A Better Default for Risk Sharing Proposals
“Please propose a risk-sharing plan to ensure critical timelines are met.”
When you receive this request, do you default to concepts that put a percentage of fees at risk?
Consider, instead, defaulting to an incredibly simple tool already used on many of your contracts, and familiar to customers as a way to align incentives with suppliers: using cash flow, NOT price.
--- Milestone Payment Schedules ---
A contract stipulating, say, 10% of fees paid upon Last Subject Enrolled, is a risk sharing contract. Most milestones represent a future forecast subject to forces beyond the service provider’s complete control. The less control the service provider holds over milestone timing, the greater the risk to cash flow.
Cash flow risks are highly incentivizing: service providers need predictable project cash flow to fund operations, demonstrate quality of earnings, conduct M&A, etc. (Service providers who don’t fund operations from projects wish they did.)
I suggest the smarter default to risk sharing proposals is tailoring a milestone payment schedule to the project’s key objectives and tying disproportionate percentages of fees to those key objectives.
This approach won’t succeed every time, that’s why it’s a default option, not the only option. The customer may, ultimately, require fee levels to be at risk, or the upside opportunity may be a much higher likelihood than the downside.
That’s fine, but if fee levels are ultimately at risk, don’t double your risk by then thoughtlessly tossing a milestone payment schedule into the contract, because then your fees AND your cash flow are at risk.