Reducing the Element of Risk

Contract Journal - 28/03/2007

For an industry that’s male dominated and resolute in its gung-ho attitude, UK construction is surprisingly risk-averse. But as the Olympics puts ‘risk’ firmly back on centre stage what does wider industry stand to learn? David Blake, Chairman at commercial and contract management construction consultant, Blake Newport Associates examines how to take the risk out of the contract…

I smile to myself as I wonder whether these days contractors up and down the country have their PR consultants on automatic speed dial. After all, recent headlines hammering Bath Spa and Wembley have done nothing if not strengthen our industry’s innate fear of anything ‘less than certain’; fearful that they too leave themselves open to a thorough dressing down. But as Sir Robert McAlpine manoeuvres itself firmly into the Olympic driving seat, are the times changing or has our approach to risk simply taken a turn for the worse?

The situation with McAlpine is an interesting one that marks an industry role-reversal unlike anything seen before. As the only bidder meeting all of the ODA’s requirements, McAlpine held no punches in reportedly submitting an opening gambit of £630 million for the Olympic stadium – and even that, on a cost-plus basis. Some would argue “why shouldn’t they?” – after all for the UK construction industry, surely involvement in the Olympics is as close to a definition of risk as we are likely to get. An immovable deadline; the creation of a legacy; taxpayers’ cash and all of this under the microscopic eye of the media and the world’s public? Who can blame McAlpine for wanting an agreement as close to no-risk as possible?

It’s ironic though, is it not, that such tactical manoeuvring and one-upmanship surrounds the global institution that is the Olympics, whose principles centre upon mutual understanding; friendship, solidarity and fair play. More ironic still when you delve further and discover that the ancient Greek tradition of the Olympic Truce centres upon conflict prevention and resolution. There is a lot, it seems, that we can learn from the Ancient Greeks.

Risk is an inevitable part of any process, both on a cost and time basis but moreover, for many contractors, on the basis of reputation. But all too often the disputes and fall out that industry associates with risk result from a lack of understanding regarding contractual obligations – something that every year industry is wasting a whopping £500 million on. On a properly managed project, robust risk strategies should be agreed from the outset, budget overruns foreseen and dealt with promptly, and adjustments made across the supply chain to avoid delays – so what’s going wrong?

The key to ensuring a water-tight contract centres upon communication. Even back in Egan’s day we were pushing this fact but it seems that 9 years on industry is still struggling. Opening up communication channels and ensuring an inclusive working environment is essential for a contract to be properly formed, established and understood from the word go. Contracts inevitably focus upon the terms and scope of a project but fail to clarify how it will be administered during the construction phase. This can all too often result in misunderstandings and ambiguities, and ultimately disputes. By investing a comparatively small amount up front in expert contract management, the risk in this regard becomes negligible.

But let’s not go into this with our eyes closed. No matter how robust a contract, difficulties can occur, and the ostrich approach of burying one’s head in the sand will do little to ease this. Instead industry must enter into contracts in full possession of the facts – if you know what to expect and how to deal with it then associated risks become altogether more manageable.

Risk is something that must be shared if we are to succeed in moving forward in a non-adversarial way, but it is a necessary evil that can be significantly softened by robust contract management from the offset of a project. After all, if all parties are communicating, and fully understand their obligations then the likelihood of time and cost overruns is greatly reduced, and with it the risk factor.

Simple you might think – and you’d be right. But with an average of 600 construction related disputes concurrent at any one time, industry clearly has a lot to learn. I’m a great advocate of moving forwards, not looking backwards but perhaps that ancient Greek principle of mutual understanding could do with a little more exploration…

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