Uncapped Liability – Bridging the Abyss

We have all seen those movies where the action hero races blindly through an overgrown jungle, only to come to a skidding halt and teeter on the edge of an abyss, arms flailing wildly to maintain his balance. The bad guys are in hot pursuit and only a flimsy rope bridge of indeterminable age spanning the gorge before them offers hope of escape. He peers down into the dizzying depths and thinks “What do I do; turn back and look for another route or step forward?” Of course the hero always pushes on and prevails in the end but this does not always happen in the land of tender and that bottomless pit called uncapped liability.

Roll the dice

Uncapped liability means there is no limit to the damages that government can sue you for if something goes wrong. For example, if the equipment you installed develops a fault, catches fire and burns down a $40 million building, the government can sue you for the replacement cost, never mind your original project was only valued at $130,000. In the face of such a “take it or leave it” stance by government in the past, companies faced a dilemma; roll the dice and take on the contract with fingers crossed their fingers, or walk away.

An emerging ground shift

In recent times there has been something of a ground shift with federal government departments starting to consider capping liabilities after pressure from industry. But how does this happen and what does it mean for you as suppliers?
In the lead up to a Request for Tender being released there is a raft of approval documents that need to be prepared and approved. Among these is a risk assessment plan specifically designed to identify risks and estimate the potential cost to the department if things go wrong. Such risks are not your typical project risks of financial viability or key personnel resign in favour of another job. Rather, the risks are issues such as damage the supplier might do during installation, databases becoming corrupted or a server catching fire and causing damage to a server room.
While the risks are assessed in terms of the usual “likelihood to occur” and “impact” they are also assessed on the cost of fixing the problem. For example, if a server catches fire and damages the server room it might include the cost of equipment and refurbishing the room. Alternatively, should your databases be corrupted it might incur six months salary cost for two staff to recreate the database. The cost for each is then tallied to arrive at a total cost for all risks after which the Department is able to decide whether the standard business liability insurance of $10 million will cover the costs. If so, the department may include a clause in the RFT that it will consider capping the liability.

Death is not certain

Coming back to the adventure metaphor and our teetering hero; with the liability now capped the seemingly bottomless pit below the ancient rope bridge now has a drop of only 5 metres. Sure it will hurt if he falls but the damage is unlikely to be fatal and he will be able to scramble out the other side. With such an assurance our hero will step forth onto the bridge and continue his escape with the treasure. While this would undoubtedly make reduce the movie as a spectacle, it would surely make you feel a lot more comfortable about bidding for a government tender.

So the next time you come across unlimited liability in an RFT consider that there could be the opportunity to cap your exposure to an acceptable level and continue your quest for the booty. After all, isn’t there just a little bit of Indiana Jones in all of us?