One of the core areas of protection for a technology business is Professional Indemnity, and one of the most important aspects within that is Breach of Contract cover. This isn’t included in a basic Professional Indemnity policy, which is why all technology companies should purchase a suitable specialist package that provides it.
A significant proportion of claims for tech organisations are triggered simply by a breach of contract, non-performance or delay in delivery. With so much that can go wrong, we thought we would touch on a few factors that influence this and demonstrate just how valuable Breach of Contract protection is.
Deadlines and project duration
In the digital sector, some projects can be short and simple, such as a basic website where the end deliverable is signed off straight away. However, many projects are much more demanding than that, often lasting years and sometimes with critical completion dates.
Imagine an agency looking to develop an app for the next World Cup. It must be delivered before the tournament, or it becomes redundant. Hitting deadlines is therefore critical, and failure to deliver on time could result in a significant claim under breach of contract.
Longer projects can also lead to additional alterations to client specifications, which increases the risk of allegations that contractual obligations haven’t been met. Whether it’s from change management issues, contract scope creep, unexpected delays, or missed deadlines, ultimately, it all results in contract non-performance and potential litigation.
Another important thing to consider is how quickly technology changes, such as search engine algorithms which would then require adaptations to coding. In extreme situations it can leave deliverables obsolete. Though usually it just involves additional work for the agency to make sure the project succeeds – again putting pressure on deadlines.
Other issues that can have unexpected impacts on long contracts include tax or grant availability matters and even government sanctions.
Non-standard contracts
It’s always recommended to work under your own terms and conditions wherever possible. But for larger contracts, it’s likely that these will have to be amended, or you may need to work under entirely bespoke contracts provided by your client.
This increase in variables ups the risk that something could be missed, leading to an unintentional breach of contract. It may be as simple as the client wanting to use a contract that’s either too generic, or for non-technology deliverables, having incorrect terminology which can be construed against the agency.
One of the problems we see when an agency is contracting with a much larger entity is that they feel unable to challenge onerous clauses for fear they’ll miss out on the lucrative opportunity. This leads to them signing the contract, unaware that they won’t be able to deliver, and leaving them open to litigation at the end – which the larger entity will certainly have the money to pay for.
Agencies need to be brave, as the potential consequences in failing to deliver the contract can be catastrophic. Don’t assume that the client will be intransigent. Negotiating shows that you aren’t desperate for the work, and demonstrates professionalism and diligence that can lead to your agency being taken more seriously by large clients.
Project management
Complex projects are just that – complex. Delivering a diverse range of inter-reliant actions, with different deadlines, and often fully dependent on others to complete certain elements, can be a mammoth task.
Whether it’s awaiting client assets, managing multiple freelancers, or even coping with non-supplier deliverables, such as services from hosting companies or software providers, there are always aspects where the project manager has limited control.
As such, effective project management is all the more important. This includes strong contract risk assessments at the outset, and robust monitoring throughout the lifetime of the contract, to a period post-completion.
Appropriate contingencies on time and cost are vital, but not infallible. That’s why it’s crucial to have full Breach of Contract protection within your Professional Indemnity – as no matter how well you might manage a challenging project, there are always variables outside of your control that can derail it, leading to expensive litigation.
Commercial considerations
When quoting the Professional Indemnity for a tech agency, insurers usually ask for details on some of their largest contracts, so they can compare them to the agency’s turnover. This is to ensure the contract doesn’t represent a disproportionately high percentage of the company’s income. As if that happens, the risk of losing the contract can severely impact the business.
It can also affect the lengths the agency would go to to keep the client happy, which in turn can cause contractual issues. Ultimately, if a company is desperate to retain the client, they might agree to unwise obligations, perhaps even going beyond what was initially agreed.
This commercial pressure is common in the tech sector, where agencies are desperate to win and please those big clients. In this competitive environment, it’s easy for the business development team to over promise, leaving the rest of the company exposed and struggling to deliver what was agreed.
Got a question?
These are just some of the reasons why Breach of Contract cover is central to any Professional Indemnity programme, especially for tech and digital agencies. We know it can be a lot to digest, but understanding this is key to protecting your business in the long run.
If you’ve got a question about what we’ve covered here, or you want to double-check that your Professional Indemnity policy includes Breach of Contract protection, reach out to our team today. Call us on 0161 533 0411 or email info@riskboxuk.com.
Photo by Farzad Nazifi on Unsplash
