Avoiding formal disputes throughout the construction project lifecycle
Risk identification and Handover to the delivery team
In this series of 9 articles, Blake Newport sets out good practice and provides the benefit of 40 years’ expertise in supporting our clients negotiate the commercial contract minefield across all construction sectors in the UK and overseas.
In the second article in the series, Gary Bone considers retained risk and handover from the bid team to the delivery team and how failure to in this area could lead to disputes.
Risk ownership – is it knowingly accepted?
One of the objectives of agreeing a contract is to apportion risk between the parties, thus providing a set of delivery obligations in return for some consideration – usually money. Contractors are essentially paid to take on risk and the contract captures the deal. In general project management parlance, we therefore ask “who owns the risk?”
Construction projects are fraught with risks which, if they materialise, can prove very expensive to the risk owner. Managing the risks you own is a must if your project has a chance of being profitable, and just to make matters even more complicated, there is a general obligation to mitigate the exposure to risk of others. It is, therefore very important to know what your risks are and what other parties’ risks are.
Generally, owned risks are agreed by the bid team and then passed to the project team to manage or pass onto subcontractors through procurement whilst delivering the contracted works. Risks on construction projects are generally allocated via the contract. Usually this will be in either the standard clauses, schedules or amendments, but sometimes risks might also be buried in a string of emails referenced in the contract or in an obscure appendix to an appendix.
When the bid team hands over to the delivery team, a major focus should be on the risks knowingly accepted. The bid team will almost certainly have taken on risks which the delivery team needs to be aware of as soon as possible in order to put in place a plan to manage them. The bid team understands the deal that has been struck. It is imperative the delivery team understands the deal too.
Failure to identify a retained risk that eventually materialises and results in cost and/or delay can lead to a dispute over who owns the risk and therefore who is responsible.
Risks passed on through procurement
Taking on, managing and limiting exposure to risk is integral to making a profit. Whether a party retains a risk usually boils down to their attitude to risk, ability to manage it and whether they can afford to pass it on. Generally speaking, if each contracting party makes a profit because the risk has not materialised or the risk is well managed there is less chance of disputes arising.
It makes sense that risk should be passed to those who are in the best position to manage it. If a risk is owned by a contracting party who is not best placed to manage it, it can often lead to a higher cost and longer delay than is necessary.
As part of the handover from bid team to delivery team, there should be a specific focus on those risks which have been retained, along with the thought process of how best to manage that risk, either through passing to a subcontractor or having a plan in place to manage it. The delivery team may of course decide to manage the risk differently to how the bid team envisaged, but at least they will do so knowingly.
Another part of the handover from bid team to delivery team should be where the latter needs to be informed of any time-related pressures. The most obvious of these is likely to be materials or equipment which require long lead times to be delivered to site ready for installation. As offsite and modular construction increases and building technology becomes more sophisticated, this issue is likely to become more prevalent. Failure to place orders in adequate time can lead to delays. What though is ‘adequate time’? The time that prospective suppliers advise? When an item is needed on site? Is it critical or can a delay be accommodated without delaying the entire project or section?
The bid team may also be aware of other time pressures such as multiple trades on site, or work by others such as services providers and early sectional handovers affecting access/productivity. Is the bid team able to effectively communicate these pressures to the delivery team?
Project team changes
At the start of a project, the handover from bid team to delivery team will only be to those people present. After this initial handover is completed, the bid team generally moves onto the next bid and the delivery team is left to deliver.
At the time of initial handover, it is not uncommon for only around half the eventual delivery team to have been deployed to the project because it is still ramping up and even that half may well be replaced at some point on a long project. Often workshops are held with the Employer’s team where risks and change management will be discussed, as well as training for the teams on how to operate the contract and to understand each other’s obligations. Such workshops, however, are usually attended only by the original delivery team.
It is recommended the handover identifies these items so that a detailed plan can be developed to address them. It may be that there is an immediate problem or an area of particular risk which might result in a delay. Managing this problem can help avoid a dispute.
These detailed handovers and start up meetings rarely happen a second or third time. As a project progresses, new personnel join the delivery team, while others leave and are replaced. None of these new team members will have had the benefit of a handover from the bid team or attended a workshop with the Employer, and some may not have previously used the project’s form of contract . It is therefore recommended that handover briefings are periodically re-run, contract training is repeated and that further workshops regarding understanding obligations of the Employer, Contractor and Subcontractors are held. These will take on greater importance as relationships mature and further project risks emerge.