Assessing pre-contract risk

Reducing risk at the pre-contract stage of a construction project

  • 14 Sep 2017

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When​ ​looking​ ​at​ ​risk​ ​managing​ ​a​ ​construction​ ​project,​ ​one​ ​of​ ​the​ ​critical time​ ​periods​ ​that​ ​is​ ​often​ ​overlooked​ ​is​ ​pre-contract​ ​risk: assessing​ ​the company​ ​you’ll​ ​be​ ​working​ ​for​ ​and​ ​with​ ​before​ ​you​ ​invest​ ​any​ ​time​ ​or resources​ ​in​ ​the​ ​project.

One​ ​of​ ​the​ ​greatest​ ​threats​ ​to​ ​a​ ​project​ ​and​ ​one​ ​of​ ​the​ ​biggest​ ​causes​ ​for potential​ ​disputes​ ​is​ ​a​ ​failure​ ​to​ ​properly​ ​understand​ ​the​ ​requirements​ ​of​ ​the contract​ ​and​ ​properly​ ​address​ ​pre​-contract​ ​risk.

There​ ​are​ ​so​ ​many​ ​variables​ ​and​ ​risks​ ​associated​ ​with​ ​being​ ​part​ ​of​ ​a​ ​large scale​ ​project,​ ​possibly​ ​with​ ​third​ ​party​ ​vendors​ ​involved,​ ​regarding​ ​the project,​ ​the​ ​companies​ ​involved,​ ​the​ ​financing​ ​and​ ​financial​ ​institutions involved.​ ​

The​ ​Kenzie​ ​Group​ ​has​ ​put​ ​together​ ​a​ ​brief​ ​guide​ ​to​ ​help​ ​you​ ​to​ ​reduce​ ​pre-contract​ ​risk​ ​in​ ​your​ ​project.​ ​The​ ​guide​ ​prompts​ ​thought​ ​into​ ​some​ ​of​ ​the questions​ ​you​ ​should​ ​be​ ​asking​ ​yourself,​ ​and​ ​the​ ​factors​ ​you​ ​need​ ​to​ ​be considering​ ​before​ ​tendering​ ​on​ ​a​ ​project​ ​or​ ​finalizing​ ​the​ ​project.

Pre-contract risk management

Risk​ ​management​ ​can​ ​start​ ​when​ ​you​ ​have​ ​an​ ​opportunity​ ​to​ ​tender​ ​for​ ​a project.​ ​At​ ​this​ ​stage,​ ​you​ ​need​ ​to​ ​make​ ​the​ ​decision​ ​whether​ ​it’s​ ​worth​ ​your time​ ​to​ ​even​ ​prepare​ ​and​ ​submit​ ​your​ ​tender.

The​ ​key​ ​criteria​ ​to​ ​be​ ​considered​ ​when​ ​deciding​ ​on​ ​whether​ ​you​ ​should submit​ ​your​ ​tender​ ​start​ ​with​ ​identifying​ ​the​ ​risk.​ ​Once​ ​you’ve​ ​identified​ ​the potential​ ​risk​ ​you’ll​ ​need​ ​to​ ​go​ ​through​ ​the​ ​process​ ​of​ ​evaluating​ ​it.​ ​Now, you’re​ ​able​ ​to​ ​mitigate​ ​the​ ​risk​ ​by​ ​deciding​ ​if​ ​you​ ​are​ ​going​ ​to​ ​decline​ ​the tender,​ ​accept​ ​the​ ​risk​ ​but​ ​cost​ ​accordingly​ ​or​ ​identify​ ​a​ ​way​ ​to​ ​reduce​ ​or transfer​ ​the​ ​risk.

For​ ​example,​ ​before​ ​tendering​ ​for​ ​that​ ​great​ ​new​ ​project​ ​ask​ ​yourself​ ​these questions:

  • Is​ ​the​ ​employer​ ​financially​ ​secure?​ ​Do​ ​some​ ​research​ ​on​ ​the​ ​finances​ ​of​ ​the employer​ ​to​ ​determine​ ​if​ ​it’s​ ​worth​ ​your​ ​time​ ​tendering.
  • How​ ​is​ ​the​ ​project​ ​being​ ​funded,​ ​and​ ​is​ ​the​ ​funding​ ​really​ ​secure?​ ​Analyze the​ ​realities​ ​and​ ​cost​ ​of​ ​funding.
  • Does​ ​the​ ​employer​ ​have​ ​a​ ​reputation​ ​for​ ​paying​ ​on​ ​time?​ ​Get​ ​to​ ​know​ ​your future​ ​bedfellow,​ ​you​ ​may​ ​need​ ​to​ ​factor​ ​in​ ​late​ ​payments​ ​into​ ​your​ ​tender.
  • Has​ ​the​ ​employed​ ​signed​ ​the​ ​Fair​ ​Payment​ ​Charter?​ ​It’s​ ​a​ ​quick​ ​check​ ​but worth​ ​knowing​ ​if​ ​you​ ​might​ ​be​ ​working​ ​for.

When​ ​looking​ ​at​ ​risk​ ​managing​ ​this​ ​stage​ ​of​ ​the​ ​process,​ ​you​ ​need​ ​to​ ​bear​ ​in mind​ ​that​ ​it’s​ ​something​ ​that​ ​needs​ ​to​ ​be​ ​revisited​ ​on​ ​a​ ​regular​ ​basis.

Initially,​ ​at​ ​the​ ​expression​ ​of​ ​interest​ ​stage,​ ​then​ ​again​ ​during​ ​the​ ​tender application​ ​stage.​ ​You​ ​need​ ​to​ ​revisit​ ​your​ ​analysis​ ​again​ ​at​ ​contract​ ​issue before​ ​making​ ​the​ ​decision​ ​to​ ​accept​ ​the​ ​contact.

Following​ ​the​ ​recent​ ​administration​ ​of​ ​a​ ​number​ ​of​ ​major​ ​contractors,​ ​in​ ​the current​ ​industry​ ​climate,​ ​it​ ​is​ ​essential​ ​that​ ​you​ ​are​ ​confident​ ​that​ ​your employer,​ ​either​ ​the​ ​main​ ​contractor​ ​or​ ​the​ ​client,​ ​is​ ​able​ ​to​ ​pay​ ​for​ ​the works​ ​you​ ​have​ ​planned​ ​to​ ​carry​ ​out.​ ​Although​ ​this​ ​may​ ​seem​ ​like​ ​common sense,​ ​it​ ​is​ ​paramount​ ​and​ ​should​ ​not​ ​be​ ​ignored.

During​ ​the​ ​tender​ ​and​ ​pre​-​contract​ ​stage,​ ​when​ ​reviewing​ ​the​ ​contract,​ ​it​ ​is important​ ​to​ ​consider​ ​issues​ ​that​ ​may​ ​cause​ ​risks​ ​to​ ​both​ ​the​ ​time​ ​and​ ​cost of​ ​the​ ​project:

  • Is​ ​the​ ​program​ ​realistic​ ​for​ ​the​ ​works​ ​which​ ​have​ ​been​ ​defined? Are​ ​there​ ​contractually​ ​binding​ ​target​ ​or​ ​interim​ ​dates?
  • Are​ ​the​ ​completion​ ​dates​ ​clear​ ​and​ ​unconditional?
  • Do​ ​all​ ​program​ ​revisions​ ​need​ ​to​ ​be​ ​approved?
  • Can​ ​you​ ​claim​ ​extensions​ ​of​ ​time​ ​for​ ​events​ ​outside​ ​of​ ​your​ ​control​ ​which delay​ ​the​ ​works?
  • Can​ ​you​ ​claim​ ​loss​ ​of​ ​productivity​ ​for​ ​events​ ​outside​ ​your​ ​control​ ​which disrupt​ ​the​ ​works?
  • Are​ ​liquidated​ ​damages​ ​(LADs)​ ​set​ ​at​ ​a​ ​reasonable​ ​level?
  • If​ ​the​ ​project​ ​takes​ ​a​ ​long​ ​time,​ ​does​ ​the​ ​contract​ ​permit​ ​price​ ​fluctuations for​ ​rising​ ​costs​ ​in​ ​materials​ ​or​ ​energy?
  • Can​ ​the​ ​employer​ ​ask​ ​you​ ​to​ ​complete​ ​works​ ​sooner​ ​than​ ​the​ ​originally agreed​ ​completion​ ​date?
  • Is​ ​the​ ​retention​ ​per​ ​cent​ ​acceptable? 
  • What​ ​is​ ​the​ ​period​ ​between​ ​certification​ ​of​ ​instalments​ ​and​ ​the​ ​final​ ​date​ ​for payment?​ ​
  • If​ ​you​ ​are​ ​subcontracting​ ​works​ ​out,​ ​does​ ​this​ ​meet​ ​your subcontractor’s​ ​expectations​ ​regarding​ ​payment​ ​periods?
  • Is​ ​the​ ​procedure​ ​for​ ​changing​ ​the​ ​price​ ​due​ ​to​ ​instructions​ ​or​ ​risk​ ​events robust​ ​and​ ​workable?
  • Is​ ​the​ ​percentage​ ​of​ ​the​ ​price​ ​represented​ ​by​ ​provisional​ ​sums​ ​acceptable?
  • Can​ ​the​ ​employer​ ​omit​ ​works​ ​and,​ ​if​ ​so,​ ​how​ ​would​ ​this​ ​affect​ ​your​ ​profit margin?

In summary

Larger​ ​scale​ ​construction​ ​projects​ ​are​ ​complicated​ ​beasts with a ​lot​ ​of​ ​moving parts,​ and ​a​ ​lot​ ​of​ ​parties​ ​involved.​ ​A​ ​company​ ​involved​ ​in​ ​construction​ ​is​ ​going to​ ​have​ ​to​ ​prepare​ ​to​ ​be​ ​exposed​ ​to​ ​an​ ​increasing​ ​amount​ ​of​ ​risk​ ​and​ ​that means​ ​to​ ​have​ ​stringent​ ​risk​ ​management​ ​processes​ ​in​ ​place,​ ​starting​ ​with risk​ ​management​ ​at​ ​the​ ​pre​-contract​ ​stage.

PWC​ ​recently​ ​discovered​ ​that​ ​out​ ​of​ ​the​ ​companies​ ​surveyed,​​ ​71%​ ​firmly held​ ​the​ ​belief​ ​that​ ​they​ ​have​ ​robust​ ​security​ ​activities,​ ​however,​ ​of​ ​that​ ​71%​ ​just​ ​32%​ ​actually​ ​required​ ​their​ ​third​ ​parties​ ​to​ ​comply​ ​with​ ​those policies.

Conducting​ ​some​ ​due​ ​diligence​ ​at​ ​the​ ​pre-contract​ ​stage​ ​allows​ ​you​ ​to​ ​paint are​ ​a​ ​more​ ​accurate​ ​picture​ ​of​ ​the​ ​risks​ ​associated​ ​with​ ​the​ ​project​ ​and​ ​how those​ ​risks​ ​may​ ​or​ ​may​ ​not​ ​be​ ​mitigated.​ ​At​ ​the​ ​same​ ​time,​ ​you​ ​should research​ ​the​ ​companies​ ​associated​ ​with​ ​the​ ​project,​ ​assess​ ​their​ ​risk​ ​as potential​ ​partners

Due​ ​to​ ​the​ ​time​ ​periods​ ​connected​ ​with​ ​such​ ​projects,​ ​circumstances​ ​and risk​ ​can​ ​change​ ​and​ ​needs​ ​to​ ​be​ ​revisited​ ​at​ ​several​ ​key​ ​points​ ​during​ ​the project,​ ​including​ ​some​ ​critical​ ​stages​ ​during​ ​the​ ​pre​-contract​ ​stage.

The​ ​questions​ ​answered​ ​above​ ​should​ ​be​ ​answered​ ​in​ ​as​ ​much​ ​detail​ ​as feasible.​ ​Some​ ​elementary​ ​checks​ ​should​ ​be​ ​conducted​ ​at​ ​the​ ​tender invitation​ ​stage​ ​with​ ​a​ ​more​ ​complete​ ​risk​ ​analysis​ ​completed​ ​during​ ​the tender​ ​application​ ​process​ ​as​ ​naturally,​ ​you​ ​look​ ​at​ ​the​ ​project​ ​under​ ​a microscope.

If​ ​you​ ​are​ ​unsure​ ​of​ ​the​ ​answers​ ​to​ ​any​ ​of​ ​the​ ​above​ ​questions,​ ​then​ ​it​ ​is advisable​ ​to​ ​discuss​ ​with​ ​a​ ​construction​ ​contract​ ​claim​ ​consultant​,​ ​and​ ​the Kenzie​ ​Group​ ​can​ ​help​ ​ensure​ ​your​ ​contract​ ​is​ ​robust​ ​with​ ​a​ ​fair​ ​and appropriate​ ​balance​ ​of​ ​risk,​ ​whilst​ ​reducing​ ​the​ ​risk​ ​for​ ​you​ ​wherever possible.

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