Contractors can risk manage many aspects of their contracting careers to avoid pitfalls and manage change. Or, to use the more colourful description of risk management used by one of my ex-bosses, successful project management is like robbing a bank when you know the cops are in another part of town.
Being paranoid in business is healthy. If you assume the worst is going to happen and plan accordingly, then when it goes right you can capitalise on your luck and life is all sunshine and flowers. When things go wrong, you have contingency plans to get things back on track, so that those sunshine and flowers are still in sight.
Some risks can be avoided from the outset by changing the plan. Operational risks are managed during a project by monitoring ‘risk triggers’. Then, once they’re triggered, you know that you have to do ‘XYZ’ to get the project back on track.
By way of an example, let’s say you are managing a project that means working outdoors. You know that working in the wet costs more than working in the dry. You factor weather patterns into your planning and insure against a wet summer. If the sun shines all summer, its congratulations all round; if it rains continuously, you’ve already covered your losses and know how to react.
But we’ve seen several examples of poor risk management recently. These have largely resulted in contractors losing out financially, when alarm bells should have been ringing after risk triggers had been activated:
- Rumours suggest one umbrella company that went bust recently was insisting on 45 day terms for paying invoices. Its contractor clients have lost thousands.
- A contractor asked our Contractor Doctor for help after their client refused to pay the final invoice because the original spec had not been met, despite the client changing the requirements on numerous occasions.
- And then we have the recent BN66 ruling. HMRC warned the members of the offshore tax scheme concerned that they would have a significant tax liability, and that the taxpayers should set aside funds accordingly. Many didn’t and some will lose their homes as a result.
Being properly paranoid about these circumstances might have offered the contractors concerned some alternative options to losing money and their homes:
- If an umbrella insists on using you as a private bank for 45 days, change umbrella. If it does not pay according to your original terms, issue a letter before action for breach of contract. Don’t just roll over – get paid.
- If your client constantly changes the deliverables, get them to sign off on a variation order or revised spec, so they can’t say right at the end that you’ve not delivered on what was agreed. That way you’ll have a leg to stand on if you have a legal battle to get paid.
- If a tax solution looks too good to be true, it probably is. And if HMRC tells you to plan for a big tax bill, then take its advice to heart, and put aside sufficient funds so that you don’t put your house on the line.
You can’t predict the future, but you can assume the worst and plan accordingly. So when tackling your next contract, or considering a risky trading solution, remember that your paranoia is just good risk management.