customers/clients on the other, could cause you a major headache if not addressed.

Ideally this should be checked before you enter into the new contract, so that any such issues can be resolved in advance. If that was not possible for whatever reason, it should be rectified as soon as possible, so that a satisfactory solution for your business can be negotiated before you go any further.

As told to ContractorUK by Sue Mann, commercial solicitor at legal advisory Cousins Business Law.

Monday 24th September 2012