Managing Risks on Projects

No project is risk free. Generally following categories of risks are involved on the construction projects:

1. Strategic risks
2. Project risks
3. Programme risks
4. Health and Safety risks

Risks need to be carefully identified, defined, analysed and managed. Following techniques are generally applied for risk management:

• Identifying and applying measures to avoid risks or to reduce their impacts
• Establishing contingency plans to deal with risks, if they should occur
• Initiating further investigation to reduce uncertainty though better information
• Consider risk transfer to insurers
• Considering risk allocation in contracts
• Setting contingencies in cost estimate, float in programme and tolerance or ‘space’ in performance specifications.
• Monitor and control risks. It involves managing the risk register, as the project progresses through the project life cycle. Two important things to make note are that the probability and impact of risks can change over time, and that additional risks can surface either by defect identification or additions to the scope of the project.

Strategic risks and uncertainties affect the core aims and objectives of the Client. By their nature, the occurrence of strategic risks would change the very nature of projects and agreed business plans. Such risks can be identified, monitored and managed if they occur, but are not costed in project budgets.

Programme risks and uncertainties which affect many projects, and which need to be considered fall into three categories:

• Changes imposed by third parties, that may or may not be beneficial to customers
• Value adding opportunities
• Time – certain types of risk which affect the durations of projects.

Health and safety risks are dealt with by adopting ERIC approach. It is briefly explained in the following table:

Programme and outturn cost risks are managed with the following tools:

1. Early Warning Notices (EWN)
2. Programme
3. Target Cost Arrangement + Pain / Gain mechanism
4. Key Performance Indicators (KPIs)
5. Monthly Reporting
6. Supply Chain Management.

These tools are explained in detail below:

Early Warning Notices:

The Contractor and the Project Manger give an early warning by notifying the other as soon as either becomes aware of any matter which could:

• Increase the contract price
• Delay completion or meeting a key date
• Impair the performance of the works in use.

The Project Manager enters early warning matters in the Risk Register. Early warning of a matter that has already been notified as a claim for money and time does not need to be notified as a separate early warning. The Project Manager or the Contractor may instruct the other to attend a risk reduction meeting. In the risk reduction meeting, each may instruct other people to attend if the other agrees. This could include instructing the Employer, other consultants, other contractors and any of the sub-contractors to attend.

At risk reduction meetings, the attendees co-operate in making and considering proposals for how the effect of the registered risks can be avoided or reduced. The solutions are sought, and decisions are made on actions and who would take them. The risks which have already been avoided or passed can be removed from the risk register.

The Project Manager revises the Risk Register to record the decisions made at a risk reduction meeting and issues the revised Risk Register to the Contractor. If a decision made at a risk reduction meeting needs a change to the Specification/Employer’s requirements, the Project Manager issues a variation at the same time as he issues the revised Risk Register to the Contractor. The Project Manager gives an instruction as a variation in accordance with contract. The variation mechanism and the valuation rules in the contracts would apply to the variation.

The EWN process works well, if each and every contractor, consultant and supplier have the same mechanism in its contract in order for the risks to be notified up and down the supply chain. The Contractor should have these mechanisms in its supply chain contracts otherwise the Contractor will never know (until it is too late) the risks faced by its supply chain or have any chance to help reduce or avoid risks. The EWN should not be seen as a pre-cursor to claims but a process for managing risk during the project lifecycle.

Programme:

The intention of a detailed program is to:

• Manage and monitor the progress of the works
• Manage any interfaces between the Contractor and any other contractors the employer may have employed in respect of other projects and
• To assess changes to the time for completion and any key dates/milestone dates arising out of claims for delay under the contract.

The program is an important document for the management of works and as a reporting tool on the progress of the works. The program should indicate float, time risk allowance and terminal float.

The Contractor shall submit a detailed time program to the Employer within 28 days after receiving the notice to proceed. The Contractor shall also submit a revised program whenever the previous program is inconsistent tithe actual progress or with the Contractor’s obligation. Each program shall include:

• The order in which the Contractor intends to carry out the works including the anticipated timing of each stage of design (if any), contractor’s documents, procurement, manufacturer of plant, delivery to site, construction and testing
• Each of these stages of work by each nominated sub-contractor, the sequence and timing of inspections and tests specified in the Contract, and
• A supporting report which includes a general description of the methods which the contractor intends to adopt and the major stages in the execution of works and details showing the Contractor’s reasonable estimate of the number of contractor’s equipment required on the site for each major stage.

Target Cost Arrangements + Pain/Gain Mechanism:

It is commonly used on complex infrastructure projects, where the parties share the price risk through the pain / gain share mechanism. The Contractor is financially rewarded and effectively incentivised to find saving on high-risk project. If the Contractor is incentivised to generate savings (and the savings are split equally under the pain / gain share mechanism) then the employer will also save money.

Typically, under the target cost contract the Contractor is paid his actual costs to execute the works until such time as the pain/gain share is calculated at the end of the project. The actual cost will consist, namely, staff and labour resources, plant, material, equipment, preliminaries, other pre-defined costs (utility costs, licence costs, import costs to name a few) and a fee (to cover the Contractor’s profit).

The fee element may be a fixed fee or a variable fee. If the fee is treated as a fixed fee (this will be adjusted in the same way as the contract price (i.e., the target cost) as the fee is fixed to the duration of the Program.

If the fee is variable, this is a percentage against the actual costs. Typically, Employers do not like fees which are variable as it encourages the Contractor to increase its actual costs as this will in turn increase its fee entitlement. This is more likely to be the situation if the target cost is unrealistic.

FIDIC do not publish a form of target cost contract. Therefore, conditions of contract would need to be bespoke to deal with this type of arrangement.

The advantages of target cost arrangements are:

• The aim of a target cost contract is to share the cost risk on complex infrastructure projects between the Employer and the Contractor.
• If the target cost is appropriately set a target cost contract may help the Employer generates cost saving and achieve value for money

The disadvantages of target cost arrangements are:

• Target cost contracts are not suitable where the scope of works is likely to change as the target cost may be over-inflated to compensate for the number of variations issues
• May be time consuming to agree the target cost due to the fact that if the target cost is incorrectly set, the Contractor pays for the cost overruns
• Labour intensive to administer a target cost contract due to time required to audit and verify the costs.

Key Performance Indicators (KPIs):

KPIs are frequently used in an attempt to incentivise the Contractor as opposed to penalising the contract through sanctions in the contract. We see incentive schedules being developed to focus on the objectives of the Employer to include:

• Incentives for meeting stages of the works by milestones dates or non-time related activities
• Incentives for no breach of health and safety or accidents on site
• No defects at take-over or during the defect liability period
• Completing work under budget (where KPI regime is used similar to a pain / gain share mechanism)
• Training / knowledge transfer to the client.

A contractor may want to consider the impact on the KPIs (especially where there is a date and payment attached to it for meeting it) where:

• Delays occurred caused by risks carried by the Employer
• Suspensions instructed by the Employer
• Termination by the Employer, especially if there is a termination at will clause.
• Breach or act of prevention caused by the Employer

Monthly Progress Reports:?

Following consideration should be given in the preparation of monthly progress reports:

• Remove away from traditional, largely narrative type reports
• Report data driven and graphical – colour photographs showing the stages of the work at dates
• This helps to reduce the size and improve overall readership.

The reports cover:

• Achievement to date
• Goal so far
• Key issues for resolution

Executive matters included are:

• Health and safety
• Environmental
• Security incidents
• Insurance claims
• Stakeholder relations

Besides, scheduled performance and cost performance indicators are included in the reports.

Supply Chain Management:

It includes:

• Influencing critical procurement pre-award and then through monitoring seeking to highlight and mitigate supplier failure post award
• Requesting completed procurement schedules for subcontracted work from Contractors
• Competitive tendering / evaluation criteria
• Mandating the use of tier-2 conditions of contract prepared by the Employer
• Monitor solvency of the Contractor’s supply chain.