Risk management whilst a generic term encompasses all aspects of procurement and delivery, and is becoming ever more important in this industry. Nowhere more so than in the Caribbean which is its own unique market subjected to challenges rarely experienced elsewhere in the world and now exacerbated by the global economic climate. This period of sustained economic pressure will inevitably result in more competition, tighter margins and a hardening of relationships.
The Caribbean construction market has matured significantly in recent years, particularly in Barbados, and particularly as a result of greater access and more affluence demanding a better quality product. Clients are also becoming more savvy and won’t settle for solutions or experiences that they might have been forced to a few years ago.
When the market here begins to recover, clients and more particularly funders will demand more robust methods of procurement which is the primary risk area. The more traditional contract arrangements which are endemic to this region and still perfectly acceptable for some schemes are by no means the answer for all as they require the client to assume the majority of the risk from design and procurement to construction and programme. At RLB we consider that this is not in the best interests of either party and will not achieve the goal of construction professionals to deliver projects on time and on budget.
Whilst resolving procurement issues is not the complete solution, unless you have contractors entering into positions that they are reasonably comfortable with and professionals properly administering these relationships it will more than likely fail. The method of procurement of the works
has a significant effect on the construction cost, time, and quality and is thus inextricably linked to other sources of risk.
One of the principal aspects of risk management in construction is the appropriateness or otherwise of the choice of construction contract. The specification, the type of project and the intended relationship between the parties should influence this choice, but perhaps the most important aspect of procurement is the degree to which the employer can manage its own risks under the chosen construction contract.
Whilst there are many factors that will contribute to the success of a project I firmly believe that if a project is procured properly, with proper documentation the chance of it being a success is increased dramatically. You may argue that this is common sense but if so why are there so many distressed, late or over budget schemes in this region. It is also obvious that if not administered correctly the adequacy of the procurement route becomes an irrelevance and whether your project is a chattel house or a multi million dollar development the principle remains the same.
All too often I have seen bespoke contracts or over simplified contracts which do not adequately protect either party and are open to much interpretation when things go wrong. I am not saying produce more complicated documents that will result in contractors pricing unnecessary risk but the contract is there to protect both contractor and employer and it should be sufficiently robust to ensure it satisfies these criteria.
It should also reflect the risk allocation. Risk or uncertainty is inevitable in this industry and cannot be eliminated but it can however be reduced dramatically. Risk should however lie with the party best able to manage and mitigate it. Forcing a contractor to take all the risk for unforeseen or unquantifiable issue will only result in an uneconomic tender and potential dispute. Similarly an employer taking on risk for construction issues will result in him paying for contractor’s mistakes.
Given that the procurement method is inextricably linked to other sources of risk, it is useful to review some general principles of risk allocation and a categorisation of the risks that will need to be managed by the form of procurement eventually selected.
- There is nothing intrinsically bad in assuming risk. The challenge is in identifying and quantifying the risk retained and identifying a method of managing it. It is also important to recognise that a risk which is transferred under some circumstances may be retained under others.
- There are usually a large number of parties involved in a building project with differing responsibilities from the professional team to the main contractors and the supply team. Their different responsibilities inevitably lead to different priorities
- It is in the nature of contracting that the contracting parties will have conflicting interests. Contractors by their nature tend to want to be paid as much as possible for as little risk as possible. Conversely, developers want to pay as little as possible and to transfer as much risk as possible.
- Within limits, who bears what risk and at what cost is a matter of commercial negotiation. However, even in terms of self-interest, this approach can be overly simplistic. If all the risk is transferred to the contractor, and it has priced for those risks, then, if those risks do not materialise, the owner will probably have paid more than was necessary.
- How risks are distributed will depend not only upon the method of procurement but also the form of agreement under which the works are procured and the duration of the contract under which the risk is assumed. For example, a risk of an adverse economic shift in the demand for materials is more easily manageable over three months, but over a period of a few years that risk may be of an entirely different character.
- Some risks such as the selection of an appropriate contractor, proper active contract administration, ensuring the design is either sufficiently complete or proper provision is made for incomplete elements and materials procurement may result from several factors and be controllable by more than one party. Other risks, in particular financial and political, may not be susceptible to control at all or maybe insurable. However, taken together, the following principles of risk apportionment are generally assumed to be efficient and fair in the industry at the moment:
- Risks should be allocated to the party best able to control them, that is, the party which is best able to forestall the risk or to minimise its effects if it occurs.
- Risks should not be allocated to a party which is unable to sustain the consequences if the risk materialises.
- Risk allocation should encourage risk management by the party best able to manage the risk. For example, under a management contract the management contractor should shoulder the risk of delay caused by works contractors.
- The party that does not assume primary responsibility for risk should nevertheless be motivated to manage the consequence of the risk if it materialises.
For the benefit of all parties, we are going to have to accept other ways of procuring, doing business and sharing risk. Choosing the right procurement route will not eliminate the risk. However, choosing the best procurement route, properly documenting and administering this as well as identifying all risks and making adequate provision, will significantly reduce the exposure of all stakeholders.
Rider Levett Bucknall (Barbados) Ltd have recently published the first comprehensive Caribbean wide construction cost and economy survey copies of which can be obtained from RLB or by visiting their website: www.rlb.com