Assessing pre-contract risk

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

  • 14 Sep 2017

  • Share

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.

Leave a Reply

More articles

Alcumus

Tackling industry regulations with Alcumus courses

Alcumus has released two new Association for Project Safety (APS) accredited courses, designed to offer businesses a better legal understanding and practical guidance on The Construction Design and Management (CDM) Regulations 2015.

Posted in Articles, Building Industry Events, Building Industry News, Facility Management & Building Services, Health & Safety, Posts, Publications, Site Preperation

  • Share
Screen Shot 2017-12-15 at 15.03.21

Wienerberger introduces new Kassei KTF clay paver

Wienerberger has increased its product offering with the launch of a new Kassei KTF clay paver.

Posted in Articles, Bricks & Blocks, Building Industry News, Building Products & Structures, Civil Engineering, Garden, Hard Landscaping & Walkways, Landscaping

  • Share
recofloor img

Get your entries in for Recofloor's 2018 Awards

Recofloor is now accepting entries for its 2018 Awards Event which is set to take place in April at Liverpool Football Club’s Anfield ground.

Posted in Awards, Building Industry Events, Building Industry News, Building Regulations & Accreditations, Posts, Site Preperation, Waste Management & Recycling

  • Share
Screen Shot 2017-12-15 at 12.37.10

Delta appoints new Company Director, Kevin Dodds

Delta Membrane Systems Limited has announced the appointment of a new Company Director, Kevin Dodds, effective 8th December 2017.

Posted in Articles, Building Industry News, Posts

  • Share