Overview of Risk Transfer and Risk Management under the new Irish Government DOF / GCCC Public Works Contracts

1. Government Contracts
Risk Allocation
Mark Wearen MInstCES ASCS MRICS MCIOB
Bruce Shaw
CivilEx March 2009

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Concluding Thought
‘The pessimist sees difficulty in every
opportunity. The optimist sees
opportunity in every difficulty.’
Winston Churchill
Bruce Shaw Partnership

22. Government Contracts
Risk Allocation
Mark Wearen MInstCES ASCS MRICS MCIOB
Bruce Shaw
Thank You….
CivilEx March 2009
Bruce Shaw Partnership