Wednesday, October 21, 2020

Counter-party risk


Define counter-party: 
In a transactional relationship, the other party to -- or participating in -- the transaction is your counter-party.
 
In project situations, there are usually many counter-party transactional arrangements, such as contractors and suppliers with transactional relationships. And within the business there may be transactional relationships among business units and the PMO. 
 
Oh! And don't forget the money: there may be financiers of the business or project which have a counter-party relationship to the project.

Fair enough. But now comes counter-party risk: the risk that the other party to the transaction, or perhaps you yourself, will not be able to hold up their side of the transaction.
 
About counter-party risk
So, you are about to enter into a transaction with another party. What might be the risks?
  • Trust: you may not know the other party well enough to convey trust, a willingness to believe what they say without the protections of a written agreement.
  • Ability to perform their side of the transaction may be in question. Do they have all the requisite tools, resources, and experience? Is something required of you in order for the other side of the transaction to be completed?
  • Willingness to perform their side of the transaction when the whole deal comes under stress may require backup
What is your strategy; what are your tactics?
  • Your strategy should be to keep the counter-party fully engaged with intent to fulfill their side of the bargain.
  • Your tactics should be to put in place standard risk management tools: Written agreements with incentives and penalties; sober assessments of their track record on similar activities; and perhaps insurance for consequential damages if the counter-party fails.



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