Guiding Principles of Risk Allocation: 1, 2 & 3
The general guiding principles of risk allocation should be that:
- Successful risk allocation is based on having fair project contracts
that are understood by everyone
- The different parties involved should seek a multi-beneficial distribution of risk
1. Economic Price Adjustment
This allows for controlled price escalation during the life of a project. Fixed price contracts are the most prone to claims. This is particularly the case for complex design projects that have a construction duration in excess of three years.
In this context, contracts would set a limit on the price escalation to be carried by the contractor, leaving anything above that amount to the owner. This way, if costs increase significantly during the life of the project, the contract contains a formula and the conditions for compensating the contractor, potentially eliminating or reducing the need for claims.
2. Innovative project award and delivery mechanism
A new bidding method for earthwork and tunneling jobs is suggested. This involves a "Negotiated Cooperative Process". This bidding/selection system divides the contract award into three steps as follows:
(a) Selection of contractors. The owner and the consultant qualify interested contractors.
(b) Joint decisions. Selected contractors meet with the owner and the consultant to jointly decide on the best type of equipment to be employed on the project. This is important in pricing earthwork and tunneling jobs. In addition, other possible issues critical to the execution of the project are also discussed, including geotechnical reports that are reviewed and jointly interpreted.
(c) Awarding the contract. Each contractor presents a bid based upon the criteria agreed on in the previous steps of the process. The owner then awards the contract.
The benefit to the three-step bidding system described above is that it provides a more balanced distribution of project risk, since some of the equipment and other uncertainties are reduced. The joint decision aspect allows for significant savings during submittals and start-up for all parties. It limits problems associated with equipment, productivity and schedule sequence during construction.
3. Procurement, Engineering and Construction Process
This approach is a response to the increasing role major suppliers of equipment and materials are playing in the construction process. In this process, we utilize the expertise and knowledge of key suppliers in all phases of the project life cycle by developing an advance procurement strategy, and by reaching a full commercial agreement with suppliers of strategic procurement items and/or systems prior to the principal engineering activities.
That is, critical pieces of equipment and materials are negotiated and procured before the engineering takes place, based upon conceptual designs and the owner’s detailed performance requirements. With the suppliers on board, the engineering design process incorporates their input, special requirements and experience into the design.
The benefits from such a process include improved quality of detailed design; improved system and facility performance; more equitable allocation of risk; improved use of supplier expertise; reduction or elimination of redundant work; and reduced need for owners and contractors to maintain areas of expertise that are more cost and time-effectively maintained and delivered by suppliers.