Dangerous liaisons

Construction is a risky business, and more so now than ever before. That’s one of the conclusions you could draw from KPMG’s 2005 Global Construction Survey. It found that only 25% of respondents believed their contracting organisations “never overrode key risk management policies in order to secure a contract”. This means that three out of four senior executives sometimes override their own risk policies to win work.

Perhaps this is simply an illustration of how the real world works – companies weigh up risk against financial return. And, as many contractors would point out, projects are becoming more complex at a time when clients are increasingly risk averse. The inevitable result is that the burden of risk falls on the contractor. If this is the case, the results seem to suggest that the industry is not dealing with the increased risk effectively and that it should be considering risk management more carefully.

KPMG’s survey sought the views of top executives at international contractors in the USA, Europe and Asia Pacific on the challenges they faced, their risk management practices and the future of the construction industry as they saw it. It found that managing contract risk is one of the key challenges that the industry faces, with 63% of respondents saying it is their biggest issue (see chart).

Another key challenge that was identified was securing forward workload. Respondents indicated that in order to capture future contracts they often become party to inequitable contract conditions late in negotiations, which turned against them when conditions become unfavourable. In a recurring theme, respondents subsequently find themselves in dispute because of poor contract administration.

One respondent in Malaysia said: “Management normally follows the key risk management policies but there are circumstances where they are willing to take certain calculated risks in return for higher margin projects.”

And when it comes to the causes of disputes, the survey found that contractors blamed pressure from clients above anything else (see chart, left). It seems that clients assume when signing a contract that they no longer need to be involved in managing project risk. One executive from Australia said: “I think the biggest cause is an abdication of ‘issues management’ by the client and dependence on a contract that supposedly transfers all risks to the contractor”.

However, more disputes does not necessarily mean more litigation or arbitration. Sixty-two per cent of respondents indicated that the percentage of projects with claims or disputes requiring resolution through specialist consultants, mediators or lawyers was less than 10%. This suggests that although the industry is often perceived as litigious, the reality is that a small percentage of projects taint what would otherwise be an industry that successfully resolves disputes without resorting to litigation or arbitration.

One explanation could be that lower costs and faster timescales have led to an increased use of alternative dispute resolution techniques, including adjudication and mediation, with a corresponding, but not proportionate, decrease in litigation and arbitration.

But if contractors want to prevent disputes arising in the first place, they will need to pay greater heed to risk management. This means that they need to look within their organisation for ways of calculating the balance between risk and return, and outside their organisation for ways of persuading the client to participate more in risk management – for example, through the greater use of partnering. Finally, there is also a role for prudent contract management to play in reducing the incidence of disputes.