Risk Assignment in The Delivery of a Project

1
Risk Assignment in The Delivery of a Project

• RISK!
• Construction projects have lot of it
• Contractors manage it
• Owners pay for it

2
FACT

• Todays owner is placing more demands on designer
  constructor to get job done.
• ON TIME
• ON BUDGET
• WITHOUT UNANTICIPATED CHANGES
• FAILURE TO SATISFY ANY OF THE ABOVE IS CONSIDERED
  RISK AND CAN OFTEN CAUSE FINANCIAL PENALTY
  AND/OR LIQUIDATED DAMAGES

3
FACT

• Traditionally, owners seek to minimize their risk
  through the contract
• They like to allocate the majority of the risk to
  others, depending on the contract type
• Construction Manager
• Prime Contractor
• Multiple Primes, etc

4
RESULT

• project participants develop strategies to
  minimize their own financial risk
• inflate job costs to cover potential loss
• seeking reimbursement for insurance costs
  associated with excessive or owner-imposed risks
• FINAL EFFECT HIGHER ULTIMATE
  JOB COST TO OWNER

5
Risk

• Risk is inherent to the construction process
• If risk is managed through assignment to the
  team member most able to manage it..
• Owner
• Designer
• Contractor
• then risk can be shared in a manner that
  results in reduction of the job cost.

6
Why Owners Should be Concerned with Risk
Allocation

• If unexpected risk is experienced that causes
  financial loss
• Adversarial relationships develop
• Time/energy/money is wasted on disputes and
  claims
• Focus of the team is lost to get the job done
  right, on time on budget

7
Origin of Risk

• Many risks are common to all projects
• Time delays
• Overruns
• The amount by which actual costs exceed estimates
• Unexpected changes
• Other risks are very specific to type of
  construction and/or location of the project

8
Examples of Risk

• Who is responsible for the acquisition of
  easements?
• What happens if theres an archaeological
  discovery?
• What if environmental hazardous waste is
  encountered?
• Subsurface conditions may vary from those
  expected.
• Late or unsuitable owner furnished materials may
  cause a time delay.

9
Risk Allocation

• The process of identifying project risks is
• Determining how risks may be equitably shared by
  all parties
• Develop dispute avoidance techniques
• The result is more project for the money

10
Benefits to The Owner

• Costly disputes are minimized
• Avoids
• unexpected delays added job costs
• WHY?
• Contractors are able to avoid addition of
  contingencies in the bid
• contingency money is fluff money added for
  the WHAT IF situation.
• Contractors are not saddled with having to
  recognize, anticipate and cost risk which may
  be unfairly allocated to them
• If risk issues are dealt with in advance, owner
  will realize a price advantage.

11
Benefits to the Contractor

• When uncertainties are minimized and specific
  risk is allocated
• Contractor can submit more competitive bids
• Lower contingencies
• Disputes litigation avoided

12
Benefits To The Project

• Shortened project delivery
• Minimal resources allocated to conflict
  resolution
• Owner, designer contractor realize a
  partnership relationship

13
What is The Owners Role In Allocating Risk?

• Willingness
• to share project risk
• to be realistic in terms conditions
• to become educated regarding potential problems
  with the project
• to make educated risk allocation decisions
  approve necessary contract procedures

14
Basic Principles of Risk Allocation

• Identify risk as specifically and early as
  possible
• Risk Sharing
• Contractually place risk upon parties according
  the their ability to
• Minimize it
• Handle the potential risk if it occurs

15
Example

• Sharing risk due to unusually severe weather
• Typical boilerplate AIA contract clause grants
  contractor the right to a time extension, but
  does not provide additional compensation for the
  costs incurred as a result.
• THIS IS A FINANCIAL RISK ASSUMED BY THE
  CONTRACTOR DUE TO LOSS OF WORK TIME
• HOWEVER, the Owner assumes risk of delay in
  progress/completion (no liquidated damages or
  penalty may be assessed)
• This is an example of risk sharing

16
What Owners are Doing To Better Allocate Risk
Reduce Project Costs

• Thorough front-end document review
• Include a dispute resolution system in the
  General Conditions or Supplementary Conditions
• Use of AIA or EJCDC documents which do the above

17
What Owners are Doing To Better Allocate Risk
Reduce Project Costs

• Owners SHOULD invest in subsurface investigation
• Boring logs should be available to contractors
  during bidding process
• results in more competitive bid
• Some owners think this may lead to claims if
  the logs dont accurately identify all
  encountered conditions.
• BUT IT IS APPROPRIATE THAT THE OWNER PAY FOR
  THESE CHANGED CONDITIONS IF ENCOUNTERED!

18
What Owners are Doing To Better Allocate Risk
Reduce Project Costs

• Quality Design
• Comprehensive and complete design effort
• Multidisciplinary Constructability Review
• Owner (functionality)
• Contractor (builders perspective)
• Design Professional (quality of design)

19
What Owners are Doing To Better Allocate Risk
Reduce Project Costs

• Adequate funding of
• Pre-design surveys
• Investigation of rite-of-way easement issues
• Investigation if site access issues
• THESE SOFT ENGINEERING ISSUES MAKE A
  DIFFERENCE IN PREPARATION OF ADEQUATE,
  RESPONSIBLE AND COMPLETE BID PRICING

20
The Importance of the Contract

• Focal point should be risk allocation
• Importance cannot be over-emphasized
• Ideally, the contract will
• Clearly identify risks and responsibilities
  associated with the project
• Assign risks to party best equipped to manage them

21
In The End

• The Contract will
• Serve as framework of the legal agreement between
  the parties
• Establish which party has assumed what risk
• Be significant in defining the duties of each
  party