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Insuring IT contractors – how insureds can minimise the scope for disputes

We take a look at IT contractors and how insureds can minimise the scope for disputes through the pre-contract/tender phase, contract drafting, and…

Does your professional indemnity insurance cover IT contractors? If so, you will know that IT projects can go wrong and disputes between insureds and their corporate customers can be commonplace. Furthermore, given that a company’s IT system is often critical to the smooth running of its business, when things do go wrong, they can go very wrong indeed. 

Pre-contract/tender phase

With many distressed IT projects, a common source of problems can be where an IT contractor has over-sold its ability to deliver at the outset of the relationship, typically during the bid phase when it was attempting to win the contract. This has the effect of setting unrealistic expectations, whether that is in relation to functionality, cost or timescale. 

In fact, this difference of expectations between an IT vendor and its customer (in terms of what a new software solution will do, how long it will take to develop; or how much it will ultimately cost) is often the root cause of a significant number of IT project disputes that claims handlers will see.    

It is therefore crucial for IT contractors to ensure that their sales personnel are communicating effectively with their technical personnel, to ensure that promises made during the bid phase can actually be delivered. Whilst no-one wants to miss out on securing a piece of work, making promises that cannot be kept without spending significantly more time, resource or cost than the customer was expecting will simply store up problems for later. 

Contract drafting 

Contracts on IT projects come in all shapes and sizes, from simple standard form terms and conditions to lengthy and heavily negotiated agreements. 

The precise form of contract will depend largely on the project in question, but a few simple pointers may help insureds to avoid issues later down the line. For example, contractors would be well advised to:

  • Clearly define the roles and responsibilities of each party, not only the obligations on the contractor but also any customer dependencies (e.g. the provision of suitable information about the current IT set-up);
  • Think carefully about which pre-contract representations make it into the contract, as well as the status given to any other representations;
  • Agree a clear scope for the services that are to be provided, including specific customer requirements and the specific capabilities of any software. In particular, insureds should make sure they specify the contractual status of that scope of works, since this could be crucial during any disagreements over “scope creep”;
  • Agree a clear process for the implementation of any software (e.g. with proposed milestones and deliverables) and be transparent about timescales and how they relate to costs; and
  • Be specific about how any contract variations will take effect.

Contract and Project management

When it comes to managing an IT project, many parties will put the contract straight in a drawer as soon as is signed it and then never look at it again, unless and until there is a disagreement. 

Such an approach rarely stands either party in good stead. It is far better for the parties to maintain a good working knowledge of the key contract provisions during the life of the project. That way, when issues do arise, they can be logged, reported and addressed (from both a technical and commercial perspective) promptly.   

If issues are not resolved however and they do turn into disputes, this is where a good understanding of the contract really does pay dividends. For example, if a potential contract termination is on the cards, insureds should consider carefully what the relevant provisions say and whether a clear right to terminate has in fact arisen. Terminating commercial contracts early is rarely straightforward and getting it wrong can be costly.   

Insureds should also consider whether there are any informal routes to resolution, before matters escalate. Many IT contracts will contain dispute resolution provisions, which provide for a series of without prejudice meetings between increasingly senior individuals. This can be a useful way to nip disputes in the bud and get a project back on track, rather than letting disputes escalate to the point where a notification to insurers becomes inevitable.

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