Managing project risks during tender

About us

An international law firm with over 50 years’ experience, ranked top 15 in

UK.

Widely recognised as the leading provider of legal services to the

construction & engineering, energy and infrastructure industries world-

wide.

Over 260 partners and 900 lawyers in total worldwide.

According to Legal 500 a top tiered Projects and Infrastructure law firm (Shanghai) for the past 2 years, and

a top tiered construction and engineering law firm (Hong Kong) for

the past 6 years.

Asian Legal Business Construction

We live in a world of risks … Risks are unavoidable in any project. Certain "common" risks are inevitable (for example, tax risks, interface risks, local site risks). Other risks may be less likely to occur but would have a significant impact if they did occur (for example, force majeure events, change in law).

Starting the project off correctly The key to successful management of risks is to start the management process right at the beginning before the contract is even signed. If this is not done or not done properly, then trying to manage it or contain the damage later on during project implementation is often less effective and more costly – often by that stage there is little that can be done to address an ambiguous or (worse) an unfair or unwanted risk placed upon your organization. Once signed, your rights and liabilities are governed by the strict wording of the contract. We are frequently called upon to assist Chinese Contractors, particularly in international infrastructure projects, as early as the tender invitation stage. Because of our track record and experience and familiarity with the contracting language often used, we can quickly and cost-effectively review (and immediately start to advise on) voluminous tender documents and complex contracts.

Is it too early to incur legal costs? Sometimes there is a misconception that by engaging us early, this will increase legal costs. In reality and in practice, the reverse is true - the later we are engaged (when certain key decisions have already been reached and positions taken) the more expensive it is for us to do a proper job, and also the less effective our services becomes to your organization. The other misconception is that by ascertaining project risks early this will inevitably lead to an uncompetitive price in the market. However this view underestimates the benefits which advance risk management and supply chain management brings.

Managing Risks Usual steps include: (A) Identification – of risks realistically involved in the Project; (B) Assessment – quantifying the risks, assessing likelihood of each

risk occurring and its potential impact if it does occur; (C) Planning – deciding whether (and what) action should be taken now

to avoid or reduce the risk, and to reduce the impact if it does occur; (D) Monitoring – constant monitoring of the situation for risks emerging,

or changes affecting the assessment of existing risks, and dealing with these changes.

Identifying the likely risks in Stage (A) is relatively easy with experience and access to project information. However the added value that we bring to your organization is our wide international experience and the extensive accumulation of knowledge within our firm that we can rely upon during the other Stages, in particular Stage (B) to help you assess which risks are really vital, and Stage (C) helping you devise practical measures to mitigate or avoid your risks, reduce its likelihood, lessen the impact of its occurrence, transfer the risks "back-to-back" to others, or insure your risks.

Planning : The most important step...

…in conducting a risk analysis is to identify methods by which the

Contractor's risks might be mitigated, avoided, transferred or

insured.

Contingency & mitigation plans ("to-do lists") should be devised

early so you are prepared to deal with the risk if it should occur - this

ensures the project proceeds smoothly and your profit margin is

protected.

LONDON BIRMINGHAM BRISTOL EDINBURGH GLASGOW LEEDS MANCHESTER BEIJING BRUSSELS DUBAI HONG KONG SHANGHAI T (+)852 2521 5621 www.pinsentmasons.com

RISK ALLOCATION RISK

GRADE

OF RISK

POSSIBLE

IMPACT Owner Contractor COMMENTS – ACTION LIST

OWNER'S

CREDIT

RISK

Clause xx

Specs – X

BQ – X

Drawing X

D Non or late

payment,

negative cash

flow.

May not be able

to pay

subcontractors.

√ 1. Conduct financial due diligence checks on the Employer's financial health before signing contract. Usual searches include : (a) asset tracing; (b) immovable property searches; (c) litigation searches etc.

2. Exercise FIDIC Sub-Clause 2.4 and ask for evidence of financial arrangements – this

is only possible AFTER signing contract - unless Contractor expressly asks the Employer for such evidence before the contract.

3. Impose Pay when paid clause on subcontractors – place risk of non payment by

Employer on other subcontractors, or at least share risk. This is a clause to be added to the subcontract.

LOCAL LAWYERS FINANCE DEPT LEGAL DEPT PROCUREMENT DEPT TO NEGOTIATE

LEGAL

RISKS –

Owner, Site,

Government

approvals

Clause xx

Specs – X

BQ – X

Drawing X

C Project not

proceeding or

having to stop

midway.

Idle machinery

and manpower,

wasted costs.

√ √ It is advisable to conduct due diligence checks on the Owner regarding

(a) its authority to enter into the contract,

(b) its ownership of the project site,

(c) the legality of the contracts in question and on the contractual arrangements,

(d) whether any of the contracts require further government approvals.

Ask for a separate representation by the Owner or Parent company that Owner

possess all approvals - if the project cannot proceed because of non-approval the Owner

is liable to Contractor for a false representation.

Check suspension clause. Negotiate more favourable position.

Any Sub-contracts need to factor in this, and execute contingent Sub-contracts with a

price lock until this Contract comes into effect.

LOCAL LAWYERS

& ACCOUNTANTS

FINANCE DEPT

NEGOTIATING

/PROJECT TEAM

NEGOTIATING

TEAM

PROCUREMENT DEPT TO NEGOTIATE

The Risk Matrix A valuable exercise is to capture the information gathered from Stages (A) to (C) above in a risk matrix, which typically contains:

• a description of the risk

• to whom the risk is allocated or shared

• the relevant clause references in the Contract

• the likelihood of the risk occurring

• a description of the potential impact of the risk

• the likely cost if that risk occurs

• suggested actions to be taken now and by whom ("to-do" list)

• suggested contingency plans to be formulated now so that your organisation is ready to act if the risk occurs

• suggested preventive precautionary measures to avoid the risk or reducing its likelihood, or else to reduce the impact of its occurrence

• what risks can be allocated to or shared with other parties

• which risks can be insured against

An academic risk matrix commenting on contract provisions clause by clause is not useful. Instead, we prefer a functional Risk Matrix organized in a logical sequence, ordered chronologically (i.e. when the risk is most likely to occur), and banding together risks of the same nature or which are otherwise related. The actual layout of the risk matrix will be tailored to suit your organization and how your project teams are organised. We recognise it is important that distinct sections of the lengthy matrix can be simultaneously reviewed by say the Legal, Contracts, Finance, Design, Construction and Project Management divisions of your organization.

The Benefits The risk matrix is a necessity in more complex projects, because the project team is better able to appreciate the totality of the risks, it makes for easier reporting to senior management on critical risks, and ensures comprehensive insurance coverage is procured. Most importantly, it minimises inconsistencies or gaps in the manner the risks are allocated to other parties, facilitates the transfer of risk to JV partners and sub-contractors, enables negotiations to proceed logically and forces the early formulation of contingency plans and site measures to deal with specific risks. A good matrix has a long "shelf life" - during implementation it functions as a contract summary & an aide memoir for the project team.

Want to learn more?

To learn more about our services and how we might be

able to help you, please contact

Hew Kian Heong Partner, Shanghai T: + 8621 6321 1166 E: hew.kheong@pinsentmasons.com Bernard Ang Partner, Hong Kong SAR T: + 852 2294 3336 E: bernard.ang@pinsentmasons.com

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