I am currently working on a Highways scheme under the NEC3 and have a question regarding the assessment of Contractor’s risk within a quotation. Whilst the Main Contractor is allowed to account for this risk when preparing quotations, how can the risk be evaluated?
This is of course a subjective exercise so my question is trying to bring some kind of objectivity to the evaluation of risk. Are there any measures one can use to do this, such as likelihood of risk, previous examples where the risk has/hasn’t occurred, statistics etc
Also, are such measures listed anywhere contractually or something that the parties apply themselves?
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You are right when you say that the Contractor is allowed to add in for risk which has (under clause 63.6) “a significant chance of occurring and are at the Contractor’s risk under this contract.”
Taking the second bit of the sentence first - “are at the Contractor’s risk under this contract” - this means up to the point at which they become compensation events, if they become compensation events. E.g. they allow for the effect up to the point at which the weather compensation event kicks in. Consequently, if the weather compensation event clause 60.1 (14) has been deleted, then the Contractor can allow more for weather risk in a CE quotation. Likewise if the physical condition risk has been deleted.
Now let’s take the first part - “a significant chance of occurring” - and divide into two sorts of risks :
- average productivity risks for doing activities of that type which equates to ‘time risk allowance’ under the NEC. This can be inferred from looking at the Contractor’s programme, past productivities, experience of the Employer’s PM and the QS’s &/or programmers that support them etc. Essentially, the Contractor is pricing and programming that compensation event on expected productivities to arrive at a figure for the change in Defined Cost and delay to Completion Date. Obviously if people are talking as this productivity figure is arrived then their is mutual understanding of what pops out at the end.
- discrete source risk of the sort that is entered into a classical risk register. I suggest that people sit down and generate their top 5 risks for the compensation event. Having done this, you discuss what you could do about them and this may well result in tangible actions being taken which can be priced up as Defined Cost. There will also be residual risk which people can ‘have a stab’ at estimating the MOST LIKELY effect and actions should the risk occur. As it is a ‘possible’ don’t spend hours nailing to the n’th degree what the impact MIGHT be. Then times this figure by an agreed probability - I could go on here as it a personal crusade of mine against an aspect of risk management - but people are absolutely appalling at guessing probabilities and in a project environment - where every opearation has a degree of uniqueness - I don’t see how you can get, let alone rely on, good historical data (as you could if the same operation was repeated 100’s of times in a factory). So it has to be by agreement between two sensible people. If this agreement on ‘Probability x Most Likely Impact’ cannot be reached or because it can, but the PM does not want to pay for risk which is too much of a guess, then the PM can refine the quotation by :
- stating assumptions (clause 61.6)
- breaking it down into bite sized pieces (e.g. do the re-design, then once that is done, price the re-design)
- by agreement with the Contractor, extending the timescales for the quotation until the uncertainty has reduced (clause 62.5).
Hope this helps.