Construction’s understanding of risk is becoming ever more sophisticated in these post-Latham days. Alas, when it comes to risk allocation in procurement, things are rather more primitive
The construction industry has certainly learnt the language of risk-based assessment of projects. While the cynical might point to an overuse of management jargon and a tendency to take precedent risk registers from previous projects, there is now much more empirical examination of the risks involved on construction projects than was perhaps the case in pre-Latham days.
The NEC June 2005 contract adopts the approach of making the risk register a contractual document. The contract data are to include matters to be addressed in the risk register and the register itself is to include a description of the risk and a description of the actions to be taken to avoid or reduce the risk. Early warning matters are then noted in the risk register as the project proceeds.
Other clients adopt a less contractual, but no less effective, approach to risk management. They produce short, succinct and focused risk registers for each work package/trade contract, which have no contractual status, but which are used as a management tool as the package proceeds through design and construction.
Who is to say which is the better approach? One thing is sure: none of the contractual words in the NEC will make any difference to a project where there is no real focus on risk management; where the risk register is not tailored to the particular project and the terms of the particular contract; or where bulk and form prevails over substance.
But is this management focus on sensible identification and mitigation of risk being reflected in contractual terms? Anyone who has been through the experience of poor package management on construction management projects will be familiar with the issues: packages bought on incomplete information with claims for late issue of information/subsequent variation to the scope of the package; gaps between different packages; poor programming with the result that one contractor delays another; incomplete records to manage loss and/or expense claims, and so on.
But more recently, the diet of the average construction lawyer has changed. The prevalent forms of contract post-Egan are “single point”. In the building and development markets many managers/ lawyers see only forms based on what is known as “design and dump”. This is the procurement route under which the developer works with its professional team to produce a design up to Work Stage D. The contractor is then appointed on the basis of its overheads and profit and works alongside the design team through to completion of Work Stage F, and work packages/contracts are bid sequentially by the contractor based on design information produced by the team. At a certain point, say, when 70% of the packages have been bid, the contractor negotiates its lump sum price, the main contract is signed, the design team is novated to the main contractor and the main contractor assumes responsibility for the whole of the design and construction of the project for the price and by the completion date. The system has many advantages for the client and has many proponents – and indeed the JCT Major Projects Construction Contract is designed to accommodate it. It does not demand of the client’s advisers a very sophisticated approach to identification and allocation of risk – quite simply, the stated aim of the route is to ensure that all risk ends up with the contractor.
In parallel, of course, many project managers/construction lawyers have been working on the construction contracts on PFI/PPP projects. Again, these construction contracts and indeed the project financings are structured on the basis that the contract “steps down” all of the delivery risk accepted by the private sector partner under its concession contract with the public sector client. So the drafting of these construction contracts largely takes the risks imposed by the concession contract and incorporates them into the construction contract.
So it seems to me that there is a dichotomy developing between the more sophisticated approach being adopted in the construction industry generally to the development of risk registers and risk management and the increasingly narrow experience and approach to procurement which is the day to day experience of most project managers and construction lawyers. Are they developing satisfactorily the skills needed to understand the risk on construction contracts, or is a more sophisticated analysis of risk within the industry not being really reflected in the approach to risk allocation in procurement?
Ann Minogue is a partner in Linklaters