Mlw Presentation Dof Risk Civilex 09

CivilEx March 2009

Bruce Shaw

Government ContractsRisk Allocation

Mark Wearen MInstCES ASCS MRICS MCIOB

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


Context of Risk Transfer - Why the new forms?

Key Aims

How are these aims to be achieved

Employer’s Perspective

Contractor’s Perspective

Presentation Overview


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

Why the New Forms?


Why the New Forms? - MCC

Review

Estimate

Time

Contingency, Budget and Project Delivery Stages

Prelim Planning Detailed Planning Implementation

Project Delivery - Stages

Contract Award

Final Account

Desired Budget Profile

Desired Contingency Profile

‘Overrun’


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 ???

Risk Allocation, Key Aims


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)

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



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



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.’



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



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)



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

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



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)



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

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)



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 ?



Future Scenario

– Are tender levels reflecting risk transfer as per intention ?

– When will risk transfer provisions be tested ?

– When rather than if……



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

Key Points – Old and New…


Concluding Thought

‘The pessimist sees difficulty in every opportunity. The optimist sees

opportunity in every difficulty.’

Winston Churchill

Bruce Shaw PartnershipCivilEx March 2009

Bruce Shaw

Government ContractsRisk Allocation

Mark Wearen MInstCES ASCS MRICS MCIOB

Thank You….

Business

Mlw Presentation Dof Risk Civilex 09