Information Technology (IT) development is the cornerstone of technological innovation in Australia. It is, however, fraught with high risks including integrating developmental software or hardware into a complex and dependent system, or constraints imposed by an aggressive delivery service. This article will set out the risks involved with IT Development as well as the Australian Government’s involvement.

Why is the Australian Government Involved?

The Australian Government provides an ICT liability policy about setting out and managing risk for medium and high risk IT procurements. The Government provides guidance in this area as it represents the largest IT market in Australia. Securing Australian Government contracts is critical to the success and growth of many of Australia’s fast-growing, IT developers. This work provides opportunities to develop and leverage innovative products and solutions, domestically and internationally. The Australian Government has provided a guide to limiting supplier liability in information communications technology (ICT) contracts with Australian Government agencies.

Why Should the Client Bear Any Risk?

The ICT liability policy comprehensively discusses sharing risk. Specially developed for ICT contracts, it reflects the unique characteristics of ICT procurement including the inherently high-risk associated with some ICT development. The policy considers that finding an IT supplier willing to undertake the work may depend on an alliance-based or cooperative approach to sharing risk.

Another consideration is if a client insists on unlimited supplier liability,  this may significantly reduce market competition as small to medium IT developers are generally unwilling or unable to accept such liability.

Further, if a client insists on unlimited or unjustifiably onerous supplier liability, then suppliers are likely to need considerable insurance. They may then pass on the cost of excessive insurance cover and their own risk premium in the price, resulting in clients paying a higher than necessary contract price. In turn, this stifles innovation by reducing the number of businesses seeking IT development. 

Assessing Risk

1. Project specific risk assessment

Depending on the nature of the work, both the IT developer and the procurement officer need to assess accurately whether procurement is low, medium or high risk. 

High-risk elements include introducing a new IT system that replaces one or more existing procedures. A project may be riskier if a large number of users will be using the system. Another critical consideration is the level of risk and impact on the business if the development is unsuccessful. 

2. Supplier specific risk assessment

The procurement officer should consider the supplier’s technical skills, the level of experience doing a kind of work required, and capacity and resources available. This includes the size of the business, their staffing team including contractors, and their financial viability.

3. Managing the risk

You can deal with procurement risks through legal and practical measures. Although legal risk management methods are necessary, equally as important for a high-risk procurement are practical risk measures. These include: 

  • The IT developer and client conducting a series of tests and checks at important stages of the business to identify issues and develop solutions during the project before installation.
  • Setting out clear experience requirements for staff as well as the developer. 
  • The IT developer can increase the breadth of their insurance and insurance limits.
  • The client estimating their risk in detail with a model that combines the financial impact of the consequences on the one hand, with the likelihood that risk occurring on the other.

Conclusion

It is imperative first to understand the associated risks before entering into a procurement agreement for that project, and certainly before starting work.

Both the developer and the client need to take a practical and collaborative approach before embarking on the project. It is prudent for both the client and the developer to outline the timeframe, tests and deliverables as well as negotiate a comprehensive and reasonable agreement.

LegalVision’s Information Technology lawyers have considerable experience with Information Technology law and agreements. It would be our pleasure to assist you.

Ursula Hogben

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