Government Contracts Risk Allocation Mark Wearen MInstCES ASCS MRICS MCIOB Bruce Shaw CivilEx March 2009
Bruce Shaw Partnership � Ireland’s largest Cost Management Firm Offices in Dublin; Cork; Limerick; Belfast � � European offices in London, Bucharest and Warsaw Specialist divisions � – Civils; M&E; Healthcare; Retail; PPP; Consulting Services Ireland’s largest cost database � � Currently working on many of Ireland’s largest projects Bruce Shaw Partnership
Presentation Overview Context of Risk Transfer - Why the new forms? � � Key Aims How are these aims to be achieved � Employer’s Perspective � Contractor’s Perspective � Bruce Shaw Partnership
Why the New Forms? History of Cost Overruns � – Budget Vs Tender Vs Final Outturn Consultancy Contracts � – Payment linked to construction outturn Concern over Value for Money � Multiplicity of contract forms – inefficient � Bruce Shaw Partnership
Why the New Forms? - MCC Project Delivery - Stages Prelim Planning Detailed Planning Implementation Review Desired Budget Profile ‘Overrun’ Estimate Contract Award Desired Contingency Profile Final Account Time Contingency, Budget and Project Delivery Stages Bruce Shaw Partnership
Risk Allocation, Key Aims Greater Cost Certainty � Lump Sum Fixed Price Contract � � ‘Optimal allocation of risk’ – ‘the more comprehensive the information…the greater the risk transfer’ Value for money � – Quantification ?....see also optimal allocation of risk More efficient project delivery – standard forms; fewer disputes ??? � Bruce Shaw Partnership
How Aims are to be achieved � The Capital Works Management Framework – Introduces a structured framework for project delivery from Preliminary Planning stage to close-out – Procedures and Contracts – Defined procedures for the preparation of budgets – Formats & Component listings • Risk Assessment • Inflation Provision – Deliverables • Budget Templates • Risk Register (Note : Appraisal stage covered by Cap Ex Guidelines – Feb 05) Bruce Shaw Partnership
How Aims are to be achieved Risk Transfer………. to the Contractor as per the Contract includes � – Programme Contingency – Design by Specialists – PVC (first 36 months) – Design of the Works – the adequacy of the Works Requirements (D&B Only – Cl. 1.7 & Cl. 4.6.2 – also ‘Factual Errors’) – All other risks not expressly allocated in the Contract Bruce Shaw Partnership
How Aims are to be achieved Risk Transfer………….Optional as per Schedule K Compensation Events Risks � • Pricing Document (BOQ) differences >€500 (not in D&B) – Lump Sum Option in practice • Unforeseeable Archaeology • Unforeseeable Ground Conditions (option not in D&B) • Unforeseeable Utilities (option not in D&B) • Unforeseen Utilitiy Owner Delays If options are not completed – Risk lies with the Contractor � Bruce Shaw Partnership
How Aims are to be achieved � Contractor carries all other risks not expressly allocated in the Contract (Articles 3 and 4) � This includes Unforeseeable Ground Conditions/Unforeseeable Utilities Risk under the D&B Contract Article 4 states: ‘The Contractor has included in the initial Contract Sum allowances for all risks , customs, policies, practices, and other circumstances that may effect it’s performance of the Contract, whether they could or could not have been foreseen , except for events for which the Contract provides for adjustment of the initial Contract Sum.’ Bruce Shaw Partnership
How Aims are to be achieved Schedule K risks which are carried by the Employer include : � • Change Order (includes impossibility in Emp Design Only - Cl . 4.5.4) • Factual Errors (Emp Design Only) • Late Instructions (Emp Design Only) • Failure to allow occupation • Employers Personnel on site…unforeseeable • Breach of Contract Price Variation – Employer Risk after 36 months & Hyperinflation � Bruce Shaw Partnership
How Aims are to be achieved � Lump Sum Fixed Price with Cost Certainty except for : – Compensation Events (includes Breach) – Price Variation (in strictly defined circumstances) – Value Engineering Proposals (Cl. 4.8) – Savings Only (Note Employer powers to set-off and withhold amounts – Cl. 10.9 and Cl. 11.4) Bruce Shaw Partnership
Risk Allocation, Employers Perspective � Contract achieves Risk Transfer � Fixed Price Lump Sum should be achievable as intended…. � However Employers need to focus on : – Pre and Post Contract Risk and Value Management – Quality of ‘information about the Site’ – Comprehensively developed design information Bruce Shaw Partnership
Risk Allocation, Employers Perspective � Employers need to focus on : - Quality of Contract Documents - Consideration of project specifics when allocating optional risks as per Schedule K - Working with the Contract – pro-active risk mitigation • Issue Directions not Instructions • Implement Requirements of the Contract Bruce Shaw Partnership
Risk Allocation, Employers Perspective � Employers need to focus on : – Records – sufficient to protect the Employer (use Cl. 10.3.4) – Contractor has an obligation to mitigate (Cl. 10.1.1) - MONITOR – Reciprocal Co-operation – Employer also to mitigate (Cl. 4.1) Bruce Shaw Partnership
Risk Allocation, Contractors Perspective � Risk Transfer – ‘The governing principle is that risks should be allocated to whichever party is best placed to manage them’ • Unforeseen Archaeology not a compensation event ? • Any other consents… – Quality of ‘information about the Site’ – Comprehensively developed design information Bruce Shaw Partnership
Risk Allocation, Contractors Perspective � Need for Risk Management Strategy – Risk Register – Quantified Risk Assessment – Regular review and Updating � Contract Administration - Resources – Notices (Cl. 10) – Submissions required under the contract (e.g. programme) Bruce Shaw Partnership
Risk Allocation, Contractors Perspective � Commercial Aspect – Initial Message from the industry – tender levels would increase.. – Actual tender levels were not as envisaged (building and civils) � Factors – tender levels….. – Competition – industry capacity – Current Market Conditions and Forecast Workload – Improved Efficiencies – better value – Contract possibly not as onerous as industry believed ? Bruce Shaw Partnership
Risk Allocation, Contractors Perspective � Future Scenario – Are tender levels reflecting risk transfer as per intention ? – When will risk transfer provisions be tested ? – When rather than if…… Bruce Shaw Partnership
Key Points – Old and New… To achieve Aims – comply with DOF CWMF Guidelines � From Early Planning to Review � – Systematic approach to design development and cost planning • Value Management Strategy • Risk Management Strategy Comprehensive Design & Realistic Outturn Projections � Level of Factual Information – consider additional expenditure � Optimise Risk Transfer – reflecting the stated principles � Prices to reflect Risk Transfer � Pro-active post-contract risk mitigation from both parties � Bruce Shaw Partnership
Concluding Thought ‘The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty.’ Winston Churchill Bruce Shaw Partnership
Government Contracts Risk Allocation Mark Wearen MInstCES ASCS MRICS MCIOB Bruce Shaw Thank You…. CivilEx March 2009 Bruce Shaw Partnership
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