Risk: At What Price?

15 September 2008

In discussing the current government approach to “risk,” the Canadian Association of Defence and Security Industries (CADSI) would like to draw attention to the question posed by Mr. Dan Ross, ADM (Mat), when he appeared at the Standing Committee on Government Operations and Estimates on 5 June 2008: “is too much risk being passed to vendors, and what’s the price of that risk?”

Mr. Ross has posed the key question that needs to be addressed, and CADSI members believe that the answer to the first part of the question is clearly: yes, the government expects industry to absorb a disproportionate amount of risk. This approach to risk management offers many possible outcomes, each of which hurt both the private and public sectors. For instance, it can result in:

  • contracts in which the degree of risk is underestimated by the contractor because they misunderstand the government’s risk apportioning;
  • increased costs to the government; and/or
  • nonproductive procurement processes (as seen recently in a number of high profile cases, when potential contractors could not be compliant and either submitted a non-compliant bid or declined to submit a bid).

We encourage the Treasury Board, in its policy review, to consider where and how best to apportion risk between the public or the private sector based upon an understanding of where that risk can best be managed. For instance, risks which are political in nature can best be managed by the public sector.

A key component of equitable risk sharing relates to the nature of the pricing model selected for the associated contract. While it may appear attractive to the ­government to have in place a fixed price contract, in the case of work involving considerable development risk, it might be more appropriate for the contract to be negotiated based on costs, where the costs are determined using Contract Cost Principles 1031-2 of the Standard Acquisition Clauses and Conditions (SACC) Manual.

Another component of risk sharing relates to the management structure to be used. If commercial terms and conditions are used, and if commercial quality assurance approaches are used, then not only can the costs be lower but the risk can also more appropriately be borne by the contractor.

In recent times, DND has adopted a contracting approach where there is to be a prime contractor (usually the equipment manufacturer) with a single point of accountability for not only the original equipment but also an extended period of In Service Support (typically 20 years). The concept depends upon the prime contractor then sub-contracting work to other suppliers for 20 years of support, and as Mr. Ross said; “when you ask industry to take on the full-service delivery of something, and to do it over a 20-year period, even though you’ll renegotiate labour rates on an annual or biannual basis, and you ask them to take on the management and deliver... power by the hour for an aircraft, or a ship being available to go to sea on a daily basis, and you ask them to do all that management and take all that risk – there’s a price to that.”

CADSI members believe that, in such circumstances, it is not reasonable to expect either the prime contractor or the sub-­contractors to absorb this risk. What we see happening, however, is prime contractors pushing the risk down onto their sub-contractors; a very natural response to the model that the department has established.

We also recommend that the Treasury Board look at specific concerns relating to risk and liability that are unique to our sector such as the following issue that has been raised by one of our members, and supported by others:

            "The Company is very concerned with potential liability to third persons resulting from acts of terrorism when providing products and services designed to detect, prevent or mitigate acts of terror. Adequate insurance for such ­liability is not reasonably available and margins potentially available for such work do not justify the risk of enterprise-threatening liability that accompanies the sale of anti-terrorism technology. The Company has not under­taken any anti-terrorism work without some form of effective risk mitigation."

            "In response to the threat of uncapped liability to third parties resulting from acts of terrorism, the United States Congress enacted the SAFETY Act (Support Anti-Terrorism by Fostering Effective Technologies) of 2002 (www.safetyact.gov). The SAFETY Act provides limitations of liability and immunities to providers of qualified anti-terrorist technologies. The Company’s research indicates that Canada has not enacted similar legislation, but that laws and regulations already exist authorizing agencies of the Canadian government to indemnify contractors from such liability where there is a compelling reason in the public interest."

            "Is the government willing to consider to indemnify The Company (subject to an appropriate financial cap to be borne by The Company) for third-party liability associated with its border security products and services pursuant to paragraph 7(1)(a) of the Financial Administration Act and the Treasury Board’s Policy on ­Decision Making in Limiting Contractor Liability in Crown Procurement Contracts?"

CADSI suggests that there is another large area where risk management needs to be re-evaluated – the Industrial and Regional Benefits (IRB) Program. It is our belief that the current approach by government needs to be improved to ensure that high quality benefits are achieved. To this end, CADSI would like to meet to discuss ways in which the process could be improved.

CADSI believes that the issue of risk management and appropriate allocation of risk is critical for both the Canadian defence and security industries and for the federal government as a whole, and for the Department of National Defence specifically.

These issues are important to CADSI members, and we believe that there is value in full consultation involving all interested parties on both the general approach and specific problems in an environment of understanding and respect.
Janet Thorsteinson joined CADSI as Vice President, Government Relations after retiring from 30 years of public service in the federal government. During that time, she was heavily involved in defence procure­ment, public policy, strategic planning, communications, and business development related to the Canadian defence and security environment, including 16 years at the executive level.
© Frontline Defence 2008