TECHNICAL FIELD

The invention is concerned with a system and method for management of contracts.

BACKGROUND

A contract is a legally-binding agreement which recognizes and governs the rights and duties of the parties to the agreement. An agreement typically involves the exchange of goods, services, money, or promises of any of those. In the event of breach of a contract, the law awards the injured party access to legal remedies such as damages and cancellation.

Contract management or contract administration is the management of contracts made with e.g. customers, vendors, partners, or employees. Contract management ensures compliance with negotiated terms and conditions, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution. It is also a process of maximizing financial and operational performance and minimizing risk. Most larger contracts require the effective use of contract management software to aid administration among multiple parties.

The contents of a contract are known as terms or clauses. The main terms are generally the price paid and the subject matter of the contract, e.g. the goods or services provided. A contract clause is a provision therein, which details the agreement to ensure that all parties understand what is expected of the other in the form of obligations, i.e. exchange of promises to be performed.

Since a contract is legally binding every obligation need to be fulfilled. Milestones and events need to be accurately met and payments must match contracted terms and occur on time.

Most construction contracts require the contractor to complete the works within a specified time, either by a particular date or within a set period. These contracts commonly provide that if the contractor fails to complete within that time, a liquidated (that is, fixed and agreed) sum will be payabie as damages for that breach of contract, up to the date when the works are finally completed.

Breach of a contract occurs when a party to a contract fails to fulfill its obligation(s) as described in the contract or communicates an intent to fail the obligation or otherwise appears not to be able to perform its obligation under the contract. Breach of contract results in sanctions, whereby e.g. resulting damages, such as liquidated damages or a contractual penalty will have to be paid by the party breaching the contract to the aggrieved party. Instead of a payment, some kind of a performance might be required for the breach.

The type of clauses for liabilities that can be considered for defining the damages to be paid is either a liquidated damages or a contractual penalty. Liquidated damages shall compensate the non-defaulting party from losses and the amount shall approximately match the actual or potential damages incurred. Contractual penalty awards a lump-sum compensation to the non-defaulting party for damages (similarly to the liquidated damages) connected with a specific breach. The difference is that, unlike the liquidated damages, the penalty clause may impose a sanction on the non-performing party in addition to the compensation. A condition for being charged with a contractual penalty is non-performance or improper performance of an obligation.

Thus, parties to commercial contracts may agree that, if a contractual provision is breached, the defaulting party must pay the suffering party a specified sum of money.

The state of being legally responsible for something is called liability. A limit to the liability, such as to a contractual penalty, is often defined in contracts as a “risk limit”. Contractors endeavour to keep the limit of liability to a minimum, i.e. as low as possible, while in practice the limit is typically set to correspond to the price of the contract. Otherwise, e.g. some small and medium suppliers might be unable to bid for certain jobs simply because they would lay themselves open to liabilities that they could not bear. Unlimited liability can cause contractors considerable difficulty, whereas in some cases, contract negotiations have been difficult to end due to an inability of the parties to agree to liability limits. Contracting parties has a substantial autonomy in defining their respective rights and obligations. Their autonomy, however, in defining remedies for breach can be subject to certain limits, including limits on “fixed sums” payable in the event of breach like in connection with liquidated damages. It is common for the construction of contracts to include a liquidated damages clause that quantifies and limits the compensation which will be payable for certain types of breach. However, owners and contractors often agree on clauses that do not provide them with a sufficient certainty and especially they do risky contracts.

The amount of the contractual penalties can also be objectionable. Freely negotiating parties, not operating under compulsion, would be expected to agree on the amount of a contractual penalty that corresponds to the anticipated amount of the loss which the non-breaching party would suffer in the event of a specific breach of the contract. But in practice the amounts of penalties are often set arbitrarily, with no clear connection to the actual loss. This might e.g. be the case, when a contracting parly has a stronger position and can impose contractual provisions lying solely within its own interest.

Contracting thus create many risks. There is for example a probability of loss arising from the buyer's reneging on the contract, as opposed to the buyer's inability to pay. There is also a probability of loss arising from failure in contract performance from the vendor’s side, which might lead to damages to be paid by the seller. Vendors have the highest risk in fixed price contracts and unlimited damages to be paid.

Contracts can make an organization a lot of money but can cost as much if they are not properly managed.

Institutions might e.g. have some kind of a tool such as a checklist or a review process of the deal in order to ensure the quality of the review process for contracting. Known check lists deal with issues relating to e.g. legal status of parties, performance measures and reporting requirements, possible changes to the contract to be required, specifying jurisdiction for governing law, specifying insurance requirements, and possibly identifying limitations of liability. But they do not deal with overall risks or bad contracting or continuous follow up. All contracts should be reviewed periodically to determine if changes are needed, or even if the contract should be continued but no sufficient tools exist for that purpose. There are challenges in e.g. determining and monitoring risks across the entire portfolio of agreements and during negotiating individual agreements. Risk vary by company, industry, corporate philosophy, risk appetite, business model and level of organization, or because risks might be based on individual decisions and decision makers.

Risks are, however, often perceived as a secondary concern to contracting, and only applicable to the lawyers in an organization. Contracts can, however, affect the entire organization and there is a constant possibility of litigation. Poorly agreed or loosely worded contracts can cost the further opportunities of a business and impact revenue and can have an influence on investors. Bad contracts or contracting processes can ultimately cause the loss of business and slow the growth of the organization. Poor contracts can also be a common result of poor contracting and cause wrong people to sign or approve a contract.

OBJECT OF THE INVENTION

The object of the invention is a solution with which risks of contracts held by an institution can be managed that deal with the above-mentioned shortcomings.

SUMMARY

The system of the invention is intended for management of one or more contracts by means of a contract portfolio with information of the contracts. The system comprises a processor, a memory with a contract portfolio and coupled to the processor, and software executable by the processor to generate one or more state reports of the contract portfolio. The information comprises an individual risk score value for each contract determined on the basis of one or more sanctions, and the contract portfolio has one or more overall risk score values calculated by the software on the basis of a function of the individual risk score values of the contracts.

The computer-implemented method of the invention for management of contracts comprises preparing a contract including a preliminary price and obligations to be fulfilled according to criteria as well as sanctions in the case of non-fulfillment of the obligations. A conventional risk value is determined for the contract as well as an actual risk value on the basis of its sanction. A difference between the conventional risk value and the actual risk value for the contract is calculated. A score for the contract on the basis of a function of the calculated difference is defined. The score of the contract is stored in a contract portfolio together with an identification for the contract. An overall risk score value of the portfolio is determined calculated as a function of the individual risk scores of one or more contracts therein.

The preferable embodiments of the invention have the characteristics of the subclaims some of which are presented in the following.

One or more of the individual risk score values are usually dynamic in time for the contract(s) in question, such an individual risk score value being related to obligations to be performed according to a time schedule, as a consequence of which also the overall risk score value(s) are dynamic in time.

The overall risk score value of the portfolio can be a function of the individual risk score values of all contracts or of a group of contracts, such as a sum of those.

The contracts of the contract portfolio can be grouped by region, country, continent, customer, branch, technology, price and/or subject into two or more groups. Then there can be an overall risk score value for each contract group as calculated by the software.

Each contract comprises criteria for different obligations to be fulfilled for the subject of the contract in the form of time-scheduled numerical values and each contract also defines sanctions for non-fulfillment of the different obligations as a function of delays in the fulfilment. The sanctions of the contract define how they should be paid upon breach of the contract and/or upon non-fulfillment of one or more obligations.

A state report comprises information of risk score values of one or more contracts and/or how much space there is for entering new contracts of certain risk score values that increase the overall risk score value of the contract.

There are preferably rules set for managing the overall risk value of one or more contracts of the contract portfolio, such as a maximum limit for the overall risk score value not to be exceeded.

The information further comprises an identification for each contract to be linked to its individual score value. The contents of the contracts are stored in a database of the contract portfolio.

The system further comprises a database of historical data of finished contracts including information with respect to revenues, losses, sanctions, costs, prices, and non/fulfillment of obligations. The determination of a conventional risk value for the contract is based on market practice, the preliminary contract price, or on factors that are related to the expected risk of sanctions at non-fulfilment of one or more obligations of the contract by using in the determination evaluations or historical data of earlier contracts.

The determination of an actual risk value for the contract can be made on the basis of the sanctions of one or more obligations.

The method preferably further comprises determining a compensating risk premium for the contract if the difference between the conventional risk value and the actual risk value for the contract is a negative number and adding the compensating risk premium to a determined, evaluated or calculated preliminary contract price so as to form the final contract price.

The added risk premium can be a function of the risk for a given sanction, such as a sanction that corresponds to the difference between the conventional risk value and the actual risk value for the contract.

The sanction of the contract can have a liability limit as a clause of the contract to be used as the actual risk value for the contract, whereby the difference between the liability limit and the preliminary contract price is calculated.

The sum of the sanctions can be determined in the form of a mathematical time function.

The determination of the compensating risk premium for the contract can be based on calculating partial risk premia on the basis of the risk of non-fulfillment of one or more obligations and the compensating risk premium for the contract being a sum of those.

The calculation of the conventional and actual risk values of the contract on the basis of its sanction can be performed by using a Value-at-Risk, VaR, method.

The score of the contract to be stored in the contract portfolio is negative if there is no or not sufficient price compensation for the difference and if the difference between a calculated conventional risk value and the actual risk value of the contract to be managed < 0.

The score of the contract to be stored in the contract portfolio is negative also if the difference between a calculated conventional risk value and the actual risk value of the contract to be managed < 0 and its liability limit exceeds a conventional risk value of the contract and if there is no or not sufficient price compensation for the difference.

The score of the contract to be stored in the contract portfolio is positive if the difference between a calculated conventional risk value and the actual risk value of the contract the contract to be managed > 0. The score of the contract to be stored in the contract portfolio is also positive if the difference between a calculated conventional risk value and the actual risk value of the contract of the contract to be managed > 0 and/or there is an over price compensation for the difference when the difference is < 0.

The score of the contract to be stored in the contract portfolio is also positive if the difference between a calculated conventional risk value and the actual risk value of the of the contract to be managed > 0 and/or its liability limit is below a conventional risk value of the contract.

The score of the contract to be stored in the contract portfolio is neutral if the difference between a calculated conventional risk value and the actual risk value of the contract to be managed = 0 and/or if the price compensation for a negative difference corresponds to the difference.

The score of the contract to be stored in the contract portfolio is also neutral if the difference between a calculated conventional risk value and the actual risk value of the of the contract to be managed = 0 and its liability limit corresponds to the conventional risk value of the contract.

The contract portfolio is preferably continuously updated along with changing risk values in the existing contracts upon the proceeding of a project being the subject of the contracts related to fulfillment or non-fulfillment of obligations, upon inserting new contracts and upon removing finished contracts, whereupon the overall risk score value is dynamically changing in time. An overall risk value can be calculated for the whole contract portfolio and/or for one or more contract groups of the contract portfolio.

The overall risk score value of the portfolio or the overall risk value of the portfolio is calculated as a sum or other kind of function of the parameters of the individual risk values of the contracts.

A maximum limit can be defined for an overall risk score value relating to the entire portfolio or some group thereof, the exceeding of which is not allowed by the portfolio or requires an exceptional allowance process.

The overall score value of the portfolio or the overall risk score value of the portfolio is used to manage inserting of new contracts based on their risk values, whereby a software program calculates to space for new contracts with negative risk values to be inserted.

Some further aspects of the invention are discussed in the following.

Contract content

Subject of the contract with obligations

The contracts or written agreements (hereafter the term contract includes both) managed in the invention typically involves at least a subject, a price for the subject, and obligations detailing the subject and are made with e.g. customers, vendors, partners, or employees. The subject is an exchange of goods, services, money, or promises of any of those and they, are made with customers, vendors, partners, or employees. Obligations to be fulfilled for the exchange in accordance with certain criteria are part of the contracts’ content.

A contract is prepared by defining the criteria for e.g. different time-scheduled obligations to be fulfilled for the subject of the contract. Such criteria vary depending on what obligations it is question about but can in addition vary according to e.g. country, country wise regulations, and customer.

The contracts have been made by negotiating the terms and conditions therein in a way that a contract in question is legally binding so that every obligation of its contents needs to be fulfilled. The invention is especially useful for managing risks of contracts relating to delivering of equipment, such as apparatuses and their components, in accordance with certain criteria and especially according to a given time-schedule. Other types of contracts for what the invention is useful for can e.g. be contracts related to projects dealing with developing software solution products for customers.

Such criteria for obligations to be fulfilled might also be defined for the applicability of e.g. components of equipment installations. There might e.g. be requirements for an Internet of Things component that creates an internet connection to software that executes a method. In addition, there might be requirements for installing, security and other quality criteria for the subject concerned.

Contract price and criteria for the obligations

The contents of the contracts prepared consist of terms and clauses, the main term being the price to be paid for the subject matter of the contract, e.g. objects as goods or services provided, and the clauses defining criteria, such as conditions or requirements, for the obligations or duties that define fulfillment.

There are different models for defining a contract price. The contract price can e.g. be a fixed price or the subject of the contract might be charged on an hourly basis in an agreed way. In the latter case, there is usually an estimate of the number of hours needed, which formally can but not necessarily have to be binding. The estimation of the number of needed hours can be used as a basis for a preliminary contract price optionally to be used in the calculation of risks.

The duties in a contract thus comprises acceptance criteria for different obligations to be fulfilled for an element or part of the contract. Such a criterium can e.g. be a criterium for the installation of a component and can have an upper limit and a lower limit for e.g. quality, delivery date, installation date, performance criteria etc.

Sanctions for breach of contract

A contract breach takes place, if the obligations are not fulfilled in accordance with the criteria, which typically leads to sanctions, such as redelivery, cost reduction or compensation for damages. Such a sanction can be a liquidated damage clause or a contractual penalty. The amount of the sanctions can be determined as a sum being e.g. a function in time for non-fulfillment of the criteria of one or more obligations.

Liability clauses might be included in the contracts to protect from being exposed to financial loss due to a breach of contract provision. A contract can therefore have a defined liability limit regarding e.g. the maximum limit for a sanction to be paid, which conventionally is an amount not higher than the price of the contract but can typically be higher if required by a buyer in a strong position. In addition to the contract price to be used as a factor for determining the liability limit for damages, the sanctions or sanction conditions can be used for defining a liability limit upon a party forsaking its contractual obligations.

If there are clauses that impose unlimited or high liability against a supplier breach when compared to a conventional liability limit, additional costs should according to the invention be included in the contract price for compensating the unlimited or high liability. Such additional costs (e.g. compared to what would be a normal or basic price based on e.g a baseline and historical data) can also be related to the probability of sanctions (and their conditions) related to obligations wise risks.

Risks For preparation of a contract, there is determined a contract price and its content with obligations and sanction functions, a conventional risk value for the contract (calculated based on a baseline practice in this text), an actual risk value of the contract (calculated based on a sanction sum or sanction function, the difference between these risk values, optionally a risk premium for compensating a high sanction risk, and a score of the contract. The score is a risk value calculated or determined on the basis of a difference between the actual risk value (or a baseline) and the actual risk value and optionally and preferably also on the basis of a risk premium.

Conventional risk value (calculated by means of a baseline)

The baseline is a contract condition according to market practice being thus a basic risk level, which is calculated in the contract price. A baseline value could be a point value or a range of values within a certain recognized tolerance, e.g. the baseline could correspond to liquidated damages for delays within a tolerance of 0.5 - 2% of the contract price for one week, so if the contract price is e.g. 100.000 EUR, it would make 500 - 2000 EUR per week. The value of a risk premium can e.g. be the product of the risk deviating from the baseline and the likely damage.

The baseline is an economic value (in the form of a price or money sum) and can be determined or calculated in different ways, i.e. as an established risk value calculated on the basis of a market practice principle, as a risk value that is based on a price calculated from conventional obligation-wise risks, or a risk value based on the liability limit compared to the contract price, or just as a risk value estimated in some way. Also, a combination of these ways can be used so that in the calculation of the baseline both the liability limit, the obligation wise risks, and/or some other known factors are taken into consideration.

In principle, the baseline is strived to be determined based on earlier information on similar subjects of a contract, and there can even be an established value for a given subject of the contract, e.g. if the subject consist of delivering of a standardized product, the same product or a similar product as before. Sometimes there might be earlier information of risks with some obligations, whereby the base line is determined obligation- wise before ending up to the baseline of the whole contract.

Different risk factors having with knowledge to do in special cases might influence of the baseline, such as knowledge of some customer with which business historically fail more often than usual, or other special risks.

An example of the baseline is an agreed liability limit, which corresponds to the contract price as a rule of thumb and according to a general market practice. In such a case, the risk is related to the liability limit and is priced in by default. If the liability limit is agreed to be higher, e.g. twice the contract price compared to the market practice, it is not in accordance with the baseline and there is thus a higher responsibility for the supplier and consequently a higher risk. This higher risk has to be priced in in the contract by a risk premium for compensating this higher risk, or then the costs of the risks involved in a contract with a higher risk have to be compensated with other contracts of the portfolio or with other assets.

If there is no earlier information, the baseline might just be estimated in some way for example by comparing to a similar product or contract and adjusting the baseline on the basis of circumstances and other factors, such as higher production costs.

Some obligations are related to risks for the service provider or the like in view of fulfillment in that there are sanctions, e.g. contractual penalties, if not fulfilled.

Sometimes the subject of a contract is very similar to or equal to a previous project. In such cases the risk for contract breach (unability to fulfill the obligations therein) is rather known or can be easily estimated or directly evaluated even with respect to the whole contract or then the risk can be evaluated obligation wise based on historical data.

The baseline can e.g. be determined, estimated, or calculated on the basis of an estimated risk or probability for a given sum of sanctions, in which case the baseline is calculated as the probability multiplied with the expected sanction sum. It is taken into consideration that the sanction sum again is often a function of time (for not having fulfilled an obligation) so the baseline might vary along with the proceeding of a project being the subject for the contract and can thus in some embodiments be time-dependent in the method of the invention.

The default value in money (conventional risk value) for an obligation wise risk (called here the conventional risk value for an obligation) is then the probability for a sanction of a breached obligation multiplied with the sanction sum or the sum with which a suffering party has to be compensated.

In practice, this can be made in a simple way by just calculating with an average risk for a certain sanction to find a baseline to work with or then different percentages for certain sanction sums can be taken into consideration and the calculation ca be performed e.g. graphically or mathematically. There might, based on historical data, for example be a probability of 10% for a damage of 30.000EUR (30 % damage), the probability of 5% for a damage of 50.000EUR (50 % damage) and the probability of 2% for a damage 80.000EUR (80% damage). Then the conventional risk values (baselines) for each percentage are accordingly calculated as 10% x 30% x 100.000 EUR = 3000 EUR, 5% x 50% x 100.000 EUR = 2500 EUR, 2% x 80% x 100.000 EUR = 1600 EUR. Differential and integral calculus and/or graphical solutions can be used for finding a useful baseline.

In the determination of the conventional risk value (baseline), one way is to calculate or consider a price for the risk of a sanction on the basis of the amount to be paid by established methods.

E.g. some “Value-at-Risk” (VaR) method can be used for such a calculation. It provides a single number to summarize a potential risk of a financial instrument being a statistic that measures and quantifies the level of financial risk within a firm, portfolio or position over a specific time frame. There are four different methods using such Value-at-Risk (VaR) models, i.e. the Delta-Normal Method, the Delta-gamma Method, the Historical- Simulation Method, and the Monte Carlo Method.

E.g. Iterative Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables. It is a technique used to understand the impact of risk and uncertainty in prediction and forecasting models. Monte Carlo simulation can be used to tackle a range of problems in virtually every field such as finance, engineering, supply chain, and science.

Probabilities can thus be estimated as conventional risk values for each obligation with respect to its fulfillment. Estimates of probability can be generated from historical data and past knowledge of similar systems and operations, design parameters and objectives, known failure rates and, in the absence of other data, best guesses.

An obligation wise risk can thus be determined on the basis of a conventional risk for an actual obligation on the basis of historical data and/or other expectations. An expected conventional risk value (baseline) for each obligation wise risk is thus determined and a baseline is calculated as a conventional risk value for the whole project based on the individual obligation wise risk values.

A baseline is a general term for a benchmark that is used as a foundation for comparing current and past values. As stated above, the baseline can be calculated on the basis of historical data of similar past projects or data evaluated in other ways, sometimes even on the basis of experiences, expectations, and guesses. The baseline can e.g. be considered to be the starting point against which future values are used for comparison and analysis.

The step of determination a risk value for each obligation of a contract is requiring and there can be tens of risky obligations in a single contract. There is not necessarily any market practice in evaluating conventional risks for some obligations or for an entirety that the contract is concerned with, and in such situations, the risks have to be evaluated without historical data.

A part of the method of the invention is that on-going projects are monitored with respect to fulfillment of obligations in the contracts they are concerned with and data collected with respect to fulfillment or non-fulfillment of the obligations. Caused sanctions are then used as historical data to be used in future contracting.

The type of contract might even be such that any established type of action will not even be developed that would define any market practice. In such cases, an acceptable risk level must be evaluated on a different basis and be defined separately for each case.

Continuously accumulating historical data as collected in the invention facilitate a dynamic improving of the evaluation of probabilities for different risks and their expected risk values as well as the quality of defining a compensating price evaluation for the risks.

Further, in the determination of the obligation wise conventional risks, component wise risks (such as manufacturing defects) and general risks (such as defects related to element type or manufacturing lots) can be separately determined and be taken in into consideration in different ways in the determination of the baseline, since e.g. the general risks can be technical or non-technical.

As a summary, different methods can be used for the determination of conventional risk values for each obligation and thereafter for the whole the whole contract when there are historical data. Obligation wise conventional risks are used to calculate a baseline in the form of a conventional risk value for the whole contract (can here be called a first risk value), which e.g. can be a sum or some other function of the expected (conventional) obligation wise risks.

After having considered the conventional risks from one or more aspects, a risk can be a probability measure in the form of a likelihood that a sanction will occur and it quantifies as a number between 0 and 1 , where, loosely speaking, 0 indicates impossibility and 1 indicates certainty. The higher the probability of a sanction, the more likely it is that the sanction will occur.

Actual risk value for an individual contract

The actual risk value of a contract can be connected to a liability limit of the contract as e.g. required by a contracting party or as negotiated between the supplier and the customer. There can also be a liability limit for all obligations of a contract. If a contract has a liability limit as a clause of the contract, it can be used for calculating the maximum risk value for the contract, thereby decreasing the risk that could be higher if it were based on a sum of individual, clause-based (i.e. obligation-wise) likelihoods of risks. In other cases, the actual risk value of a contract is a sum or some other function of obligation- wise risk values.

The determination of the actual risk value for the whole individual contract is calculated from a function of the parameters or factors influencing that individual risk value. Such parameters can e.g. relate to the risk of non-fulfillment of the obligations that the contract consist of with respect to the sanctions of each obligation, whereby even the sanctions sometimes can have individual limits of liability or a contract-level aggregate limit of liability. The obligation wise sanctions can in themselves be functions of obligation wise risks, so that a sanction for non-fulfillment of an obligation is related to its risk of non- performance.

As in the case of the conventional risk value, also the actual risk value for the individual contract is a probability measure in the form of a likelihood that a sanction will occur and quantifies as a number between 0 and 1 .

A possible existing liability limit can be taken into consideration in the determination of the actual risk value of the contract. As in the determination of the baseline as explained above, one way of calculating the actual risk value for the individual contract is to calculate or consider a price for the risk of a sanction on the basis of the amount to be paid.

As in the determination of the baseline as explained above, also the actual risk value of a contract is then calculated as the probability for the price of a sanction of a breached obligation multiplied with the sanction sum or the sum with which a suffering party has to be compensated.

Such an actual risk value of an individual contract determined on the basis of its sanction can be dynamic in time for the contract in question in that such an actual risk value can be related to obligations to be performed according to a time schedule or other requirements. The obligations are usually related to elements of the subject matter of the contract e.g. with respect to a bigger installation project. The obligation-wise risks decrease upon fulfillment of the obligations.

Risk premium

The risk premium is aimed to compensate for a high sanction risk.

Such a situation can e.g. arise in a contract, where a client according to normal market practice, i.e. baseline, has the right to change a given resource and require this to take place within a month from the request.

If there then is a condition in the contract that the change has to take place within a week with a sanction of 1000 EUR per day for a delay, this condition is a deviation (called delta) from normal market practice and a risk premium has to be calculated to be added to the contract price as an additional price. Assuming that, such a change probably will take 2 weeks, but with a probability of 50% even three weeks, a damage risk of 5000 EUR can be calculated for the first week (and 50% x 10000 EUR for the following week).

Assuming that it is also known that this particular client will require such a change with a probability than is higher than average, e.g. 20% higher, a further addition of 2000 EUR should be added to the contract price, so that the additional risk from baseline should be price neutral.

Score of a contract

The score of the contract is the final risk value of it.

A difference between the conventional risk value (baseline) and the actual risk value for the contract is calculated.

Another way, as indicated above, can be a comparison between the contract price against a possible liability limit, whereby the baseline assumes a conventional liability limit as equal to the contract price.

The difference between the conventional risk value (baseline) and the actual risk value for the contract can either directly be used as a score for the contract or alternatively, after some actions aiming to e.g. compensate for a negative difference in the following way.

If the sanction of the contract has a liability limit as a clause of the contract it can be used for calculating the actual risk value for the contract in some way or it can directly be used as the actual risk value for the contract (multiplied with the likelihood of the risk in question).

A limit of liability conventionally corresponds, as a default, to the price of the contract or some function thereof, in which latter case the difference between the liability limit and the contract price is calculated.

An actual limit of liability of a contract often, however, often does not correspond to the price and can be higher, which can be a high risk for the obligee.

If the actual limited liability is unlimited or unreasonably high, then it preferably should be compensated in the price in some way.

Thus, if the difference between the conventional risk value (baseline) and the actual contract risk value is negative, it preferably should be compensated in the price in some way, e.g. by adding a sc risk premium to the contract price.

The individual score for a contract is preliminary calculated as the difference between the calculated baseline and the actual risk value of the contract to be managed. If, however, a risk premium has been added, it has a decreasing influence on the score.

This score for each individual contract is then used as an input to the contract portfolio database for managing risks.

Contract portfolio

In this text, a contract portfolio is a collection of contracts held by an investment company, a fund, financial institution or individual or any other organization and it is used to measure the current value of these contracts individually and as a whole and the involved financial risks. Furthermore, it is used for managing the contracts in it by controlling the preparation and insertion of new contracts with respect to its influence on an overall score of the portfolio (for definition of the overall score, see the next paragraph) or some groups thereof as well as for monitoring the contracts along with how the projects being their subject proceed. It is also used as a tool for collecting historical data to be used in future contracting.

The contract portfolio comprises a contract or a plurality of contracts to be managed. Each contract in the contract portfolio has an individual risk score value, the so called “score”. An overall score of the whole contract portfolio is defined as a sum or some other function of the score of the individual contracts. There can also be overall risk score values of groups of contracts being then defined as the sum or other function of the risk score values of the contracts of each group. Also, weight sums can be used to calculate the overall score of the whole portfolio or for a part thereof.

The contracts of the contract portfolio can be grouped in different groups e.g. by region, country, country regulations, continent, branch, technology, customer, customer group and/or subject, and then a score can be calculated for each contract group.

Criteria, such as an upper limit for the overall risk score value, can be defined for the overall risk score value for an entire contract portfolio or groups thereof.

The contract portfolio is continuously updated by inserting new contracts and deleting finished contracts, as well as updating existing contracts, whereupon both the individual scores and the overall score(s) is/are dynamically changing in time. A contract can be deleted from the contract portfolio for risk management when all the duties of it have been fulfilled and there are no complaints or claims for compensation from the other part, for example when all components of an order have been supplied. In other words, when there is no risk position by law or otherwise after a given defined or agreed time.

When a contract that has had a negative score has been deleted from the contract portfolio, its overall score becomes more positive and there is space for new risk at a corresponding level. Correspondingly, when a contract that has had a positive score has been deleted from the contract portfolio, its overall score becomes more negative and decreases the space for new risk. Similarly, existing contracts are also updated as a consequence of fulfillment of the obligations therein along with the proceeding of the obligations of the contracts or as a consequence of agreed changes or other changes. Thus, also the proceedings of the projects of the contracts have an influence of the score of the contract on question and consequently on the overall score.

An overall score of the portfolio can, alternatively, be calculated as a function of the parameters of the individual actual risk values of each contract. The parameters of the individual risk values for a contract is primarily calculated from the liability limit of the contract and/or from the risk of sanctions for non-fulfillment of criteria for different obligations to be fulfilled as well as factors that are related to the fulfilling of the criteria.

A score of a contract can have a negative value, a positive value or the neutral value of zero.

A contract has a negative score in case the difference between a calculated conventional risk value (Rbasic) and the actual risk value (R¥ntract) of the contract to be managed is negative, i.e. Rbasic minus Rcontract < 0 or if its liability limit exceeds the contract price and if there is not sufficient price compensation for the difference.

Correspondingly, a contract has a positive score in case the difference between a calculated conventional risk value (baseline) and the actual risk value of the contract to be managed is positive, i.e. Rbasic minus Rcontract > 0 or if its liability limit is below the contract price or if there is over price compensation for e.g. a negative difference.

Further, a contract has a neutral risk score value in case there is no difference between a calculated conventional risk value (baseline) and the actual risk value of the contract to be managed, i.e. Rbasic minus R¥ntract) = 0 or if its liability limit corresponds to the contract price or if the price compensation corresponds to e.g. a negative difference.

For instance, if there is a contract with three terms deviating from their respective baseline risk values, the impact on the portfolio is a sum of these deviances. One of the terms can e.g. be a jurisdiction clause that increases litigation costs, another term can e.g. be a strict delivery timeline that increases risks of liquidated damages for delays and finally, the third term can e.g. involve higher liquidated damages than usual in this kind of contracts.

Advantages

Thus, the invention provides a solution, with which contractors can move away from a position of a conventional risk calculation based on a recognized baseline through careful consideration and assessment of the likely events and consequences that may lead to damages where the contractor may be held liable. Such consideration is in the invention based on detailed knowledge of the contract scope of work and the nature of any services and deliverables as well as a continuous monitoring of the proceeding of the project being the subject of the contract.

The way of the invention, for managing risks for being obligated to pay damages or cover additional costs, protects an institution or the like from loss since the invention provides better information of on-going risks and the system of the invention enables an improved transparency of what factors influence on the risks of on-going contracts and contracts to be prepared.

The method of the invention can be used for evaluating and managing risks of a single contract as such as an entirety as well as obligation wise and with respect to a group of obligations. When a defined entirety of obligations is evaluated, a sum of probabilities of risks of each obligation is handled.

The method can further be used for evaluating and managing risks of the whole contract portfolio of an owner as an entirety, as well as of a group of contracts per e.g. country, partner, branch, etc. A continuous evaluation of risk over time can be performed by using the method of the invention. This can also be done in situations, wherein inapplicable systems are replaced by applicable ones in non-conformity situations, in which obligations are not fulfilled. A component can for example break and are thus not applicable anymore in order to fulfill an obligation and produces an inapplicability alarm and thus a risk for damage. In quality management, a nonconformity (sometimes referred to as a defect) is a deviation from a specification, a standard, or an expectation or here a non-fulfillment of an obligation.

As said, the method of the invention can be extended to be used for evaluating and managing risks of a group of contracts of the entire contract portfolio.

The method also provides a way to get improved and dynamically updated data of risks of a specific area, product, partner or supplier. Thus, each unit can independently manage risks within determined risk criteria.

Conventional methods do not define risks by probability when criteria are evaluated in implementation of systems. A conventional method can e.g. produce an error alarm upon a negative result meaning that the system does not fulfill set criteria, for example if a component fills required criteria, and automatize such a process. Such a conventional method does not take probabilities into considerations for non-conformity situations or damages in relation to those.

The method of the invention can be used to make decisions on the basis of probabilities taking overall criteria into consideration.

The invention provides a new and advantageous way for managing risks for non- conformity situations. With a non-conformity situation, there is meant a situation deviated from an expectation or criterium of an element of the contract or a condition not met.

Dynamic methods for managing non-conformity risks with which decisions could be made on the basis of overall risks are not known - not known contract wise and neither not known for managing overall risks for an entire contract portfolio or groups thereof.

The method of the invention enables improved decision making since risks for consequences and sanctions can be managed and obligation wise changes can be made along with the management by monitoring on-going projects. The method of the invention can also take an external criterium or factor into consideration, such as a competence of an installer or the relevance of documentation in defining criteria. On a general level, the invention provides a better insight in to risks and decision making related to entireties by seeing “the big picture”. The invention also enables methods for risk managing for some special business units or other sectors with the same principles. Furthermore, the invention especially enables unit or product specific, independent (sub)portfolio management under set criteria and therefore, simultaneously enables a well-structured corporate level risk management.

The method of the invention can furthermore take such data into consideration in the risk evaluation, which is produced by the data system itself, such as competence requirements of the installer or criteria concerning proper testing documents. In other words, factors relating to criteria to be fulfilled. These factors are used as additional criteria.

The method of the invention provides tools to evaluate when a system is not applicable (in other word is inapplicable) and also the risk level of damages related and in which extent the system is not applicable. Other factors and parameters than these criteria can be taken in consideration as additional criteria on the basis of which the inapplicability of factors can be evaluated in the light of these additional criteria and then produce a new updated evaluation of whether e.g. a component should be replaced, repaired or be left where it is.

The method also allows changing of criteria to be fulfilled from the original ones. Thus, an earlier validated component might not be in accordance with new criteria set.

The features of the additional criteria and the changing criteria makes the method dynamic and produces at each time an updated evaluation of a situation at present time.

The system of the invention uses advanced software for comprehensive data collection and analysis. The invention can also be utilized for management of different compliance risks in a corresponding way, especially in supply chains. Organizations are responsible in front of their customers and authorities in an increasing extent in following quality and regulation requirements. Compliance risk is the potential for losses and legal penalties due to failure to comply with laws or regulations. In many cases, businesses that fully intend to comply with the law still have compliance risks due to the possibility of management failures.

The method can also be used for management of general regulation risks. If for example country wise regulation risks are defined for products, the amount of responsibilities can be evaluated in relation to supplied products, contracts and services separately for each country and product.

In the following, the invention is described by means of some example embodiments by referring to figures. The invention is not restricted to the details of these examples.

FIGURES

Figure 1 is an architecture view of the system of the invention

Figure 2 is a general flow scheme of the method of the invention for creating a contract portfolio Figure 3 is a general flow scheme of the use of the contract portfolio created in figure 2

DETAILED DESCRIPTION

A computer system of the invention as described in figure 1 for management of a plurality of contracts in a contract portfolio generally consist of a processor 1 that controls the overall operation by processing data and a memory 2 that holds the software programs and data to be processed. The computer system further includes interface units and drives that stores and reads information that are used by the processor 1. One such unit is an input device 3 that a user can interact with, such as a keyboard, for inputting new data and for change of data through a user interface 4 for communication. The user interface 4 is a communication interface that may be a part of the processor 1 or can be a separate component and created in software or be a physical connection in hardware. The communication interface 4 is configured to connect with a display 5 also belonging to the computer system. The display 5 is an interface for the user to see the functioning of the processor 1 , in other words, it is an interface with the software stored in the memory 2.

A bus 6 can be used as a communication system that transfers data between the components inside the computer system including all related hardware components (wire, optical fiber, etc.) and software, including communication protocols.

The memory 2 can communicate via the bus 6 and can include said drives. The memory 2 can consist of one memory or several memories and can be separate from the processor 1 or be part of it.

The memory 2 stores instructions executable by the processor 1 according to functions performed by software programs 9 and 10, which are tools to perform the invention. The software programs 9 and 10 can be in a separate drive unit.

The memory 2 can store a database 7 with contract documents of at least one owner, such as an organization, company or the like. Each contract has been stored with an individual risk score value, “a score”, and an overall score of the entire contract portfolio or of a group of contracts has been calculated and stored on the basis of the individual risk scores of the contracts. The individual scores and the overall scores are dynamic and changing in time.

A module comprising a contract portfolio 8 is a database connected to or is in the database 7. The contract portfolio 8 discloses pairs consisting of an individual risk score value and an identification for the contracts concerned so that each pair consist of an identification (ID) of a contract and its individual risk score value, i,e, its score. There might be a link to the contract document itself from the ID.

A first software program 9 or tool A generates analysis of the overall state of all contracts or some groups of contracts by an algorithm that takes individual risk score values (of individual contracts) into consideration when calculating an overall risk score value for the whole contract portfolio or for some group of contracts of the contract portfolio. Thus, risk score values might be calculated for e.g. contracts in a given country, of a customer, branch, for contracts concerned with certain country wise regulations, for contracts of a given price range, of given subjects etc. The overall risk score value of the portfolio is a function of the individual risk values of all contracts or of a group of contracts, such as a sum of those. A risk score value of a contract can be negative, positive or neutral. If a contract has a negative risk value, it can be considered risky and some sanctions are probable. If, in the contrary, the risk value is positive, the risk for sanctions is lower. The portfolio 8 has stored data and information of the status of contracts and it is continuously monitored and updated along with how the projects being the subject of the contracts proceed and the obligations fulfilled. Thus, an individual risk score value for a given contract is tightly related to obligations to be performed according to a time schedule, as a consequence of which also the overall risk score value(s) are dynamic in time.

This risk score value for an individual contract as well as the identification to which contract it is associated with (and the contract file itself) are used as input to the contract portfolio database 8 for managing risks by using an input device 3. Also, the contract itself is stored in the database 7.

The input device 3 can also be used for making changes in existing contracts and software, which then calculates a new contract risk score value for the contract in question. The software 9 (or tool A) can also calculate a value for how much space there is for new risky contracts to be inserted for facilitating contract preparation and management.

Different rules might be set for managing the overall risk value of the contract portfolio. Such a rule might e.g. consist of a maximum limit for the overall risk score value as a risk level not to be exceeded. The system can e.g. be constructed not to accept input of a new contract, which would lead to an increase of the overall risk score value beyond the set risk level or alternatively, a special function of the acceptance of such a contract would be required. Such risk levels, which can be mutually different, could be determined separately for one or more groups of contracts.

A second software tool 10 (tool B) monitors the individual contracts with respect to the return of each project against its price, expected baselines, risk premia, sanctions and time schedules. This information is then stored as historical data to be used in the future at determining liability limits, baselines, sanctions and risk premia. Thus, the projects being the subjects of the contracts in the contract portfolio are followed up with the software program 10, i.e. tool B. The follow-up can be performed by controlling action points of each contract in that how the project proceeds and by inputting information of the proceeding by using input device 3 or some additional input device. The information is put in in a form that software tool B can relate the proceeding to the obligations in a contract and analyze updated risks for sanctions of individual obligations or an entire contract. In this way, the score value of individual contracts, groups of contracts or the entire portfolio is dynamically changing in time upon fulfillment of obligations, upon non-fulfillment of obligations and when being close to a time that there is a risk for that or it is probable that one or more obligations will not be fulfilled. In some embodiments, the software program 10, i.e. tool B can alarm or warn when upon checking an action point it seems that an obligation has not been fulfilled or is close to not being fulfilled. The software tool B might use machine learning algorithms and/or Artificial Intelligence for recognizing risk situations. Information from the follow-up is further analyzed by software tool A.

The method of the invention can be used by any organization or enterprise or the like having contracts to be managed in controlling risks. The risks to be controlled are concerned with sanctions upon non-fulfillment of obligations agreed on in the contracts. The risks are controlled by using a contract portfolio of the invention, the use of which is described more in detail in figure 3. The contract portfolio comprises a database with on- going contracts of the organization and software for monitoring and steering contract handling.

Such an organization, enterprise or the like might deal with contracts of delivering service or products of only one type or technology with only a few variations and therefore might have quite detailed information of past contracts to be used in evaluating risks. The projects being the subject of the contracts can in spite of that have a whole list of obligations to be fulfilled. Examples of such products can e.g. consist of development of software solutions for document handling, project management and the like.

Other organizations, enterprises or the like might deal with many contracts concerned with huge projects of e.g. construction of buildings, industry solutions comprising the delivery and installing of different components. Such huge projects often have insufficient historical data for making exact evaluation of risks and they can have a big number of obligations to be fulfilled.

Naturally, contract management is simpler the less contracts there are, the less different types of contracts there are, and the less obligations there are in the individual contracts. Also, much historical data of similar projects facilitates contract management.

The system can also have a separate database (not shown) for collecting information for the definition of baseline in future projects. The collecting can optionally be automatized by software or such information can be put in by input device 3.

Figure 2 is a general flow scheme of the method of the invention for managing a contract and its preparation the subject of which e.g. can be an assembly installation.

When starting preparation of a contract between e.g. a supplier and a customer, issues to discuss and agree with respect to terms and conditions are e.g.

- the name of the supplier and the name of the customer

- a subject

- e.g. a project concerning an assembly installation to be installed by the supplier

- elements in the form of parts constituting the subject

- e.g. specifying components and their delivery needed for the assembly

- specified obligations for the fulfillment of the different elements of the subject

- acceptance criteria, such as a time schedule and other requirements for the fulfillment of the obligations

- e.g. a time schedule for the delivering and installation of each component and technical requirements

- sanctions in the form of money or price reduction defined as a function in time for non-fulfillment of the criterium of each obligation, sometimes including a

- a limit of liability for the sanctions, and

- the contract price in the form of a fixed price for the subject of the contract or on charging on hourly basis, whereupon, it is usually evaluated how many hours are needed and thus what the total price will be. A baseline in the form of a conventional risk value for such a contract under preparation is determined in step 1 based on e.g. the conventional risk values of each obligation. The baseline, in the form of a conventional risk value for the whole contract (called here a first risk value), can e.g. be a sum or some other function of the expected conventional obligation wise risk values. In order to be able to estimate such a conventional risk value, probabilities for not being able to fulfill an obligation is calculated on the basis of historical data of similar obligations and projects as well as possible other circumstances case by case. When there is no historical data, the baseline is just evaluated in some other way, e.g. based on some kind of experience. A price can be calculated for the risk of a sanction for each obligation in case of non- fulfillment of the obligation on the basis of the compensation amount of the sanction. Some “Value-at-Risk” (VaR) method as explained earlier can be used for such a calculation. It provides a single number for the risk over a specific time frame.

Partial baselines can thus be calculated first as the prices for the conventional risks of each obligation. Thereafter, a baseline in the form of a conventional risk value for the whole contract can be calculated, e.g. as a sum of the partial baselines or by using some some other function.

In step 2, the prices for the obligation-wise risks are calculated on the basis of how the sanctions are defined to be paid in the drafted contract under preparation. These prices are then used to calculate a price for a contractual (or actual) risk value (called here a second risk value), which e.g. can be a sum or some other function of the obligation wise sanction-based contractual risk values.

In step 3, the difference between the calculated baseline or the conventional risk value and the price for the actual contractual risk value is calculated. In step 4, it is decided how to proceed based on the result of the calculation of the difference.

If this difference is negative (minus -), the difference should be compensated by adding an extra cost to the contract price in step 5. The extra cost is a risk premium, which can be the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset in order to hold the risky asset rather than the risk-free asset. It is positive if being risk averse. Thus, it preferably is the minimum to accept compensation for the risk.

The risk premium may also be a measure of the extra return to bear risk - a market portfolio’s reward-to-risk ratio. Thus, the risk premium is a type of compensation for bearing the additional risk, compared to that of an asset with virtually no risk, in a given investment.

Thereafter, steps 3 and 4 are repeated as steps 6 and 7 and if step 5 was omitted or not needed and no compensating price is inserted (the compensating sum being zero), or an insufficient compensating sum was inserted, a negative score value is stored and calculated for the contract in step 8. The calculated negative score value of the contract is inserted together with its identification in the contract portfolio of the invention.

If the difference calculated in step 4 or step 7 is positive (plus +), a positive score value of the contract is inserted together with its identification in the contract portfolio of the invention in step 9.

If there is no difference as calculated in step 4 or step 7 and the difference is zero (zero 0), the score value zero for neutral is inserted for the contract together with its identification into the contract portfolio of the invention in step 10.

The absolute negative and positive score values depend on the difference calculated as a sum of contracts in a portfolio at any given moment or as a sum of each subcategory of contracts in a portfolio. This e.g. gives effective information of increased risks in a geographical area, business unit or a service or a product line.

Figure 3 is a schematic view of the use of the contract portfolio of the invention.

The contract portfolio is a collection of the contracts to be managed, which are identified together with their individual score value. Each time a new contract is inserted or intended to be inserted in the contract portfolio (by referring to figure 1 with respect to portfolio, databases, and communication interfaces) steps 1 - 5 of figure 3 are gone through.

After having inserted a contract with its risk score value in the contract portfolio in step 1 , the overall risk score value of the whole contract portfolio is updated in step 2 by calculation according to an equation as a function of the other risk score values of the other contracts in the contract portfolio. Overall score values for a group of contracts may also be updated and calculated according to which group the new contract belongs.

The contracts maybe managed for risks by having a determined maximum limit for the risk core value of the whole contract portfolio.

Each insertion of a new contract usually changes the risk score value of the whole contract portfolio. In connection with step 2, it is advantageous to calculate the difference between the maximum limit for the risk core value of the whole contract portfolio and the current risk core value of the whole contract portfolio, which gives information for how much there is space for increasing the risk and thereby making it possible to already in advance avoid new contracts which would increase the risk core value of the whole contract portfolio in an unacceptable way.

The determination of a maximum limit for the risk core value of the whole contract portfolio might be defined absolute for the contract portfolio in such a way that the contract portfolio simply does not allow insertion of new contracts which would cause the maximum limit for the risk core value of the whole contract portfolio to be exceeded as is illustrated by steps 3 and 4.

The contract portfolio is anyway continuously followed up after steps 3 or 4 by monitoring in step 5 the on-going projects which are subject of the contracts. The risk values of the obligations in the individual contracts are changed along with that the projects proceed and consequently also the risk values of the contracts themselves.

Therefore, the parameters, factors, and data influencing the risk values and scores are updated and fed into the system by referring to figure 1 in this respect.

When a risk value of a contract changes/is updated, the method continues with repeating the method by performing steps 2 - 5 again. When a project has been finished and all obligations of the contract it was concerned with are fulfilled (or it is interrupted or stopped of some reason) and there can no more be any responsibilities or the like, the contract in question can be removed from the contract portfolio in step 6. Such a removal usually causes a change of the risk score value of the whole contract portfolio, whereby steps 2 - 5 are repeated again.

When a project has been ended, information can be collected in step 7 on fulfillment on obligations, sanctions etc. and such information can be used as historical data in the determination of the baseline of conventional risk values for future contract evaluation in e.g. steps 2 and 3 of figure 2. In that context, different types of risks can be identified an be separately handled and managed, such as component wise risks (for instance manufacturing faults) and general risk concerned with the obligation type). Such information can be collected in a separate database (not shown in figure 1 ).

Projects can be written up or be written down depending on if there was a revenue. In terms of rules of revenue recognition, there is a booking value of a contract at the moment of entering into a contract. In case that e.g. actual costs are lower than an estimation, a contract has a higher value as it generates more revenues than booked, and in accounting, there needs to be a respective write-up. In an adverse case, the costs could be higher, and a contract generating less revenues than booked, there needs to be a write-down. The same applies in case of a breach triggering e.g. liquidated damages; unless there is a risk premium covering such a lost, there needs to be a write-down.

The contract portfolio can also be divided in different parts and be managed on the basis of e.g. region, country, continent, customer, branch, technology, price and/or subject. Such parts can have different limits for the overall risk score.

EXAMPLE 1

It is assumed that a contract between a customer and a supplier has a suggested price of 100.000 EUR and a liability limit of 100.000 EUR.

The contract has a neutral risk score value since its liability limit corresponds to the contract price in accordance with a baseline assumption of 1 :1 . EXAMPLE 2

It is assumed that a contract between a customer and a supplier has a suggested price of 100.000 EUR and a required liability limit of 150.000 EUR.

Such a high liability limit clearly means a higher risk for the supplier than the market practice calculating with a baseline of 1 :1 , that would be 100.000 EUR.

Thus, the conventional risk value is here 100.000 EUR and the actual risk value for the contract on the basis of its sanction is 150.000 EUR.

The difference between the baseline sum (= the conventional risk value) and the required liability limit (the actual risk value for the contract on the basis of its sanction) is here thus 50.000 EUR.

In this example it is assumed that, based on historical data of similar contracts, it can be expected or evaluated that the risk for a sanction of 50.000 EUR is 10%, in other words 5000 EUR.

If 5000 EUR now is added to the contract price as a risk premium, the contract can be given a neutral score value of zero to be inserted in the contract portfolio.

If no risk premium is added (e.g. because the parties can not agree on such an additional price and the supplier accept the suggested starting conditions), the contract is given a negative score value to be inserted in the contract portfolio.

EXAMPLE 3

It is assumed that a contract between a customer and a supplier has a suggested price of 100.000 EUR and also a required liability limit of 100.000 EUR.

Historically, it is known that there is in average a 10% risk for a 30% sanction, a 5% risk for a 50% sanction, and a 2% risk for a 80% sanction.

The total conventional risks are calculated as being 7100 EUR based on the following:

- 10% ^* 30% ^* 100.000 EUR producing a conventional risk value of 3.000 EUR for this risk

- 5% ^* 50% ^* 100.00 EUR producing a conventional risk value of 2.500 EUR for this risk - 2% ^* 800% ^* 100.000 e - producing a conventional risk value of 1.600EUR EUR for this risk

The baseline is calculated as the product of the probability (based on historical data) and the expected sanction.

A risk premium is a function of the conventional risk values. Graphically it means that its value starts from zero and increases fast. The function turns to be more horizontal when the baseline decreases. At some point the value is so small that there is no meaning of adding such small sums to the risk premium anymore. A liability limit of 100.000 EUR is assumed and thus the contract price and liability limit is 1 :1.

A risk premium of 7100 EUR should be added to the contract price. Here the risk premium therefore covers the additional risk, i.e. the deviation from the baseline.

The sum of 7100 EUR is the risk premium for an additional risk caused by a given deviation.

If e.g. a probable damage should be 1.000.000 EUR with a 50% probability, the expected value of the damage would be 500.000 EUR. if in this case, the liability , limit would be only 100.000 EUR, it would not be necessary to calculate the risk premium on the basis of the real risk for the damage, but instead only on the basis of the liability limit of 100.000 EUR.

When the liability limit condition deviates from the 1.1 level, an own value has to calculated for it.