Assessing pre-contract risk

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

  • 14 Sep 2017

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

Cembrit launches new fibre cement cladding

Cembrit has announced the launch of a new through-coloured cladding board with a sandblasted surface, Patina Rough.

Posted in Articles, Building Industry News, Building Products & Structures, Cladding, Innovations & New Products, Posts, Walls

Ahmarra exceeds expectations in Ministry of Housing fire door test

Sample timber fire doors from Ahmarra Door Solutions recently exceeded expectations when tested against regulations.

Posted in Articles, Building Industry News, Building Products & Structures, Doors, Health & Safety, Research & Materials Testing, Security and Fire Protection

EverEdge chosen for Islington Square project

EverEdge was recently specified to provide edging and planters for a project for Cain International at Islington Square in London.

Posted in Articles, Building Industry News, Building Products & Structures, Garden, Posts

How do you maintain LST radiators?

Contour discusses maintaining LST radiators and ensuring that they are consistently meeting their expected potential.

Posted in Articles, Building Industry News, Building Products & Structures, Building Services, Heating Systems, Controls and Management, Posts