Risk Assignment in The Delivery of Risk Assignment in The Delivery of a Projecta Project

RISK!RISK!

– Construction projects have Construction projects have lot of itlot of it

– Contractors manage itContractors manage it– Owners pay for itOwners pay for it

FACT:FACT:

Today’s owner is placing more demands on Today’s owner is placing more demands on designer & constructor to get job done….designer & constructor to get job done….

ON TIMEON TIME ON BUDGETON BUDGET WITHOUT UNANTICIPATED CHANGESWITHOUT UNANTICIPATED CHANGES

FAILURE TO SATISFY ANY OF THE ABOVE IS FAILURE TO SATISFY ANY OF THE ABOVE IS CONSIDERED “RISK” AND CAN OFTEN CAUSE CONSIDERED “RISK” AND CAN OFTEN CAUSE FINANCIAL PENALTY AND/OR LIQUIDATED FINANCIAL PENALTY AND/OR LIQUIDATED DAMAGESDAMAGES

FACT:FACT:

Traditionally, owners seek to minimize Traditionally, owners seek to minimize their risk through the contract:their risk through the contract:

They like to allocate the majority of the risk to They like to allocate the majority of the risk to others, depending on the contract type:others, depending on the contract type:

– Construction ManagerConstruction Manager– Prime ContractorPrime Contractor– Multiple Primes, etc Multiple Primes, etc

RESULTRESULT

– project participants develop strategies to project participants develop strategies to minimize their own financial riskminimize their own financial risk

– inflate job costs to “cover” potential lossinflate job costs to “cover” potential loss

– seeking reimbursement for insurance costs seeking reimbursement for insurance costs associated with excessive or owner-imposed associated with excessive or owner-imposed risks risks

FINAL EFFECT: HIGHER ULTIMATE FINAL EFFECT: HIGHER ULTIMATE JOB COST TO OWNER JOB COST TO OWNER

RiskRisk Risk is inherent to the construction processRisk is inherent to the construction process

If risk is managed through “assignment” to If risk is managed through “assignment” to the team member most able to manage it…..the team member most able to manage it…..

– OwnerOwner– DesignerDesigner– ContractorContractor

………………………………then risk can be shared in a then risk can be shared in a manner that results in reduction of the job manner that results in reduction of the job cost.cost.

Why Owners Should be Why Owners Should be Concerned with Risk AllocationConcerned with Risk Allocation

If unexpected risk is experienced If unexpected risk is experienced that causes financial loss:that causes financial loss:

– Adversarial relationships developAdversarial relationships develop– Time/energy/money is wasted on Time/energy/money is wasted on

disputes and claimsdisputes and claims– Focus of the “team” is lost to get the job Focus of the “team” is lost to get the job

done right, on time & on budgetdone right, on time & on budget

Origin of RiskOrigin of Risk

Many risks are common to all projects:Many risks are common to all projects:

Time delaysTime delays Overruns: Overruns:

– The amount by which actual costs exceed estimatesThe amount by which actual costs exceed estimates Unexpected changesUnexpected changes

Other risks are very specific to type of Other risks are very specific to type of construction and/or location of the construction and/or location of the projectproject

Examples of RiskExamples of Risk

Who is responsible for the acquisition of Who is responsible for the acquisition of easements?easements?

What happens if there’s an archaeological What happens if there’s an archaeological discovery?discovery?

What if environmental hazardous waste is What if environmental hazardous waste is encountered?encountered?

Subsurface conditions may vary from those Subsurface conditions may vary from those expected.expected.

Late or unsuitable owner furnished materials may Late or unsuitable owner furnished materials may cause a time delay.cause a time delay.

Risk AllocationRisk Allocation

The process of identifying project risks The process of identifying project risks is:is:

– Determining how risks may be equitably shared by Determining how risks may be equitably shared by all partiesall parties

Develop dispute avoidance techniques Develop dispute avoidance techniques

The result is: “more project for the The result is: “more project for the money”money”

Benefits to The OwnerBenefits to The Owner Costly disputes are minimizedCostly disputes are minimized

Avoids:Avoids:– unexpected delays & added job costsunexpected delays & added job costs

WHY?WHY?

Contractors are able to avoid addition of “contingencies” in the bidContractors are able to avoid addition of “contingencies” in the bid

– ““contingency” money is “fluff money” added for the WHAT IF contingency” money is “fluff money” added for the WHAT IF situation.situation.

Contractors are not saddled with having to recognize, anticipate and Contractors are not saddled with having to recognize, anticipate and “cost” risk which may be “cost” risk which may be unfairly allocated to themunfairly allocated to them

If risk issues are dealt with in advance, owner will realize a price If risk issues are dealt with in advance, owner will realize a price advantage.advantage.

Benefits to the ContractorBenefits to the Contractor

When uncertainties are When uncertainties are minimized and specific risk is minimized and specific risk is allocated:allocated:

– Contractor can submit more Contractor can submit more competitive bidscompetitive bids

– Lower contingenciesLower contingencies– Disputes & litigation avoidedDisputes & litigation avoided

Benefits To The ProjectBenefits To The Project

Shortened project deliveryShortened project delivery

Minimal resources allocated Minimal resources allocated to conflict resolutionto conflict resolution

Owner, designer & Owner, designer & contractor realize a contractor realize a partnership relationshippartnership relationship

What is The Owner’s Role In What is The Owner’s Role In Allocating Risk?Allocating Risk?

Willingness:Willingness:

– to share project riskto share project risk

– to be realistic in terms & to be realistic in terms & conditionsconditions

– to become educated regarding to become educated regarding potential problems with the potential problems with the projectproject

– to make educated risk to make educated risk allocation decisions & approve allocation decisions & approve necessary contract proceduresnecessary contract procedures

Basic Principles of Risk AllocationBasic Principles of Risk Allocation

Identify risk as specifically and Identify risk as specifically and early as possibleearly as possible

Risk Sharing: Risk Sharing: – Contractually place risk upon Contractually place risk upon

parties according the their ability to:parties according the their ability to:1.1. Minimize itMinimize it

2.2. Handle the potential risk if it occursHandle the potential risk if it occurs

ExampleExample Sharing risk due to unusually severe weather:Sharing risk due to unusually severe weather:

– Typical boilerplate AIA contract clause grants contractor Typical boilerplate AIA contract clause grants contractor the right to a time extension, but does not provide the right to a time extension, but does not provide additional compensation for the costs incurred as a additional compensation for the costs incurred as a result.result.

– THIS IS A FINANCIAL RISK ASSUMED BY THE THIS IS A FINANCIAL RISK ASSUMED BY THE CONTRACTOR DUE TO LOSS OF WORK TIMECONTRACTOR DUE TO LOSS OF WORK TIME

– HOWEVER,HOWEVER, the Owner assumes risk of delay in the Owner assumes risk of delay in progress/completion (no liquidated damages or penalty progress/completion (no liquidated damages or penalty may be assessed)may be assessed)

This is an example of risk sharingThis is an example of risk sharing

What Owners are Doing To Better What Owners are Doing To Better Allocate Risk & Reduce Project CostsAllocate Risk & Reduce Project Costs

Thorough front-end document review:Thorough front-end document review:

– Include a dispute resolution system in the Include a dispute resolution system in the General Conditions or Supplementary General Conditions or Supplementary Conditions Conditions

– Use of AIA or EJCDC documents which do Use of AIA or EJCDC documents which do the abovethe above

What Owners are Doing To Better What Owners are Doing To Better Allocate Risk & Reduce Project Allocate Risk & Reduce Project

CostsCosts

Owner’s SHOULD invest in subsurface investigationOwner’s SHOULD invest in subsurface investigation

Boring logs should be available to contractors during Boring logs should be available to contractors during bidding process bidding process – results in more competitive bidresults in more competitive bid

**Some owners think this may lead to claims if the logs don’t **Some owners think this may lead to claims if the logs don’t accurately identify all encountered conditions.accurately identify all encountered conditions.

BUT: IT IS APPROPRIATE THAT THE OWNER PAY FOR THESE BUT: IT IS APPROPRIATE THAT THE OWNER PAY FOR THESE CHANGED CONDITIONS IF ENCOUNTERED!CHANGED CONDITIONS IF ENCOUNTERED!

What Owners are Doing To Better What Owners are Doing To Better Allocate Risk & Reduce Project CostsAllocate Risk & Reduce Project Costs

Quality DesignQuality Design– Comprehensive and complete design effortComprehensive and complete design effort

Multidisciplinary Constructability Review:Multidisciplinary Constructability Review:– Owner (functionality)Owner (functionality)– Contractor (builder’s perspective)Contractor (builder’s perspective)– Design Professional (quality of design)Design Professional (quality of design)

What Owners are Doing To Better What Owners are Doing To Better Allocate Risk & Reduce Project CostsAllocate Risk & Reduce Project Costs

Adequate funding of:Adequate funding of:

a.a. Pre-design surveysPre-design surveys

b.b. Investigation of rite-of-way & easement issuesInvestigation of rite-of-way & easement issues

c.c. Investigation if site access issuesInvestigation if site access issues

THESE “SOFT ENGINEERING” ISSUES MAKE A THESE “SOFT ENGINEERING” ISSUES MAKE A DIFFERENCE IN PREPARATION OF ADEQUATE, DIFFERENCE IN PREPARATION OF ADEQUATE, RESPONSIBLE AND COMPLETE BID PRICINGRESPONSIBLE AND COMPLETE BID PRICING

The Importance of the ContractThe Importance of the Contract

Focal point should be risk allocation:Focal point should be risk allocation:– Importance cannot be over-emphasizedImportance cannot be over-emphasized

Ideally, the contract will:Ideally, the contract will:

– Clearly identify risks and responsibilities Clearly identify risks and responsibilities associated with the projectassociated with the project

– Assign risks to party best equipped to Assign risks to party best equipped to manage themmanage them

In The EndIn The End

The Contract will:The Contract will:

– Serve as framework of the legal agreement Serve as framework of the legal agreement between the partiesbetween the parties

– Establish which party has assumed what riskEstablish which party has assumed what risk

– Be significant in defining the duties of each Be significant in defining the duties of each partyparty