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Risk is inherent in any business venture, including major projects. These risks, which occur throughout the project life cycle, usually stem from the fact that parties to a project have no way of controlling the unpredictable. There are no known perfect construction practitioners any more than there are perfect designs or that the forces of nature behave in a perfectly predictable way. Change, the key risk that makes projects vulnerable, cannot be eliminated. It is, however, to be managed sensibly so it does not lead to delays, additional costs or, even worse, compromise on quality and safety of delivery.
Risk at various phases
Risk factors are present throughout the project life cycle, from the feasibility study phase to the selection of appropriate procurement and contract strategies and contracting partners, through to managing the construction stage and the operation of facilities.
During the feasibility phase, elements such as political and economic motives can significantly influence any risk study undertaken determining it a viable project, notwithstanding any risk elements that could be inherent, such as environmental issues and cost overburden. More often than not, unless there is a drive for significant government involvement, the project remains privately funded to avoid any commercial exposure to public expenditure. Even where the feasibility study endorses the project, during the subsequent procurement process, there are various risk factors that will continue to exist. These include tenders being sought on insufficient information, inadequate design, limited information on technical requirements or site conditions and inadequate understanding of project jurisdictional requirements (business and regulatory).
At times, it can even be a simple case of failure to understand the full implications of the various stakeholder relationships, which can result in a tender submission that lacks definition, has unrealistic expectations, adopts inappropriate procurement and contracting strategies, has poor documentation and unsuitable supply chain partners. As the competitive bidding process would require the most economical tender, which although technically compliant, there is no saying how successful the project is likely to be until the execution phase.
Therefore, key players to a project, particularly clients, designers, owners and contractors, should set out a step-by-step risk assessment plan covering all phases of the project. This should firstly identify the project objectives, i.e. is it a profit-driven investment or does it serve community needs? Based on objectives, internal project teams need to be established at the tender stage to identify risks through the various stakeholder requirements, quantify their effects (i.e. risk analysis), develop a risk management process, which must include foresight beyond design and construction phase (operational maintenance), and establish appropriate allocation of risks through contractual framework.
Undoubtedly, the risk assessment process is heavily reliant on assumptions made at the relevant time, and so engaging competent and experienced technical, commercial and contractual (including legal) teams as part of the management process is essential. At the time of carrying out a risk assessment during the tender process, owners/developers will need to decide very early on a procurement structure that is either based on a traditional contracting structure (separate contracts with the employer for each package or element of work) or whether to enter into an engineering, procurement and construction agreement (design and build) where there is a single entity contract arrangement.
The latter offers a safer option to owners/developers as it passes risks to contractors/consultants, who will ultimately be responsible for delivery according to agreed project requirements.
Partnering with a contractor in submitting a tender bid addresses both parties’ expectations very early on. Working mutually on risk analysis will require a risk rating of critical, mid-level critical or non-critical. This will set the basis of how par ties will manage these risks in their submission, either through pricing allowance, risk insurability or an outright exclusion. Ultimately, risks will be appropriately allocated to contracting parties based on which party can best control, manage and absorb these risks, giving consideration to resourcing and commercial strength to do so. Bearing in mind the requirements of the client contract, the owner/developer’s advisors will need to draw up a sensible heads of term schedule to reflect the agreed risk management structure between parties.
Clarity in a project
Successful tenders are often based on well-thought-out risk management strategies at the outset of the contract award. This is not to say that risks will be reduced or eliminated altogether upon signing the contract. It certainly makes execution of the plan or managing new risks easier at the subsequent stages of the project, if the right processes have been put in place at the beginning.
It sets the scene for improved clarity in project documentation during project execution and reduces incidences of unnecessary change in project delivery.
Effective risk management identifies possible risks, assesses their probability of occurrence and potential impact, and the selection and development of appropriate management responses. The aim is to manage and control risks before they become problems.
Source: Shamila Neelakandan, Special to Property Weekly
Shamila Neelakandan is Middle East Group Regional Director of Hill International. She is a dual-qualified solicitor (Malaysia and UK) with 19 years of legal, contracts and commercial experience in the construction industry.