CPD: Pre-Construction Risk Management
Almost irrespective of whether a construction project has been delivered well or badly, its commercial performance and the customer satisfaction of its commissioner and users will be predetermined by the contractor's procedures and risk management processes, before a contract is even signed or the first hoarding panels are erected.
Much of what is done on enlightened construction projects is designed to make the construction process more predictable, to achieve certainty of delivery, and to limit the impact of external influences. All this is principally aimed at helping the contractor to realise the margin it had included in its bid for the project, in return for delivering what the customer wanted from the contract.
It is therefore of paramount importance that the basis of these commercial undertakings should be a properly considered and implemented pre-construction commercial risk management system.
Every business should have a clear understanding of the type of work it wishes to secure, based on its own selection criteria.
The evaluation of the tender opportunities or work stream procurement route needs to be an inherent part of a business’s marketing plan and communicated throughout the business so that everyone is clear about what the business wants to do and what it is capable of doing.
Opportunity selection is a filtering process, like panning for gold. A business should develop its own criteria based on factors such as the experience of its staff and directors, risk profile, capability, geographic coverage and resources. The key to successful delivery of any project will depend on defining what the businesses can and cannot do and seeking to secure work which fits within these parameters.
Once defined, the opportunity selection criteria should be consistently and objectively applied. It is very easy to be seduced into taking on work which doesn’t fit within the defined criteria for any number of subjective reasons which might make a project seem attractive at the time, but this rarely leads to a successful outcome for anyone involved. To make the selection criteria objective and transparent businesses may variously develop matrices and electronic tools which help drive objectivity and define levels of authority and roles and responsibilities. But whatever system is adopted, it is important that senior management ensures that the system is implemented.
Whether a particular business secures new work through competitive tendering, competitive dialogues, negotiation or through any other targeted route, work winning will be a major business preoccupation.
Often opportunities will have been tracked for months or even years. But when the pricing document arrives, it is essential that it should still match up to your chosen selection criteria. It is not unknown for employers to change their procurement options – thereby amending the risk profile - between feasibility and contractor selection stages. Turning down an opportunity to submit an offer when an opportunity is in the office for pricing is extremely difficult and will test even the most hardened decision-maker.
Preparing an offer is essentially a dialogue to test and validate understanding of what is required on the one hand, and how it will be fulfilled on the other. Where there is not an alignment of expectations in respect of this dialogue, the potential for difficulties to arise at a later stage, after an offer has been accepted, is high. Put simply: do I understand what is required? Can I do it? Does the price match the work scope? Have I answered the exam question?
The basis of contract formation is that there will be an offer by one person which is accepted by another. To submit an offer which is capable of being accepted, close attention should be paid to making sure that it complies in every particular with the prescribed method of service and the detail of what is to be provided.
Rights and Obligations
It is essential to thoroughly understand the contract that will govern the delivery of a project or service. Carry out a review of the terms upon which work will be undertaken to establish whether the business is able to accept all of the conditions that will be placed on it; whether it will need to reject elements; price the consequences of others; pass them on to its suppliers or simply be aware of and manage them.
It may be the case that the terms of the intended contract might take a potential opportunity outside of the business's selection criteria parameters, in which case negotiations must be undertaken to bring them back within these agreed criteria - or the opportunity will need to be rejected.
A contract is a working document for managing projects and once agreed the team responsible for managing the delivery stage must be fully conversant with its terms. Too often there is a disconnect between work winning and work delivery teams, and businesses need to ensure that they deal effectively with knowledge transfer.
Any analysis of rights and obligations under a contract would not be complete without a consideration of the responsibility for design. Irrespective of what form the contract may take, the instances where no design responsibility is passed to the contractor are extremely rare. This responsibility might be imposed by subtle references to purpose, performance or output specification, or alternatively the contract might be more upfront in offering clear, unambiguous references.
As a group, contractors are inclined to accept responsibility as a matter of course, quick to put on the “hair shirt” and assume that it must be theirs to deal with.
The use of a matrix as a tool to define responsibilities for who designs what is a simple and effective means of capturing information for incorporation into the contract and for communicating visually to the people who have to manage the project. This would apply equally to another common area for disagreements – namely the responsibility for integration and co-ordination of design elements with each other.
In many standard and even bespoke contracts, there is usually a limit on the extent to which a contractor is responsible for designing the work, created by the use of terms such as “complete” or “develop” which is often overlooked. If something has been designed in its entirety already then the responsibility, and therefore the risk, associated with ”completing the design” is low.
Frequently pages of correspondence and meeting time can be taken up with debates about “what constitutes design?”, “what is development?”. These could be foreshortened by considering two simple phrases: WHAT is wanted? HOW is it to be achieved?
In considering whether it has the capability to undertake the extent or design for the particular type of work in prospect, the contractor may again have regard to its opportunity selection criteria. The contractor must have direct experience or knowledge of at least the type of expertise that is required to design a particular element, especially in relation to specialist work; passing on the responsibility for design does not mean that liability will be avoided.
It is therefore important to ensure that where design is to be undertaken by a supplier, that the selected supplier has the capability to undertake it and that any insurance subrogation rights are maintained.
Much is spoken about risk registers and risk workshops, and a great deal of time is spent on identifying risks, but this is all for nothing unless it is done with purpose in mind, and in a manner which enables relevant information to be communicated effectively to other people and companies involved in the project.
The process of identification of risks should be carried out with the overriding objective of giving each risk an owner and of allocating responsibilities for its elimination, mitigation or management.
Dealing with the big issues will have the greatest benefit to the preparation of the offer for undertaking a project and for its ultimate delivery if successfully secured.
The topic of “unforeseen risk” also needs to be addressed. By definition these cannot be identified or quantified, and it would be potentially detrimental for a business to take on this class of risk unwittingly. From a project-wide prospective, it would be better that proper methods of dealing with and allocating responsibility for unforeseen risk should be put in place, to avoid simply adding cost into the project or imposing the responsibility on to a party who is not capable of dealing with it.
Roles and Responsibilities
Construction is all about bringing teams together, forming teams and delivering projects. The successful achievement of delivery at each stage of a project, including work winning, is the allocation of responsibilities and ownership of tasks and processes.
Irrespective of the scale of any particular project and consequently the team allocated to undertake it, there should be a delivery plan identifying what has to be achieved and by when.
Many businesses’ processes include standard agendas for meetings such as: tender launch; mid-tender reviews; tender finalisations; pre-contract start meetings. By their nature standard agendas will adopt a “one size fits all mentality”, seeking to dumb down the process of management to an automated process. This drive for standardisation may inadvertently remove creativity and innovation, or even frustrate the main objective of the process itself, which is to communicate and disseminate information.
Meetings have their proper place in the management of risk and the transfer of knowledge, provided that they deal with key issues appropriately, have the right attendees and are chaired and managed efficiently – management control rather than merely the perception of control.
The introduction of hold points, or reviews, is of particular importance in the preparation of an offer for a project. They give an opportunity to validate that the potential project still falls within the parameters of the business’s selection criteria and also provide an opportunity to objectively consider the invitation to provide an offer and whether this will be fully satisfied by the offer that the business will make, as well as the risk profile and the allocation of risk.
Once an offer is accepted and a contract is awarded it is important that a contractor’s internal reporting regime should adequately articulate the risks that were identified in the pre-contract stages and provide a mechanism for both their management and reporting. This is a common area of weakness which leads to knowledge being lost and impaired project delivery.
Feedback and lessons learned
All too often we are quick to identify things which have not gone well and to investigate the causes. This same level of investigation is rarely applied to successful outcomes. The performance of a business will be raised by replicating things that have been gone well, in addition to eliminating those that went badly.
As part of the business processes, lessons learned reviews should be undertaken on all projects, irrespective of the project outcome. The output from these reviews should be published and distributed appropriately within the business so that the benefit of this valuable feedback may be applied to future work winning and other activities.
Summary and Key Points
The successful delivery of projects and the achievement of expected margins is dependent upon a business’s opportunity selection criteria being fully integrated with its other business processes, enabling it to secure work within its capacity and capability.
A thorough understanding of the risks inherent in a particular project, including the responsibility for any design will need to be effectively communicated to the people responsible for delivery of the project, if the objective of predictability and certainty is to be achieved. The reporting regime should enable senior management to be able to identify, at all stages of the project, whether there are any deviations from the predicted outcome.
An integral part of informing the opportunity selection criteria, which reflects the business’ capability, is gathering feedback and re-investing the experience from lessons learned, both good and bad. It is senior management’s responsibility to ensure that this business improvement opportunity is harnessed for every project, whether it is lost or secured and delivered on site.
Jason Farnell FRICS, FCIArb is a Director of CR Management, a specialist commercial risk management company for the construction and property industries. Tel : 01442 270643