Risk Assignment in The Delivery of a Project  RISK! –Construction projects have lot of it –Contractors manage it –Owners pay for it

FACT:  Today’s owner is placing more demands on designer & constructor to get job done….  ON TIME  ON BUDGET  WITHOUT UNANTICIPATED CHANGES  FAILURE TO SATISFY ANY OF THE ABOVE IS CONSIDERED “RISK” AND CAN OFTEN CAUSE FINANCIAL PENALTY AND/OR LIQUIDATED DAMAGES

FACT:  Traditionally, owners seek to minimize their risk through the contract:  They like to allocate the majority of the risk to others, depending on the contract type: –Construction Manager –Prime Contractor –Multiple Primes, etc

RESULT –project participants develop strategies to minimize their own financial risk –inflate job costs to “cover” potential loss –seeking reimbursement for insurance costs associated with excessive or owner- imposed risks FINAL EFFECT: HIGHER ULTIMATE JOB COST TO OWNER

Risk  Risk is inherent to the construction process  If risk is managed through “assignment” to the team member most able to manage it….. –Owner –Designer –Contractor ………………then risk can be shared in a manner that results in reduction of the job cost.

Why Owners Should be Concerned with Risk Allocation  If unexpected risk is experienced that causes financial loss: –Adversarial relationships develop –Time/energy/money is wasted on disputes and claims –Focus of the “team” is lost to get the job done right, on time & on budget

Origin of Risk  Many risks are common to all projects:  Time delays  Overruns: –The amount by which actual costs exceed estimates  Unexpected changes  Other risks are very specific to type of construction and/or location of the project

Examples of Risk  Who is responsible for the acquisition of easements?  What happens if there’s an archaeological discovery?  What if environmental hazardous waste is encountered?  Subsurface conditions may vary from those expected.  Late or unsuitable owner furnished materials may cause a time delay.

Risk Allocation  The process of identifying project risks is: –Determining how risks may be equitably shared by all parties  Develop dispute avoidance techniques  The result is: “more project for the money”

Benefits to The Owner  Costly disputes are minimized  Avoids: – unexpected delays & added job costs WHY?  Contractors are able to avoid addition of “contingencies” in the bid –“contingency” money is “fluff money” added for the WHAT IF situation.  Contractors are not saddled with having to recognize, anticipate and “cost” risk which may be unfairly allocated to them  If risk issues are dealt with in advance, owner will realize a price advantage.

Benefits to the Contractor  When uncertainties are minimized and specific risk is allocated: –Contractor can submit more competitive bids –Lower contingencies –Disputes & litigation avoided

Benefits To The Project  Shortened project delivery  Minimal resources allocated to conflict resolution  Owner, designer & contractor realize a partnership relationship

What is The Owner’s Role In Allocating Risk? Willingness: –to share project risk –to be realistic in terms & conditions –to become educated regarding potential problems with the project –to make educated risk allocation decisions & approve necessary contract procedures

Basic Principles of Risk Allocation  Identify risk as specifically and early as possible  Risk Sharing: –Contractually place risk upon parties according the their ability to: 1. Minimize it 2. Handle the potential risk if it occurs

Example  Sharing risk due to unusually severe weather: –Typical boilerplate AIA contract clause grants contractor the right to a time extension, but does not provide additional compensation for the costs incurred as a result. –THIS IS A FINANCIAL RISK ASSUMED BY THE CONTRACTOR DUE TO LOSS OF WORK TIME –HOWEVER, the Owner assumes risk of delay in progress/completion (no liquidated damages or penalty may be assessed) This is an example of risk sharing

What Owners are Doing To Better Allocate Risk & Reduce Project Costs  Thorough front-end document review: –Include a dispute resolution system in the General Conditions or Supplementary Conditions –Use of AIA or EJCDC documents which do the above

What Owners are Doing To Better Allocate Risk & Reduce Project Costs  Owner’s SHOULD invest in subsurface investigation  Boring logs should be available to contractors during bidding process –results in more competitive bid **Some owners think this may lead to claims if the logs don’t accurately identify all encountered conditions. BUT: IT IS APPROPRIATE THAT THE OWNER PAY FOR THESE CHANGED CONDITIONS IF ENCOUNTERED!

What Owners are Doing To Better Allocate Risk & Reduce Project Costs  Quality Design –Comprehensive and complete design effort  Multidisciplinary Constructability Review: –Owner (functionality) –Contractor (builder’s perspective) –Design Professional (quality of design)

What Owners are Doing To Better Allocate Risk & Reduce Project Costs  Adequate funding of: a.Pre-design surveys b.Investigation of rite-of-way & easement issues c.Investigation if site access issues THESE “SOFT ENGINEERING” ISSUES MAKE A DIFFERENCE IN PREPARATION OF ADEQUATE, RESPONSIBLE AND COMPLETE BID PRICING

The Importance of the Contract  Focal point should be risk allocation: –Importance cannot be over-emphasized  Ideally, the contract will: –Clearly identify risks and responsibilities associated with the project –Assign risks to party best equipped to manage them

In The End  The Contract will: –Serve as framework of the legal agreement between the parties –Establish which party has assumed what risk –Be significant in defining the duties of each party