Constructions projects have become of increasing technological complexity with relationships of those involved are also more complex and contractually varied. Additionally global trends are dramatically impacting contracting activity. Success depends on new and innovative ways to manage uncertainty and complexity.

1. OMAN – BRIDGES /
HIGHWAYS SUMMIT
Loay Ghazaleh, MBA, BSc. Civil Eng.
Todays
Contracting –
Contracts
RISKs and
Disputes
Sep 15, 2015
Oman

2. 2
Complexity & Changing Landscape in Construction Projects
Challenges and Best Practices In Managing Government Projects
Mega Projects in Focus
Introduction to Risk
Identifying & Allocating Risk
Risk Management – PMI
Project Cost Management - PMI
Construction Projects Delivery
Procurement Payment Methods (Owner / Buyer Perspective)
Construction Hazards, Injury & Catastrophic Events & Insurance
Contractors‟ All Risks (CAR) Insurance & Wrap-ups / OCIPs
Disputes & Killer Provisions In Contracts & In Insurance

3. Complexity & Changing Landscape
in Construction Projects
3
Construction projects
have become of
increasing
technological
complexity.
The relationships of
those involved are
also more complex
and contractually
varied.
Global trends are
dramatically
impacting contracting
activity

4. NEVER HAS THE CONTRACTING
INDUSTRY BEEN SO:
 Dynamic
 Growth enabled
 Globally connected
 Communications capable
 And yet never has the markets been so
 Shaken by global events
 Resource locked
 Risk consumed
 Slow to move on innovation
 THUS, with size of projects increasing, acceptance for
other contract forms has developed over time from
fixed price to cost-plus to EPC / PPP.
4

5. Project Team Participants
 Construction projects have involvement of many
participants comprising Owner, Designer, Contractor
and many other professionals from construction related
industries.
 These participants are both influenced by and depend
on each other.
 Therefore the environment in which construction projects
are accomplished today often involves completing
complex, multi phased projects within tight budget and
time constraints and extensive efforts are required to
reduce costs associated with time, materials, and
engineering….
5

6. Typical Construction Industry!
 Less than 1 in 5 contracts are completed on time &
within budget in the Construction industry!
 Very few contracts successfully completed to
satisfaction of all participants
 Blame culture is common!
 Participants become defensive
 Relationships break down
 Participants become contractual
 Participants end up losing
 and don‟t want to do repeat business
6

7. Some Emerging Forms of Contracts
7
Model Fundamentals Success Factors
PPP / BOOT Public Private
Partnership
 Complimentary investment
and ownership outlooks
Private Equity / Ownership Private ownership and
development of assets
 Multiple equity partners
 Aligned ROI
 Supported by Government
policy
Alliances Formal alliance, usually
project or period based
 Requires exceptional trust,
open book and planning
systems
 Good opportunities for
people development
 Complimentary Partners
Relationship / Panel
contracting
Accredited panel elite
contractors
 KPI incentives / profit at risk
 High quality / engineering
 Several partners, resource
optimization

8. With Global Risks Increasing
 Global credit crisis continues!
 Global warming a serious issue now
 Natural disasters increasing
 Oil price / commodities volatility
 Terrorism spread
 Internet dependency (What if it fails?)
 Global supply chain interruption risks (steel, oil,
building equip)
 Pressure on resources: water, food, energy, labor
8

9. And Changing Social Fabric
 World population growth (7.2b by 2015)
 Growing middle class
 Urban centers expand, household sizes
fall
 Aging workforce and populations in
developed nations grow
 Social networking driving new
communication behaviors.
9

10. A MIX Change In the Contractual
Context had taken place;
 Greater MIX change has been seen in
 Developers and Clients forming “Alliances” & „Partnering‟ Forms of
Contracts with Contractors
 More of 2 Stage Tendering
 Clients wishing to secure Contractors resources to deliver their projects
 Contractors becoming more sophisticated in terms of Risk Management
 Introduction of Best Practice from other countries
 Contractors looking at undertaking numerous projects.
 Also the war on talent continues!
 Moving away from the traditional lowest cost adversarial
approach, No one party is interested in litigation!
 Remember ; „Construction is and will be a High Risk‟
industry
10

11. 11
The Future In Construction
 More PPP , More Design & Construct
 Bigger projects / Mega!
 Fewer contractors
 Higher cost to Principals / Owners / Sponsors
 More work opportunity for Consulting Engineers
 Potential for more claims and litigation
 Better risk management by all parties
 Better Measures to Evaluate Performance!

12. Some Emerging Measures to Evaluate
Performance
 Profitability is just a short – term measure!
 Satisfaction Measures!
 Client satisfaction
 End user satisfaction
 Repeat clients
 Better relationship with the suppliers and the subcontractors
 Factors Leading To Client Satisfaction;
 Better value for money
 Improved predictability of cost and time
 Better resource planning
 Better design
 Fewer defects at completion
 More effective procurement
 Fewer disputes
 Better use of resources
 Improved supply chain management
12

13. Challenges and Best Practices In
Managing Government Projects
Non financial
Benefits
Political
Environment
Formal Processes
Megaprojects
Long Product Life
Cycle
Multiple
Stakeholders
13

14. Characteristics of Government Projects
and Programs
 Generally there is Poor Performance Management of
Government Projects and Programs in ALL COUNTRIES!
 Key Characteristics of Government Projects and
Programs
 Non-Financial Benefits
 Political Environment
 Formal Processes
 Mega, complex projects
 Long Product Life Cycle
 Multiple Stakeholders
14

15. To Do List! - Non-Financial Benefits
 Identify Clear Non-Financial Benefits in the Business
Case
 Ensure that Target Benefits are Realistic and
Achievable
 Establish an Agreed-Upon Evaluation Methodology
for Project Benefits
 Evaluate the Impact of the Project on the Achievement
of Strategic Goals
15

16. To Do List! - Political Environment
 Consider Legal Consultation to ensure that Proposed
Ideas are in Line with Current Legislation
 Consider Financial Consultation to Improve
Understanding of Economic Aspects of the Project
 Ensure that the Project is aligned with Agencies’
Strategies
 Consider Public-Private Partnership (PPP) when
Appropriate
 Ensure PPPs are Economically Feasible
 Provide Project Managers More Authority
16

17. To Do List! - Formal Process
 Establish and Follow Government Projects
Management Framework and Processes
 Follow Formal Planning and Estimating Processes that
Incorporate Lessons Learned
 Follow a Formal Risk Management Process
 Follow Formal Project Monitoring and Change
Management Processes
 Establish and Follow Project Governance Framework
17

18. To Do List! – Mega Complex projects
 Develop a Base Cost Estimate and Integrated Master
Schedule (IMS) for Mega & Complex projects
 Align the Project Cost with the Annual Budget Cycle
 Consider Off-the-Shelf Solutions over High-Risk New
Development When Possible
 Split Programs into Smaller Manageable Projects for
Tighter Project Control
 Develop Contingency Plan and Monitor Risks
 Identify Training Needs for Large-Scale Mega &
Complex projects
18

19. To Do List! - Long Product Life cycle
 Ensure Robust Design and Quality Management
Process
 Reduce the Use of Unapproved (too advanced)
Technologies
 Account for Project falling out of favor as duration
usually exceeds the election cycle.
19

20. To Do List! - Multiple Stakeholders
 Engage Procurement Personnel on the Project Team
 Consult the Business Community when Relevant
 Coordinate the Project with Existing Operations
 Establish Interagency Agreements for Cross-Agency
Projects
20

21. Mega Projects in Focus
Mega projects are led by
large client, prime
contractor or joint
venture
Processes are tailored
to the requirements of
the project
There are opportunity to
find new ways to
improve performance
Success depends on
new and innovative
ways to manage
uncertainty and
complexity
21

22. Distinguish Mega Projects from Programs
& Portfolio‟s
 A program is a group of related projects managed in a coordinated way
to obtain benefits and control not available from managing them
individually.
 There must be some value added in managing projects together as a
program.
 Program management focuses on the project interdependencies.
 A portfolio refers to a collection of projects or programs and other work
grouped together to facilitate effective management to meet strategic
business objectives.
 The projects or programs of the portfolio may not be interdependent or
related.
 Portfolio management refers to the centralized management of one or
more portfolios, which includes identifying, prioritizing, authorizing,
managing and controlling projects, programs, and other related work.

23. Complex project
Simple project
Technology
Novelty
Pace
Complexity
Array System Assembly
Derivative
Platform
Breakthrough
Super-high-tech
Medium-tech
High-tech
Low-tech
Regular
Blitz
Fast/competitive
Time-critical
Shenhar and Dvir‟s (2007) 4D Model
 4 types of technological uncertainty
 3 levels of Complexity
 3 levels of Novelty
 3 levels of Pace

24. 3 Levels Of Complexity
Array
project
„System of systems‟
Systems with independent
functions, but each with common
goal
 Airport
 Channel Tunnel
 New nationwide mobile
communications system
System
project
single system - a common goal
 platform with subsystems
 Aircraft
 Air traffic control system
 Building
Assembly
project
self-contained component
perform a function in a larger
system
 Modular components and
subassemblies
 Computer stations

25. Complexity and Organization
 Assembly projects
 Single organization (often one functional group), with the help from other
functions
 Small team working in one location
 System projects
 Main contractor responsible for deliver of product
 Tasks divided among several subcontractors, in-house or external
 Array projects
 Central umbrella organization – often separate entity or company and
formally coordinates program and subprojects
 Deals with financial, logistical, legal and political issues
 Projects often spread over wide geographical area

26. Systems Integration Example
Systems integrator
Parts suppliers
Subsystem suppliers
Operator and users
Component suppliers
Design and integrate
hardware, software
and services into
functioning system
A process to
coordinate
large
network of
suppliers

27. 27
Mega Projects In Construction
 Multiple stakeholders
 Ambiguity (Unknowns) in project features, resources, phases.
 Highly regulated environment
 Significant political / authority influences
 Project duration exceeds elected officials office cycle!
 Changing project governance
 Use of technology that is new to the organization
 Use of technology that has not yet been fully developed
 Project duration exceeds the cycle of relevant technologies
 Significant external influences
 Significant internal interpersonal or social influences

28. Introduction to Risk
Construction industry
must accept that the
risks profiles has
changed and must
form new and
innovative models to
succeed in the new
un certain
environment
Your Organization‟s
Risk Experience.
Risk Management
and Insurance
28

29. Contractors Decision –
to Bid or Not to Bid!
Contractors usually consider before bidding;
 Strategic Goals of the Company
 Capabilities of the Company
 Location of the Work
 Bid Logistics
 Licensing
 Pre-Qualification
 Bonding
 Scope of Work
 Resource Requirements
 Project Risks!
29

30. Contractors –
Your Organization‟s Risk Experience??!
 How well is your organization identifying and
managing risk?
 How well are technical risks integrated into overall
program risk management activities?
 How is your organization dealing with “unknown
unknowns” associated with programs/projects with
complex elements?
 To which standardized risk management practice(s)
has your organization aligned to?
 How has that alignment affected your organization‟s
ability to identify and mitigate risks?
30

31. Contractors –
What Are Your Organization‟s Drivers?
 On time / Within budget
 Meeting safety requirements
 Meeting regulatory requirements
 Meeting/exceeding capability targets
 Competitive quality
 Customer satisfaction
 New business
 Staying in business
 Better team‐organizational performance
 Culture change
 Others?
31

32. Owners –
Does the Contractor Have In Place;
 Realistic, effective and accountable project/contract deliverables?
 Clear expectations?
 Clear KPIs and Terms & Conditions?
 Commercial, technical and legal risk register?
 Reasonable evaluation?
 Risk sharing?
 Variation and scope controls?
 Streamlined supply chain?
 Effective contract & risk management mechanisms for parties involved ?
 Insurance mechanisms for Company & Sub Contractors?
 Owner as beneficiary in insurance policies?
 Effective procurement contract templates?
 Procurement life cycle management?
 Effective tendering processes?
32

33. Owners –
Is the Contractor Buying Into Risk Management?
 Understanding of risk management:
 Does the Contractor have an effective risk management system?
 Does the team understand risk?
 Are the risks narrowly focused?
 Does the Contractor train and engage the risk team?
 Supply Chain Management;
 Is risk being built around the supplier timelines?
 Is there supply chain security?
 have long-lead items been adequately budgeted for?
 Is there risk mitigation if the supply chain fails?
 Is the risk on the Suppliers / subcontractors or the Contractor?
 Is there full disclosure in regards to inventory lead times?
 Will timelines be met?
33

34. Owners –
Are the Contractor Buying Into Contracts Clarity?
 Is there a contractor‟s relationship management with
effective contract deliverables, KPIs and terms and
conditions.
 Are commercial, technical and legal terms defined in the
contracts.
 Is Technical authority clear?
 Are terms and conditions recent and understandable?
 Is there clear reporting & meeting agendas adhered to?
 AS OWNER; ARE YOU BUILDING SUSTAINABLE
RELATIONSHIPS WITH TE CONTRACTOR?
34

35. Projects & Programs Risks
 Projects and programs are often complex
undertakings with potential risks from many
different application areas.
 There are substantial challenges to managing risks
that come from within familiar application areas.
 Program/project teams struggle with who is
responsible for risk management and which
practices are most effective.
35

36. Understand Risk From The Start
 Risk analysis of projects determine how unforeseen
disturbances can impact the project delivery.
 Identifying areas of danger in the project cycle and
developing ways to overcome delays with proper
risk management planning and cost analysis is
paramount.
 The unknowns or improbable are dealt with in
contingencies.
 Risk Funding can come from current expense
accounts, funded reserves, borrowing and from
captive insurers or commercial insurance.
36

37. Risk Management is the process of planning, leading and
controlling the resources and activities of an organization;
 To fulfill its objectives cost effectively
 To protect and grow corporate assets
 To enhance shareholder value
Risk Management
Identify
Exposures to
Loss
Examine
Feasibility of
Alternative
Techniques
Select the
Apparent Best
Technique
Implement the
Chosen
Techniques
Monitor and
Improve the
Risk
Management.
Program
37

38. Strategic Risks
• Program design
• Financing
Operating Risks
• Safety management
• Quality assurance
• Claims cost management
• Communication systems
Financial Risks
• Risk allocation methods
• Risk assumption/transfer
• Risk costs recovery
Information Risks
• Benchmarking
• Management practices
Breadth of Risk Management

39. Better Risk Management In Tenders
 Risks profiling and their management can be used to
drive contracting strategies. Different contracting
models carry different risks.
 Always: Identify the chance of loss (Risk) , establish
degree of probability of such loss and assess the money
that may be lost.
 Risk Management tools in TENDERs;
 Effective development of scope is paramount
 Risk identification and pricing in tenders
 Risk sharing with agreed specified outcomes
 Limitation of liability - for the owner, contractors and
consultants
 Tender evaluation criteria – Fair , Transparent with Equal
Opportunity
39

40. Example; Uncertainty and Contractual
Approach
Cost-plus contract
• Risk and opportunity shared
by client & contractor
• Client bears the cost of
development and seeks to
avoid less than optimal
solutions
• Contractor has an incentive
to produce best result and
maintain profits
High Low
Fixed-price contract
• Contractor takes on all the risk
• Does not work well for high-tech
uncertainty – creates risk for client
& contractor
• Contractor loses money due to
unexpected events
• Client gets inadequate product
when contractor stays within the
price range
Relative uncertainty
40

41. Major Project Delivery Risks/ Exposures
 Lack of approvals
 Supply chain lead times
 Poorly defined scope
 Design creep
 Scope creep
 Weather
 Inappropriate/unqualified team
 Contractual disputes
 Poor risk management
 Technology issues
41

42. Commodity / Resource Risk
- Susceptibly To Cost Escalation
 Steel
 Labor costs/trades
 Building materials
 Contractors
 Manufactured equipment
 Sub-contractors
 Fuel prices
 Bulk Materials
 Structured elements
 Project staff
 Plant
42

43. Top 10 Causes to Cost and Schedule
Overruns in Construction Projects
1. Engineering - delays, changes
2. Estimating – poor quality of the estimate
3. Procurement - long leads, changes
4. In adequate in house Fabrication / Manufacturing
5. Facilities – limited capacities/ available space,
constrained logistics
6. Poor Labor skills and availability
7. Low productivity and performance
8. Inadequate execution planning
9. Project funding shortage
10. Sub optimal decision making
43

44. All top contributors to Overruns can be
Mitigated! Examples
 Gate Processes – Controls;
 Engineering
 Estimating
 Funding shortage
 Front End Planning – Controls;
 Procurement, long lead, changes
 Inadequate execution planning
 Sub optimal decision making
 Construction Readiness Reviews – Controls;
 Poor labor, skill, availability
 Low Productivity and
 In adequate in house Fabrication / Manufacturing
 limited capacities/ available space, constrained logistics
44

45. Remember ; Top Ways To Improve Risk
Management In Execution45
 Standardization / formalization of construction
process
 Periodic review / secondary review / oversight
 Dedicated / experienced resources involved in
process
KEY; input early on in the construction process
 Build-ability
 Value Engineering

46. Risk Management As A Practice
 Construction industry recognizes the relationship
between risk management and sustained profits.
 Risk management requires “beyond the edge”
thinking.
 Managing risk has evolved from a one-time a year
insurance process into a serious profit initiative.
 Managing risk will boost profits, reduce costs and
change the way contractors compete.
46

47. Risk Management and Insurance
RISK MANAGEMENT INSURANCE MANAGEMENT
Active/Initiative Reactive
Dynamic Passive
Protection oriented Security oriented
Financially/analytically
oriented
Administratively oriented
Seeks responsibility Seeks safety
Curious/Creative Narrow in scope
Applied to the
construction activities /
company
Responsive to others
Broad Based – includes
multiple disciplines
Not all risk areas are covered

48. Construction Industry Bonds
 Bonds are not NOT Insurance. They stand on their own
 Bond holders will go after contractor when in default
 Goals of Bond Holders may not be all the same! In General; Do not release bond too early
 Bid Bond
 Will the selected bidder start the project?
 Public ~ 20% or as low as 5% of Bid
 Private ~ 5% to 10% of Bid
 Performance Bonds
 Guarantee the specific performance of the contract or completion of the contract
 For use when the project is not completed as contracted. usually100% Complete Job at Bid
Price
 Payment Bonds
 Guarantees the payment of subcontractors on the project. Will a contractor pay any
associated charges (e.g., subcontractor fee)?
 Cover Unpaid Bills by Contractor
 50% for < $1M
 40% for $1M < X < $5M
 2.5M for > $5M
 Most Institutions Now Require 100%
48

49. Price Premiums In Tenders
49
Risk Area Risk Premium
 Global risk environment  High in current environment
 National contract environment  Low to moderate
 Local competitive environment  Low but will drive price margin
 Core business activity  Non-core will add premium
 Multiple partner deal (partner confidence)  Low if risk sharing is accepted by partners
 Project complexity  Higher complexity higher premiums
 Global sourcing of commodities  High (hedge contracts)
 Scale and length of project  Need to structure pricing to fit
 Safety factors  Medium (added project control)
 Method of financing  High (deal many not be executed)

50. IDENTIFYING AND ALLOCATING RISK!
Systematic and
holistic approach
to identifying and
analyzing the
associated Risk in
construction
projects begins by
identifying the
stakeholders
perspectives as
project
participants have
different interests
and demands.
50

51. Typical Risk Identification & Analysis

52. Project Risk Groups
52

53. Understanding Project Participants
Interests & Perspectives
 A more systematic and holistic approach to identifying and
analyzing the associated Risk in construction projects begins by
identifying the stakeholders perspectives as project participants
have different interests and demands
 Client
 Focuses on the final quality within the Budget and timeframe.
 Contractors
 Financial Result
 Future Projects with same Client
 Image in the society
 Consultants
 Quality and Execution monitoring to comply with the design intent
 Over come the design /construction issues, which has been noticed
during the construction stage without impact in the contract.
 Liability Issues. PII important
53

54. Principles of Risk Allocation
A risk shall be allocated to the party that:
 If the risk is of loss due to the party own willful misconduct
or lack of reasonable efficiency or care;
 If the party can cover the risk by insurance and allow for the
premium in settling the charges, and it is most convenient
and practicable for the risk to be dealt with in this way;
 If the substantial economic benefit of preventing the risk
accrues to the party;
 If it is in the interest of efficiency to place in the risk on the
party;
 If, when the risk eventuates, the loss happens on the party in
the first instance, and there is no reason under any of the
above headings to transfer the loss to another , or its
impractical to do so.
54

55. Allocating The Risk To The Party Best
Able To Carry The Risk
 Leiringer (2005): Is this the party with largest
influence on the probability of an adverse occurrence
happening, or Is this the party that can best deal with
the consequence after an adverse occurrence?
 Corner (2006): To best manage risk means to
manage it at least cost. If cost of preventing an
adverse occurrence is less than cost of dealing with
consequences of the adverse occurrence, then risk
should be allocated to the party best able to
influence the probability of occurrence.
55

56. Fundamental Risk Allocation Tips
 Contractors are often highly risk averse
 For risks that contractor can’t control, they may be willing to pay a risk
premium (charge less for contract) to owner to take over the risk.
 For risks that contractors can control, may be willing to manage risk.
 Structure risk allocation in contracts so that
 Risks that contractor can better handle are imposed on contractor (i.e.
contractor will lose $ if don‟t control)
 Risks that the owner can better handle are kept with / by the owner
 Maintain Balance
 Impose high enough risk incentive to get contractor to do the job
efficiently – within the specifications of the contract. E.g. Incentive to finish
on time, incentive to stay within budget
 Impose low enough risk to have reasonably low bid
56

57. Risk Types & Categories
Risk Types
Known known Total certainty
Known unknown Degree of uncertainty
Unknown unknowns Total uncertainty
Risk Categories
External, unpredictable Regulatory, etc.
External, predictable Market risks
Internal, non-technical Management
Technical Design
Legal Contractual
57

58. Key Risks that Influence Project
Objectives
Risk
Code
Likelihood Impact
Highly
Likely
Likely
Less
Likely
High Medium Low
1 o.5 0.1 1 0.5 0.1
1 Tight Project Schedule TPS
2 Design Variations DV
3 Excessive Approval Procedures EAP
4 High Performance/Quality Expectations HPQE
5 Inadequate Program Scheduling IPS
6 Unsuitable Constructions Program Planning UCPP
7 Variations of Construction Programs VCP
8 Low management Competency of Subcontractors LMCS
9 Variations by the Client VC
10 Incomplete Approval and other Documents IAD
11 Incomplete or Inaccurate Cost Estimate ICE
12 Lack of Coordination between Project participants LCP
13 Unavailability of sufficient professionals and Managers UPM
14 Unavailability of sufficient amount of Skilled Labor USL
15 Bureaucracy of Government BG
16 General Safety Accident Occurrence GSAO
17 Inadequate or Insufficient site information ISI
18 Occurrence of Dispute OD
19 Price Inflation of Construction Materials PICM
20 Serious noise, dust Pollution Caused by Construction SNP
The analysis to be performed for 1) Cost 2) Time 3) Quality 4) Environmental and 5) Safety Risks
Typical Risk Register

59. Typical Risk Matrix
59
L i k e l i h o o d
CONSEQUENCE

60. General Sequence Of Risk
Materialization In Construction Contracts
60

61. Risks & Projects Success Formula
 Clients (should) know what kind of project features they want and therefore should
clearly define them in the brief to avoid changes during the execution.
 The early effective involvements of the parties on the projects helps clients to produce
appropriate project schedule, financial report by considering the price inflation.
 Designers (including consulting engineers) should carry out in-depth investigation of
site conditions prior to the design works and employ effective mechanism to articulate
the clients‟ needs.
 Bureaucracy Authorities Could create a swift environment to support the project
development while the project team should always maintain close relationship with the
government officers to shorten the time for approvals.
 To keep the construction work on track, experienced professionals need to be
assigned in the project as early as possible to make sound preparations for
developing valid construction programs.
 The systematic approach would assist the stockholders /managers‟ to manage
and resolve the potential risks at various stages of the project and take decisions
to drive the project team to goal and complete the construction projects on time
with profit.
61

62. Risk Management – PMI
PMI Risk
Definitions
Plan Risk
Responses –
Negative
Risks
Plan Risk
Responses –
Positive
Risks
62

63. PMI Risk Definitions
 Risk is an uncertain exposure to
a potential occurrence, causing
things to go wrong or right i.e.
to positively or negatively
affect project constraints (
Scope, Schedule, Budget,
Quality, Resources, and
Customer Satisfaction)
 The PM should be in control and
proactively manage events,
anticipate and identify areas of
risk, how to quantify them and
how to plan for them.
63

64. Plan Risk Management (PMI)
64

65. PMI Risk Breakdown Structure
The Risk Breakdown Structure (RBS) lists categories and sub-
categories within which risks may arise. Different RBS are
appropriate for different types of projects & different organizations.
65

66. Identify Risks (PMI)
66

67. Identify Risks (Diagramming & SWOT
Analysis)
 Diagramming technique
 Flow charts are useful in identifying risks because they
can breakdown complex items into an understanding
diagram
 Cause-and-effect or Ishikawa diagrams and Fishbone
diagrams are one way to show potential causes that can
lead to risks
 SWOT Analysis
 SWOT Analysis, helps to specify the most significant
project risks by plotting each risk in the corresponding
quadrant.
67

68. SWOT Analysis
68

69. Perform Qualitative Risks Analysis
(PMI)
69

70. Risk Impact Definitions – Cost, Time,
Scope & Quality (PMI)
70

71. Perform Qualitative Risks Analysis
(PMI - Tools & Techniques)
71

72. Risk Prioritization
72

73. Perform Quantitative Risks Analysis
(PMI)
73

74. Example - Risk Quantitative Analysis
All cash values are Net
Present (path) Values
74

75. Plan Risk Responses (PMI)
75

76. Plan Risk Responses – Negative Risks
(PMI - Tools & Techniques)
 Avoidance / Prevention (Before the Fact)
 Plans to eliminate a specific threat by eliminating the cause so
that it never happens.
 Mitigation / Reduction (Before the Fact)
 Plans to reduce the probability or impact of the risk.
 Acceptance (After the Fact)
 Passive - Decide to do nothing about it and live with the
consequences if it ever happens.
 Active - Develop a contingency plan and execute it once the
risk is realized to reduce risk impact and minimize losses.
 Transfer
 Get a 3rd party to take care of the risk e.g. insurance,
outsourcing / subcontracting, and warranties.
76

77. Avoidance:
 Risk prevention
 Changing the plan to eliminate a risk by avoiding
the cause/source of risk
 Protect project from impact of risk
 Examples:
 Change the implementation strategy
 Do it ourselves (do not subcontract)
 Reduce scope to avoid high risk deliverables
 Adopt a familiar technology or product
77

78. Mitigation
 Seeks to reduce the impact or probability of the risk
event to an acceptable threshold
 Be proactive: Take early actions to reduce
impact/probability and don‟t wait until the risk hits
your project
 Examples:
 Staging - More testing - Prototype
 Redundancy planning
 Use more qualified resources
78

79. Transfer
 Shift responsibility of risk consequence to another
party
 Does NOT eliminate risk
 Most effective in dealing with financial exposure
 Examples:
 Buy/subcontract: move liabilities
 Selecting type of Procurement contracts: Fixed Price
 Insurance: liabilities + bonds + Warranties
79

80. Acceptance
 Used when project plan cannot be changed & other risk
response strategy cannot be used
 Active Acceptance
 Develop a contingency plan to execute if the risk occur
 Contingency plan = be ready with Plan B
 Passive Acceptance
 Deal with the risks as they occur = No Plan B prepared
 Contingency allowance/ reserve
 Established amount of reserve (e.g.: time and/or money) to
account for the identified known risks.
 Amount is decided based on probability and impact
80

81. Plan Risk Responses – Positive Risks
(PMI - Tools & Techniques)
 Exploitation (Before the Fact)
 Plans to ensure a specific opportunity actually happens / realized.
 Ex: Assigning organization most talented resources to the project to
reduce cost lower than originally planned
 Enhancement (Before the Fact)
 Increase the probability and/or the positive impact of the opportunity
(risk)
 Ex: Adding more resources to finish early
 Acceptance (After the Fact)
 Passive - Decide to do nothing and benefit from the event if it happens.
 Active - Develop a contingency plan and execute it once the risk is
realized to increase impact of opportunity & maximize profits.
 Share
 Allocating some of the ownership to third part best able to capture the
opportunity
 Ex: Joint ventures, special-purpose companies
81

82. Control Risks (From PMI)
82

83. Project Cost Management - PMI
Life Cycle Cost
(LCC)
Sunk Costs
Working Capital
Variable & Fixed
Costs
Direct & Indirect
costs
Depreciation
Value Analysis,
Engineering,
Management
(VA, VE, VM)
83

84. Cost Versus Time
84

85. Determine Budget (PMI)
85

86. Determine Budget (Output)
Cost Baseline = Estimate + Contingency Reserve
Where as:
Estimate = summation of all activity costs
Contingency = amount of cost reserves calculated in Risk
Management for known risks.
Cost Budget = Baseline + Management Reserve
Where as:
Management Reserve = amount of cost reserves calculated in
Risk Management for unknown risks (simply a percentage %)
86

87. Control Costs (PMI)
87

88. Earned Value Management Technique
The earned value management technique is a method to measure project
performance against the project baselines. It results from an earned value analysis
indicating potential deviation of the project from the cost and/or schedule baselines.
Acronym Term Explanation
PV Planned Value Estimated value of the work planned to be done
EV Earned Value Estimated value of the work actually accomplished
AC Actual Cost Actual cost incurred in work accomplished
BAC Budget At
Completion
The Budgeted amount for the total work
EAC Estimate At
Completion
The current estimate for the total project cost
ETC Estimate to
Complete
From this point, how much more the project would
cost to complete
VAC Variance at
Completion
How much over or under budget we expect to be at
the end of the project.
88

89. Earned Value Formulas
Acronym Formula Explanation
Cost Variance (CV) EV-AC Negative is over budget, positive is under
budget.
Schedule Variance (SV) EV-PV Negative is behind schedule, Positive is
ahead of schedule.
Cost Performance Index
(CPI)
EV/AC We are getting $_____ worth of work out
of every $1 spent.
Burn Rate 1/CPI BAC burn rate.
Schedule Performance
Index (SPI)
EV/PV We are progressing at ________ percent
of the rate originally planned.
Estimate to complete (ETC) EAC-AC How much more the Project would cost.
Variance at Completion BAC-EAC How much over or under budget we
expect to be at the end of the Project.
To Complete Performance
Index (TCPI)
(BAC-EV)
/(BAC-AC)
How well shall we be performing from
this point on to be back on budget.89

90. Estimate At Completion (EAC)
Acronym Formula When to use it? Assumptions
Estimate At
Completion (EAC)
BAC / CPI Same spending rate, typical variances, no
variances to experience in performance.
Estimate At
Completion (EAC)
AC + (BAC – EV) Same spending rate is NOT acceptable,
atypical variances, variances shall have to
be experienced in performance and
geared up to 100%.
Estimate At
Completion (EAC)
AC +
Bottom up ETC
Original estimate is flawed.
Estimate At
Completion (EAC)
AC + [(BAC – EV)
/ (SPI x CPI)]
Same spending rate, typical variances, no
variances, need to hit a firm deadline.
90

91. Reporting Performance on Small Scales
 20 / 80 Rule
 Activity is considered 20% complete when it starts
 50 / 50 Rule
 Activity is considered 50% complete when it starts
 0 / 100 Rule
 Activity gets no credit for partial completion
91

92. Construction Projects Delivery
Design-Bid-
Build
(Traditional)
Design &
Construct (D&C)
Design,
Construct &
Maintain (DCM)
Construction
Manager
Public Private
Partnerships
(PPP)
Alliances (JV‟s)
92

93. Project Delivery Contract
Why do we need contracts?
 To define roles and responsibilities.
 To make things legally binding.
 To mitigate or allocate Risk.
What do we need to have a Legal Contract?
An offer > Legal Capacity – External Legal Parties
Acceptance > Legal Purpose – Legal Goods
Consideration – Value, something in return of the services
93

94. 94
 Design-Bid-Build ( DBD - Traditional)
 Construction Manager
 Design & Construct (D&C)
 EPC (Engineer, Procure, Construct)
 Public Private Partnerships (PPP)
 Design, Construct & Maintain (DCM)
 Build, Own, Operate (BOO)
 Build, Own, Operate, Transfer (BOOT)
 Partnering & Alliances
Popular Projects Delivery Methods

95. Possible Roles of Consulting Engineers
 For Owners (Purchasers)
 Initial planning, project definition
 Concept design
 D&B tender document preparation
 D&B tender evaluation
 Proof checking / design verification
 Also design verification roles for :
 BOO developer (who appoints D&B contractor)
 Financier to BOO developer
 For Contractors
 Tender design
 Detailed design
 Construction management
 Commissioning
95

96. Considerations in Project Delivery
 Owners have more options available today.
 Owners increased emphasis on qualifications.
 Promoting competition provides value for the owner and
makes the industry more responsive.
 Stewards of public funds (Governments) have a legal
and ethical responsibility to preserve and protect the
public trust.
 Transparency and fairness in procurement process are
critical to a successful project.
 Base decisions on project needs & budget……not
marketing!!!
96

97. Factors in Selecting Delivery Methods
 Complexity of project
 Project size (cost estimate)
 Is early contractor involvement desired?
 Is price or qualifications the driving factor in selection?
 Is single point responsibility or multiple contracts
desired?
 How much control does owner want?
 Intention for a general contractor with self-performance
capabilities or a Construction Manager.
 Project schedule requirements
97

98. Subjectivity While Promoting Competition
 The owner can set up a ranking system based upon
desired priorities, while fostering competition by
providing inclusive set of attainable criteria's;
 Does the contractor‟s proposed team have a history of
working collaboratively with the owner and/or designer?
 What local or regional relationships and resources does the
contractor have at their disposal?
 Which contractors proposing on the project have the best mix
of experience, price, and resources for this particular project?
 Is experience with the type of project more important than
the experience with the delivery method!
 Naturally, one should avoid selection criteria's that have
no bearing on the quality of the project!
98

99. Red Flags! - Contracts Risk and Conflict
 When competition is minimized, Owners pay more. Thus
Use reasonable project / tender advertisement to attract
bidders.
 Avoid conflicts of interest in CM procurements (separate
the responsibility for design and construction)
 Avoid qualifications requirements that are specific to
regional / country experience.
 Embrace realistic schedule requirements
 High liquidated damages result in low turn out or
eventual disputes.
 Use optimal incentives.
99

100. Focus - Design-Bid-Build (Traditional)100

101. Competitive Bidding – Best Value!
 Traditional & widely used in buildings projects
 Formal procedure for public agencies
 Time consuming process involving a bidding period as well as a bid
evaluation & review period prior to issuing notice to proceed with
construction
 Work awarded to highest score - technical and financial
 Project constructed with specified quality at usually the lowest price
 Contracts can be;
 Unit-Priced – BOQ Based.
 Lump-Sum – BOQ Guided!
 Loss is absorbed by the Contractor, if actual cost exceeds contracted
amount in lump sum contracts.
101

102. Traditional General Contracting
Characteristics102
 Single source of construction responsibility
 Presumed checks and balances between A/E and contractor
 Less construction risk for owner
 Simple and objective selection process
 Less administration required by owner
 Owner and contractor's interests are not aligned
 Lack of contractor input in design phase of project
 Loss of fast-track ability, which increases cost
 Design risk for owner is more
 Risk of "unknown subcontractors"

103. Design-Bid-Build (Traditional)
103

104. Design-Bid-Build (Traditional)
104

105. Design-Bid-Build
 Pros
 Well understood by all parties
 Owner has a large amount of control over final design
 Independence between designer & contractor
 Can apply multi-parameter bid evaluation (e.g., low bid + other technical /
delivery factors)
 Cons
 Prequalify process is aggressive.
 Pressure for lowest bid can create
 Cutting corners
 Low-quality personnel
 Bad feelings
 Sequential process
 Construction cost not established until after design is complete
 No constructability review during design
 Potential for adversarial Relationship
105

106. Focus - Construction Manager106

107. Pure “Agency” CM
with Multiple Prime Contractors107

108. Pure “Agency” CM
 The process by which a qualified firm is retained as Construction
Manager by an Owner to furnish services in connection with the
administration of the contract throughout the planning, design and
construction phases of a project. The Construction Manager is
generally authorized by the Owner to:
 Act on behalf of that Owner with respect to contract matters, including
overview of the design and construction phases of the project
 Transact business on behalf of that Owner
 Render an account of its activities
 The actual construction work is performed by others under direct
contract to the Owner. The Construction Manager is typically not
responsible for construction means and methods nor does he
guarantee construction cost, time or quality aspects of the project.
108

109. “At Risk” CM with Trade Contractors
109

110. Construction Manager at Risk (CMAR)
 Pros
 More flexibility allowed under the law in selecting the CM
 Constructability review – Shortened Scheduled
 Buy in from the CM for the design
 Maximum price is established earlier in the process
 Elimination of the conflict of interest between the design team and the
owner
 Cons
 Owner has less control over design details
 Potential Adversarial relationship between A/E & CM
 Owner must view A/E & CM as equals
 Lowest price may not be achieved
 If CM isn‟t selected prior to substantial design development benefits
are lost
110

111. Focus - Design-Build (DB) / EPC111

112. 112
Why Design & Construct ?
D&C is the most common form of project delivery in the Building,
Urban Infrastructure and Power Generation
 Reduce claims by contractors against Principals
 Risk transfer from Principal to Contractor
 Government departments downsizing / eliminating in-house
engineering capability
 Innovation without risk
 Larger projects – contractors are perceived with greater capacity to
manage than government
 Successful and speedy delivery
 Contractors having more control in project implementation
 Avoiding cost overruns which can be risks to politicians
 (Desired) Projects delivered in one political term

113. 113
Design-Build Key Risks
 Geotechnical
 Environmental
 Permits / licenses
 Existing conditions
 Inflation
 Force majeure
 Utilities Relocation
 ROW acquisition
 Change-in-law
 Owner‟s Oversight Regime
 Performance regime

114. Design – Build Characteristics
114
 A single source of responsibility for design and construction
 Providing all services necessary to design and construct a facility or
structure
 Guaranteed max price
 Valuable input by A/E and contractor from beginning to end
 Reduced time to complete
 Potential savings back to owner
 Reduced claims - by 30% or more for professional liability
 Loss of checks and balances
 Difficult and costly selection process
 Limited flexibility
 Competitive bid advantages can be retained
 Owner loses control over project and becomes sole watchdog

115. 115
Design-Build / EPC

116. 116
D & C Business Model & Risk Transfer
Principal
D & C
Contractor
ConsultantSubcontractors
Total Risk
Transfer
Risk
Transfer
Risk
Transferred
or Managed

117. 117
D & C Risk Environment for Consultants
 Legal framework – Common Law, Contract Law,
Trade Practices Laws / Acts, Occupational Health &
Safety Laws / Acts
 Onerous Agreements
 Contractors capacity
 Contractors plan to deal with commercial loss
 USE commercially sustainable PI Insurance with the
Owner & Contractor as beneficiaries!

118. 118
D & C Risks to Contractors
 Client risk dumping
 Risks inherent in Design & Construct
 Tender process suppresses risks
 Client Information risk
 Contractor has limited venue to claim against client
 Claim against consultant difficult
 The risks dominantly are commercial risks
 Professional Indemnity (PI) , as design is needed,
cannot support commercial risks

119. 119
Recommended Contractor Strategies in
DC Contracts
 Don‟t accept unreasonable terms – Examples of Onerous Terms;
 Unusual standards of care
 Responsibility for client supplied information
 Absolute fitness for purpose warranties
 Strict compliance
 Open ended indemnities
 Duty of care to multiple parties
 Liability for delays outside control
 Disclosing terms of PI Policy
 Negotiate a good contract to maintain a good relationship and a
good business
 Use Limits of Liability in Insurances
 Encourage Client to carry some risk
 Adopt commercially sustainable PI Insurance levels and guidelines
 Negotiate scope carefully and exclude others‟ responsibilities

120. 120
Potential Roles of the Consulting
Engineer in D&C
 Owner‟s (Principal) Planner and Engineer
 Banker‟s Engineer
 Contractor‟s Designer
 Contractor‟s Verifier
 Proof Engineer for the Principal and Contractor.
 Construction Verifier for the Principal and
Contractor.
 Independent Reviewer for the Principal and
Contractor.

121. 121
Contractor–Consultant Model Options
Contractor–Consultant Liability Transfer Model
 Contract conditions passed down from Principles
 Risk transfer through onerous terms
 Impossible and impractical notice requirements
 Certify compliance or breach contract
 Excessive and protective administration
 Aggressive and manipulative behaviours
 Designers site role suppressed / limited
 Post-contract claims and disputes
Contractor–Consultant Liability Managed Model
 Co-operative integrated relationship
 Methods of managing contract conditions agreed without transfer to consultant
 Consultant carries negligence risk
 Consultant assists Contractor to identify and manage risks
 Contractor to certify compliance or non-conformance
 Consultant to retain independent judgment
 Consultant uses Contractor administrative systems
 Co-operative behaviors and excellent performance
 Designers site role expanded and integrated

122. Design-Build (DB) / Design & Construct (DC)
 Pros
 Multiple procurement options
 Allows constructability review
 Single point of responsibility (as far as Owner is concerned)
 Shortened scheduled
 Non-adversarial relationship between A/E & GC
 Cons
 Owner has less control over design details
 Owner must clearly define scope prior to entering into contract (scope
creep risk)
 Owner must have extensive construction experience
 Loss of check & balance between A/E & GC
 Potentially more expensive since pricing is established prior to design
completion, however, the adverse is true as well!
122

123. D & B - Issues during Tender Stage
 Contractors expecting Consulting Engineers (CEs) , to perform
tender design at minimal fee
 Short available time to produce tender design
 Tender design based on insufficient information
 Pressure to take design risks
 Contractors expecting CEs to „guarantee‟ tender design /
quantities
 Contractual Issues
 Back to back contract arrangement
 Fit for purpose
 Liquidated damages – schedule
 Liquidated damages – performance
 CEs‟ professional indemnity insurance
123

124. D & B - Good Practices In Tenders
 Contractors preferred to be paid for tender services , high
development costs!
 Obtain commitment for appointment and fee level for a
successful bid
 Consider „success fee‟ / gain share
 Clearly state limitations (sufficiency of data, time, design
accuracy)
 Define tender design scope / responsibility
 Define exclusions (guarantees, fit for purpose)
 Involve contractor in decision process
 Commitment from and motivation of both parties to win
 CE takes ownership of tender design
 A true D&B team; Minimizes disputes
124

125. EPC
 This style of contract is usually fixed price with milestone
payments.
 Owners Team has recourse to penalties for time, and
performance shortfalls.
 EPCM acts as the Agent for the Owner for all contracts for
engineering, procurement, management of construction and
provision of commissioning support.
 EPCM is Retained on rates basis for services within a limit in
liability for faulty services.
 The Contractor is responsible for specialist technology packages and
full process warranties.
 Process design, detailed design, procurement, construction and
commissioning by the Contractor with full mechanical warranties and
varying design warranties.
 The Owners Team supplies specialist technology or free issue items.
 The Contractor completes detailed design and associated
construction based on a process or design from the Owners Team.
125

126. Multiple stakeholders
Differing risk attitudes
Protecting the taxpayer
Complex procurement
Political process
Focus - PPP126

127. PPP Project Development Issues
 There is a D&C Contract embedded in every PPP - BOOT, BOT contract.
Construction phase of a PPP likely to be delivered via design-build agreement
 Traditional contracts used by a Public Entities for delivering public works may
not be adequate templates for mega projects.
 Localities, especially those with limited experience in managing design-
build projects, should pay attention to the following:
 Are the technical requirements and standards to be incorporated into the
agreement appropriate for design-build project delivery?
 How will the notices to proceed for design and construction work be issued?
 How will the design review and the construction oversight processes work?
 Does the locality‟s oversight program properly align with the risk allocation
in the agreement?
 How will the contractor be paid for work performed?
 How will the dispute resolution process work?
127

128. Other PPP Development Issues
 Receipt of an unsolicited proposal can create resource challenges;
 Local Government units should developing guidelines, even if a locality has no
immediate plans to pursue a project using PPP, to ensure a review/management
process is in place should the locality receive an unsolicited proposals.
 Use risk workshops throughout project development and procurement
process to help inform key decisions makers / internal stakeholders;
 Risk workshops can help project owner by consider feedback received from
proposers (sponsors) and develop and refine the scope of the project.
 Also risk workshops can help the project owner to develop a negotiating
strategy.
 Risk matrix is useful when briefing internal stakeholders about the project and
contract terms
 Be mindful of additional requirements that may come along with
particular sources of funding;
 Using federal / donor funds for a project may trigger additional oversight,
reporting, and procurement requirements
128

129. Typical PPP Model Structure
Special Purpose Vehicle
SPV
PPP Contract
Public Procurer
Public Sector
Private Sector
Equity
Subordinated
Debt
Construction
Company
Operator
„Unitary Charge“ /
„Lease“ Payment
Senior Debt in
form of Project
Bonds
Investors buy
or underwrite
129

130. PPP Challenges and Mitigations
Challenges Mitigations
Multiple stakeholders Stakeholder management
Differing risk attitudes Candid, open dialogue
Protecting the taxpayer Open book awards
Complex procurement Competent, experienced advisors
Political process Keep decision-makers closely informed
 PPP procurement can be long & and complex; but it delivers value for money!
 PPP‟s are highly interdependent; a perfect opportunity for collaboration!
 One can‟t predict the future ; but it can be managed with long-term robust contracts!
 One can‟t get rid of risk; but it can its allocation can be optimized!
 PPP‟s last whole life; thus relationships and trust matter!
130

131.  Deliver value for money
 Project may become affordable within
the annual public budget
 Force the public sector to focus on
output and benefit
 Competition already in the design and
engineering phases (achievement of
performance-orientated prices and cost
minimising effects)
 Maximises the use of private sector
skills
 Adequate risk sharing
 Delivers assets on time and budget
 Partly or completely off public budget
 Conclusion of fixed utilisation fee and
defined price adjustment clauses
 Loss of management control by the
public sector
 Voluminous agreement system
especially on items like control,
devolution, reversion of rights and
events of default
 Higher cost of finance
 Long term, relatively inflexible
contractual commitment
 Risk of insolvency (selection rights to
be agreed)
 Higher efforts for control and
monitoring of (quality standards) for
the community
 Tax duty
Advantages Disadvantages
PPPs are not “one size fits all” solutions
(each individual project has to be assessed for its PPP suitability)
Advantages & Disadvantages of using
PPPs131

132. PPP Benefits for Government
Budgetary
Management
Exposure to Private
Sector Skills
Smoothing of
CapEx Spend
Profile
Public Private
Partnership
Certainty & Quality
of Service
Timeliness of
Delivery
Optimise Whole-
Life Design &
Costing
Better Risk
Allocation
Generation of Third
Party Revenues
PPP Potential Projects Requirements:
 Requirement for capital investment, either now or in the future
 Substantial service content within the requirement
 Scope for innovation in services delivery
 Competitive market, interested in the public sector‟s business,
 Private sector is better able to manage risks currently taken by the public sector
 Long term contracts are feasible
 Boundaries of activity are clearly defined
Final decision against
key evaluation criteria:
PPP offers better
Value for Money
than the Public
Sector Comparator
132

133. Making PPP Projects More Attractive?
 Strong political consensus on a cross-regional master plan (What? When?
How?)
 Realistic project planning & budgeting
 Awareness that PPPs are not a magic formula: bad projects cannot become
good PPPs
 Awareness that private partners need certain returns & stable Cash-Flows
 Feasibility Studies and Public Sector Comparator crucial for choosing the right
projects and appropriate financing structure (Public Procurement vs. PPPs)
 Openness for alternatives to bank loans for financing (e.g. Project Bonds)
 Sufficient capacity and skills on the public sector side (PPP Task Force) &
experienced private partners (e.g. advisors)
 Legislation and regulatory framework to allow the proper execution of
concession projects (concession law, expropriation issues etc.)
 “Best Practice”: replicate the process of successfully realized projects available
in the market  “Best Practice” (even if it is in another country)
133

134. Multiple stakeholders
Differing risk attitudes
Protecting the taxpayer
Complex procurement
Political process
Focus - Partnering & Alliances134

135. Project Alliancing
 Project Alliancing is a dramatic departure from traditional
contracting methods in that it encourages project
participants to work as an integrated team by tying the
commercial objectives (i.e. profit) of all the parties to the
actual outcome of the project.
 In this arrangement all decisions are made “best for
project” and not “best for individual entity” since the
alliance either wins or loses as a group.
 In all construction projects „change‟ is a defining
characteristic and is almost inevitable.
 In order to achieve truly outstanding project outcomes,
dynamic projects require contracts that are designed
specifically to embrace and manage change.
135

136. Alliance Contracting Existing Practices
Existing practice with contractors characterized by:
 Short term and essentially adversarial in nature
 Unaligned objectives
 Accountabilities not clearly defined
 Risks placed on those unable to influence or
manage them
 Skills not recognized and/or ineffective
136

137. Alliances Early Understandings
 The Eighties & Nineties – A process to establish and
manage relationships between parties that aims to
remove barriers, encourage maximum contribution and
allow all parties to achieve success via “WIN WIN”
Arrangement.
 Close of the Century – A project alliance is where an
owner forms an alliance with one or more service
providers for the purposes of delivering outstanding
results on a specific project to the benefit of all
stakeholders.
 NOW – Project alliancing turns upon the formation of
a performance based contract structure, the
alignment of the commercial interests of parties, and
a genuine no blame culture between parties.
137

138. Effective Partnering
 High level of trust between Client and Development Team
 Common objectives for entire team agreed upfront
 Development team engaged consultants and contractors
 Strong informed judgments and quick decision making.
 Good communication, quick resolution of differences.
 Respect
 Fair allocation of risk and reward
 Value add
 Win/win outcome
 Successful projects will result in repeat business and
continued success for all parties
138

139. Drivers For Entering Into An Alliance
Contract
 Cost savings and efficiencies
 Value for money
 High performance and innovation
 Overall project delivery and outcomes
 Reduction of risk
 Shared governance
 Unique environment
 Sharing of resources and capability
 The reputation of alliance contracting
139

140. Project Partnering model
140

141. Current Context Of Alliance Contracting
A commercial/legal framework between an owner and one or more
service providers for delivering works/services characterized by:
 Collective assumption of all project risks;
 No fault, no blame and no dispute between the alliance participants
(excepts in very limited cases of willful default);
 Payment under a compensation model comprising:
 Reimbursement of all direct costs on 100% open book basis;
 A fee/margin as contribution to corporate overheads and profit;
 A Gain-share Regime that equitably rewards the value of alliance
performance
 Unanimous principle-based decision-making on all key projects
issues; and
 An integrated project team selected on the basis of best person for
each position.
141

142. Pain Share (PS)/ Gain Share (GS)
In Alliances
 The PS/GS model is based on equitable share of
any single cost saving or cost overrun and any pain
for contractor is up to a maximum of the project
profits and head office overheads.
 Standard – 15%
 Overhead – 8%
 Profit – 7%
 The contractor will always be paid for work
completed under the bill of quantities (BOQ),
project related overheads and any approved
variations.
142

143. Pain-share / Gain-share Model
3 part compensation model: All Risks are shared and all participants
are jointly responsible to deliver every
aspect of the alliance.
 The alliance participants develop and
commit to work within an agreed
Project Charter.
 Reimburse to the non owner
participants (NOP) is 100% Open
Book subject to verification by audit.
 The project has established processed
to ensure the team performs at the
highest possible level and achieves
“Breakthrough” outcomes.
* NOP – Non Owner Participant
143

144. How Alliances Works
 The principal theme of project Alliancing is to move away from conventional
master/servant contracting, where each party seeks to protect their
contractual entitlement, towards an environment in which all parties share
their resources on a „best for project‟ basis and pull on one end of the rope
 The parties to the project alliance work closely together to jointly develop a
Target Cost Estimate (TCE) , based upon the most likely out-turn cost. This
TCE incorporates a contingency fund quantified by a rigorous quantitative
based risk assessment.
 The project alliance agreement (PAA) is executed by all parties and binds
them together on a joint and several risks assumption basis. Thus most, if not
all, risks are shared and therefore managed, mitigated, by the whole
alliance, rather than be allocated in the conventional way.
 The alliance is governed by a project alliance board who set the goals and
objectives of the project, establish the project values and KPI‟s and
adjudicate on any issue which cannot be resolved at the alliance
management team level.
 There is no alternative dispute resolution procedure, so the alliance
board has a responsibility for resolving all disputes.
144

145. Client Expectations
 WIN – WIN for all parties.
 Collaborative Start / Collaborative Finish.
 Non Confrontational approach by all.
 Beneficial KPI‟s (both to project and future performance).
 Integrated Management at all levels.
 Pride in Product (feel good factor).
145

146. Selecting The Right Alliance Partner
146
THE Traditional Criteria
o Project experience
o Financial strength (balance sheet)
o Partnering experience
o Engineering capacity
o Investment drivers
o Complimentary skills / culture
o Health and Safety and quality accreditation systems
PLUS New Additions
o Ability to streamline contract execution processes
o Risk sharing appetite
o Available resources (offshore, onshore, project specific)
o Financial backing (ability to get deals in a period of global credit crisis)
o Political, community, industry influence
o Collaborative legal and risk outlook
o Board support, particularly independent directors
o Quality, environmental, and project management credentials

147. Sub Contractors / Partners Risk
 Identify key Sub-Contract elements where
 success / failure can impact the bottom line and,
 Where they can provide advice early on in the procurement process
 Use Framework Agreements for projects and areas with „key‟ Sub-
Contractors
 Best to have an existing relationship. Not about working with any Sub-
Contractor
 Understand Sub Contractors;
 Quality
 Systems
 Health & Safety
 Management and Staff Resources
 Workload – current and future
 Use Risk Assessment Matrix for the Delivery & Quality of Critical
Supply Chain
147

148. Grading Sub Contractors/ Partners
 A – needs little or no assistance for the management and
delivery. Ideal candidate for Framework / Partnering
arrangement on major contracts.
 A/B - requires extra attention in the management and
delivery on major projects, but very capable on medium
sized projects. Ideal for preferred status.
 B – requires assistance in the management and delivery to
the extent of hands on management. Suitable for small /
medium sized projects.
 C – required major input in all aspects of management and
delivery. Only suitable for small projects less than ---.
 D – has very little understanding of the requirements for the
management and delivery. Should not be employed now.
148

149. Barriers To Engaging In An alliance
Contract
 Reputation of alliance contracting
 Lack of knowledge
 Internal or cultural resistance
 Lack of senior management buy-in
 Negative experience with alliance contracting
 Money and resources
 Project specifications / scope
 Legislation or project constraints
149

150. Pressing Concerns / Challenges Around
Alliance Contracting
 Partner selection
 Whether it is applicable to the project /
organisation
 Resource constraints
 Delivering and proving VFM
 Developing project KRAs (Key Result Area) and
KPIs (Key Performance Indicators)
 Accurately estimating and setting TOCs
 Risk management
 Team culture or team performance
150

151. Best Practice Tips in Alliance Contracting
 Build your own alliance culture
 Select your leadership teams carefully
 Extensively document innovations to help demonstrate VFM
 Evaluate the quantitative impact of risks for various delivery options
 Clearly define the role of each individual on the alliance team
 The basis of high performance is trust. Nurture trust or risk losing high
performance
 Be courageous and know yourself
 Both owners and Non-Owner Participant (NOPs) MUST „Lay down
their guns‟ when entering an alliance contract
 Remain focused on project objectives
 Establish a common alliance office from the start, not just after TOC is
agreed
151

152. How To Measure VFM in An Alliance?
 Historical benchmarking
 Innovations achieved
 Hard money!
 Initial evaluation of opportunities and reviewing VFM throughout
project
 Independent estimation
 Against KPIs
 Productivity improvement index
 Staff retention
 Embedding it in the decision making process
 Savings in capital costs
 Meeting of program milestones
 Actual outcomes vs. anticipated outcomes
152

153. Inhibitors To Delivering High
Performance in Alliances
 Culture / Team
 Financial constraints
 Project Specifications/ Scope
 Legislative constraints
 Staff Shortages / Skills shortage
 Lack of knowledge or experience
 Lack of internal capability
 Poor alignment of expectations
 Incorrect KRAs or KPIS
153

154. Pitfalls To Avoid In Alliance Contracting
 Agendas at odds with each other
 Lack of cultural agreement
 US and THEM mentality
 Assessment of value for money
 Putting sufficient time and resource into culture
 Under-budgeting at start
 Poor communication
 Adjusting to an alliance environment
 Failing to trust each other
 The wrong team
154

155. Finally; Compelling Questions
Regarding Alliances
 What new and innovative alliance models will emerge to
withstand the impact of global and national trends?
 Will ramped up risk management and governance regimes
lead to micro management and “opportunity block”
 What will stakeholder hurdles around legal, financial,
commercial look like in this uncertain environment?
 NOTE: Excellent contracting/ alliance outcomes rely on:
 Better understanding of macro / market trends
 Higher lever of collaboration, streamlining and trust between
contracting parties
 Acceptance that innovation takes time, and
 Strengthened, but streamlined risk and project management
techniques
155

156. Procurement Payment Methods
(Owner / Buyer Perspective)
FP, Fixed
Price
T & M, Time &
Materials
CR, Cost
Reimbursable
Cost Plus
GMP
156

157. Fixed Price Payment Schemes
 FP, Fixed Price, Lump Sum, FFP, Firm Fixed Price
 Contract = $180,000 , Seller‟s profit margin (fee) is already included
and unknown to buyer
 FPIF, Fixed Price Incentive Fee
 Contract = $180,000. For every month early the project is finished, an
additional $10,000 is paid to seller
 FPAF, Fixed Price Award Fee
 Contract = $200,000. For every month performance exceeds the
planned level by more than 17%, additional $4,000 is awarded to
seller (max $30,000)
 FPEPA, Fixed Price Economic Price Adjustment
 Contract = $300,000 but a price increase will be allowed in year
three to account for increase in some material cost
 P.O, Purchase Order
 Contract to buy 20 laptops at $1,500 each . This is normally a
unilateral contract (signed by one party only i.e. the Buyer) however if
signed by both parties i.e. Buyer & Seller then it‟s called Bilateral
157

158. Contractor‟s Risks, Example
FFPCPPF Risk For Contractor
HIGHLOW
LEGEND
FFP FIRM FIXED PRICE-LUMPSUM
CPPF COST PLUS PERCENTAGE FEE
158

159. Principles of Incentive Contracts
 TARGET COST: $20,000
 TARGET FEE: $1500
 SHARING RATIO: 80/20 %
 CUSTOMER PAYS 80 % OF OVERRUN
 CONTRACTOR PAY 20 % OF OVERRUN
 PROFIT IS $1500 LESS
 CUSTOMER KEEPS 80% OF UNDERRUN
 CONTRACTOR KEEPS 20% OF UNDERRUN
 PROFIT IS $1500 PLUS
Note: Limitations may be Imposed on Price or Profit
EXAMPLE
$20,000
159

160. Risk Sharing Meter
100 %RISK Allocation
Lump-Sum (Fixed Price)
0 %
100 %
CONTRACTOR’SRISK
0 %
OWNER’SRISK
Fixed-Price w/ Economic Price Adjustments
Fixed-Price Incentive
Cost-Plus Incentive
Cost-Plus Fixed Fee
Cost-Sharing
Cost-Plus Percentage
160

161. Some Contract Types & Risk
Contract
Type
Risk
Bearer
Explanation
Fixed Price Seller The price is fixed. Any cost overrun can‟t be passed on
to the buyer, thus the seller takes all the risk.
Cost plus
Fixed Fee
Buyer Seller passes all costs onto the buyer and gets and
additional fixed fee upon completion. Buyer must pay
all cost overruns.
Cost plus
Incentive Fee
Both Seller passes all costs and gets an incentive fee for
meeting targets. Buyer bears most risk but the incentive
fee should motivate the seller to keep the cost down.
Time and
Material
Buyer The buyer pays for all time and the cost of materials,
thus they take all the risk for overruns.
161

162. Advantages and Disadvantages of
Contract Types
Advantages Disadvantages
Cost Reimbursable
Less costly than fixed price because seller
does not have to account for their risk.
 Requires auditing all the seller invoices and
thus increases buyer efforts.
Such contracts are simple to draft.
Seller has less incentive to control cost thus
these contracts are inefficient.
Fixed Price
Seller has strong incentive to control cost
thus these contracts are efficient.
Seller may under quote initially and later try to
make high margins on Change Requests.
Requires less effort by buyer to manage
contracts.
Not having a proper scope can result in seller
not providing some of the deliverables.
Time & Material
Easy to create. Seller has no incentive to control costs.
Good for resource augmentation
assignments.
Requires monitoring of daily output.
Good for small projects only.
162

163. Fixed-price or Lump-sum Contract
163
 The Owner knows the actual cost of the project before it begins
 Contractor required to achieve the project at the Bid/Negotiated Contract Value
 Minimize the risk for the Owner if the project is well estimated, contractual
documents accurate, and project clearly defined
 High risk for the Contractor in case of many unforeseen problems
 Generally utilized with the Traditional Method & usually not possible with Fast Track
 Usually a high incentive to finish early at low cost
 Contractor carefully “Estimate Target Cost”.
 If “Estimated target cost” is low then “Total Profit reduced” & may vanish.
 Contractor may not be able to “underbid competitors” . So Contractor assumes a
Large risk.
 Lump-sum ; Provides “Max Protection to Owner” for ultimate “Cost of Project”.
Disadvantages:
 Requiring a Long Period For Preparation & Adjudications of Bids.
 Because of a Lack of knowledge of Local conditions, all contractors Include
Excessive Contingency.
 Change Requested
 After “Award of contract” can Lead to Troublesome & Sometimes “Costly extras”

164. Unit Price Contract
164
 Agreement on the price charged per unit by the Contractor to
the Owner
 Contractor overhead must be integrated in the Unit‟s Prices
 The lowest bidder is normally selected
 Necessity of an Owner presence on site to measure the actual
quantities
 Highly dependent on the accuracy of the estimation of the
quantities given by the Owner/Designer
 Difficult to accurately quantify the work necessary
 Contractor can make more profit because payment is based
on actual quantities but he can also lose money in the same
way!
 The total cost for the Owner can be greater than planned

165. Cost-Plus-Fixed-Fee (CPFF)
165
 Cost may vary but the fee remains firm
 The fee is independent of the duration of the project and can
be based on “Total/true Cost”
 CPFF is used only if the pricing could not be determined in an
alternative manner
 No financial insurance of ultimate cost
 Little incentive to reduce costs but high incentive to finish early
 The Contractor agrees to make best efforts to complete the
work
 Promotes collaboration at the early stages of the project
 Contractor agrees only to use Best Efforts to Performance
 Good/Poor Performance rewarded equally.
 CPFF Required Company books be audited.

166. Cost-Plus-Percentage – Fee Contract
166
 The Owner is paying the actual cost plus a fixed percentage fee
 High risk for the Owner
 Used only if the pricing could not be calculated in any other way and if it is
urgent
 No Financial Assurance of “Ultimate Cost”.
 Little incentive to reduce costs
 The Contractor agrees to do his/her best efforts to achieve the goals
 Whatever the quality of the work, the reward is the same but the owner
gets the quality he/she pays for
 Permits collaboration at the early stages of the Project
 Provides Maximum flexibility to owner. Permits “Owner & Contractor” to
work together cooperatively on All “Technical, Commercial, Financial
Problems”.
 “No financial incentive to contractor” this because of “High building cost”
(Compared with other forms).
 Only meaningful Incentive can be prospects for Follow-on contracts.

167. Fixed-Price-Incentive-Fee Contracts
167
 These are Same as “Fixed-Price contracts” Except have
some “Provision for Adjustment” of the “Total Profit” by
a formula.
 This Formula Depends on “Final Total Cost” at
Completion of Project
 Formula “Agreed to” in advance By “Owner &
Contractor”.
 To use this Both “Project or Contract” Requirements Must
be firmly established
 Provides An incentive to Contractor To ; Reduce Cost,
Increase profit
 Both “Owner & Cost” Share in “Risk & Savings”.

168. Cost-Plus-Incentive-Fee Contracts
168
 Same as: “Cost” Plus Contracts, Except have
“Provide for” Adjustment of “Fee as” Determined By
a Formula:
 Compares “Total Project Cost to Target Cost”.
 Formula agreed to in advance by “Owner &
Contractor”. Used for “Long Duration” or “R&D
Type Project”.

169. T&M, Time and Material, Unit Price Contract
Type
Buyer may wish to add a “Not to Exceed”
clause in the contract to limit total cost paid
to seller…
Contract = $300 per hour plus materials at $10 per can
of paint and/or $6 per brush
169

170. Cost Reimbursable, Cost Plus Payment
Schemes
 Cost Contract.
 Contract = Cost (fee is $0.0)
 CPF, Cost Plus Fee, CPPC, Cost Plus % of Costs.
 Contract = Cost + 13% of costs as fee, Not allowed in the
USA Government purchases / contracts
 CPFF, Cost Plus Fixed Fee.
 Contract = Cost + fee of $20,000
 CPAF, Cost Plus Award Fee.
 Contract = Cost + $3,000 for every month production
exceeds 50,000 units (max $18,000)
 CPIF, Cost Plus Incentive Fee.
 Guaranteed Maximum Price
170

171.  Sharing Ratio = Buyer / Seller (80/20, 90/10) it indicates cost
overruns or savings distribution
 Ceiling Price = Max price the Buyer is willing to pay to Seller as
per contract
 Target Price = Target Cost + Target Fee (as per contract)
 Final Fee = Target Fee + Incentive
 Incentive = Seller‟s Share Ratio X (Target Cost – AC)
 Final Price = (AC + Final Fee) <= Ceiling Price
 PTA (point of total assumption) = CPIF
[(Ceiling Price – Target Price) / Buyer‟s Share Ratio] + Target Cost
Any costs incurred above the PTA are considered mismanagement
by Seller who must pay the overruns.
CPIF, Cost Plus Incentive Fee
171

172. Guaranteed Maximum Price (GMP)
With Share Savings - Option172
 Variation of the Cost Plus a Fee by having a cap, or GMP
 The Contractor assumes any additional costs after the “Ceiling” Point is reached
 Similar to CPFF but quality may be sacrificed to avoid increases in cost beyond GMP
 Variation: Usually, GM Shared Savings - Below the guaranteed maximum, savings are
shared between Owner and Contractor
 Contractor-Gets “Fixed Fee” for his “Profit” and Reimbursed for the “Actual Cost” of
Engineering, Materials, Construction Labor, all Other Job Costs, but only up to “Ceiling
figure established” as “Guaranteed maximum"
 Savings below the" Guaranteed Maximum” are Shared between “Owner & Contractor”,
where as Contractor Assumes the responsibility for any “Overrun beyond” Guaranteed
“Maximum Price”.
 Contract form Combines advantages as well as disadvantages of Both “Lump Sum” &
“Cost-Plus Contracts”.
 Best form for Negotiated Contract as it Establishes a Maximum Price At Earliest Possible
Date
 Though contract awarded without “Competitive Tenders”, Yet Protects owner Against
being Overcharged,
 Unique in that “Owner & Contractor” share Financial Risk & Both have Real incentive To
Complete Project At lowest “Possible Cost”.

173. Final Notes - The Choice of Payment
Scheme
 Buyer > client, customer, procurer, purchaser.
 Seller > vendor, contractor, subcontractor service provider
 The decision whether it is more advantageous to make a particular
item in-house, or to buy it from a supplier involves both qualitative
(such as quality control) and quantitative (such as the relative cost)
factors.
 When the market is in decline, clients insist on fixed price bids
whereas when the market is in boom, it is more difficult to obtain
those conditions
 The Choice of payment scheme (i.e., contract type) depend on:
 The accuracy of the estimation
 The ultimate cost known since the beginning or at least the
maximum
 The risk appetite
 Priority for quick completion of the work
173

174. Final Notes - Procurement Statement of
Work & Contract Types
 Performance; What the final product should be able to
accomplish. No attention is paid to the way it‟s built
and/or designed (need a car going from 0 to 120 KM in
5 seconds)
 Usually RFP, RFT are issued, Most likely payment
scheme is CR
 Functional; Performance + Features
 Design; Reveals what exact work is to be done (build it
exactly as per drawings) as in construction & equipment
purchasing projects.
 Usually IFB, RFB are issued, Most likely payment
scheme is FP
174

175. Construction Hazards, Injury &
Catastrophic Events & Insurance
Primary Cause of
Loss
 Water
 Wind
 Rigging & Lifting
 Collapse
 Equipment
Damage
 Fire
175

176. Construction Industry Catastrophic Risks
 Catastrophic injury potentials
 Course of construction / Jobsite injuries
 Post Construction (Operations) Exposures;
 Bodily injury arising out of negligent construction
 Construction defect property damage claims
 Materials; asbestos exposure
 Course of Construction - Sources of exposure;
 Moving parts and activity; heavy machinery, cranes,
 Electrocution,
 Heat-related deaths
 Pollutants (asbestos and others)
 height exposures,
 failures of structural components leading to collapse hazards
176

177. Course of Construction Losses
 Personal injury & wrongful death claims
 Most commonly onsite construction workers are the injured
parties, although sometimes bystanders can get hurt
 The construction industry has one of the highest mortality
rates of all industries.
 Other losses
 Property damage
 Business interruption
 Delay damages
 Multiple bond claims
 After Construction is completed, liability exposure for
injuries can continue for decades
177

178. Property Loss Exposures
 Water is a Primary Cause of Loss
 Flooding from surface water
 Water penetration through incomplete building envelope or
temporary openings
 Condensation/moisture
 Wind
 Rigging & Lifting
 Collapse
 Equipment Damage
 Fire
178

179. Example; Structure Collapse
 Potentially covered losses
 Personal injuries
 Death
 Property damage
 Business interruption losses
 Replacement costs
 Multiple bond claims
 Potentially liable parties
 Inspectors
 Retrofit contractors
 Design professionals
 Construction managers
 Original construction
179

180. Example; Fire!
 Potentially covered losses
 Injuries & deaths
 Property damage
 Business interruption
 Rebuild
 Business reputation
 Potentially liable parties
 Business
 Promoters
 Landlord
 Suppliers (Pyrotechnics – exothermic resistant chemicals)
 Sub Contractors (flammable foam)
 Building contractors
180

181. Know! - Insurance Agents Check List!
1. Transit - Evaluate transit exposure and controls that are in place or required.
2. Storage - Review storage of materials associated with the project on and off the site.
Exposure and controls to be implemented.
3. Security - Evaluate site access controls and theft and vandalism potential.
4. Fire Protection - Review adequacy of fire protection that is provided on the site.
5. Rigging and Lifting / Equipment Exposures - Evaluate rigging and lifting exposures
and other equipment related exposures that exist on the project and controls to be
implemented.
6. Collapse - Monitor collapse exposures that may exist on the site and adequacy of
controls; e.g.: support of excavation, formwork/shoring, temporary bracing of structural
members.
7. Adjacent Hazards – Evaluate adjacent exposures and required controls.
8. Water Hazards – Evaluate water damage exposures that may exist on the site. Work in
progress or materials exposed to damage from water.
9. Flood - Review flood exposure to the project site and adequacy of control of surface
runoff or underground utilities. Action plans to minimize damage and control flooding.
10. Severe Weather Exposures - Review controls to protect stored materials and work in
progress from elements.
181

182. Lowering Insurance Costs –
Underwriters Look for;
 Solid Financial Position:
• Profitable
• Willing to invest in safety, training and equipment
 Quality Management:
• Reputation and work quality
• Clear safety accountability structure
 Contractual/Risk Transfer Controls:
• Qualified internal contract review prior to execution
• Applicable to both prime and subcontract work
 Auto/Fleet Controls:
• Uniformly enforce of company policies
• Be familiar with the doctrine of Negligent Entrustment
182

183. Commercial Insurance
 A contract under which one party, the insurer, agrees - in
exchange for the payment of a premium - to pay for
specified losses the insured may suffer, up to specified
amounts, under conditions specified in the insurance
contract.
 Experience (claim history) plays significant role in premium
level
 Contractor can be Charged Additional Premium for
Uninsured Subcontractors
 Underwriters assess loss frequency issues.
 Insurance rates are debited (credited) according to claim
history
 Exposures to Loss includes; Property, Personnel, Net Income
& Liability
183

184. Insurance- Who Does What!
Contract Should
Specify Who
Purchases
Coverage –
Owner or
Contractor?
Named Insured
Should Include
Both The Owner,
Contractor and
Subcontractors
Contract Should
Specify Who
Pays the
Deductible?
Add Loss of Use
& Testing
Coverages
184

185. • Workers Compensation – Statutory Benefits
• General Liability – limits specified in contract
• Auto Liability – limits specified in contract
• Umbrella / Excess Liability – limits specified in contract
• Professional Liability – limits specified in contract
• Builder’s Risk (Who is responsible?) - Materials On-site,
Off-site and In Transit
• Additional Insured's, (Obligates an insurer to defend and
possibly pay claims of another party, If it is included, add the
phrase: “but limited to the operations conducted by the
Insured).
• Waivers of Subrogation (prohibits the insurer from
attempting to seek restitution from a third party who causes
any kind of loss to the insured)
• Safety and Loss Control Programs / OSHA Compliance
(at the discretion of Owner)
Insurance Specifications
185

186. Extends Limits Over Underlying:
Premium = Limits Selected and Underlying Premiums x Rates
 General Liability
 Auto Liability
 Employer’s Liability
Premium = Type of Professional/Sales/Limits x Rates x Experience
 Professional Errors & Omissions
 Settlements, Awards
Premium = Value of Equipment X Rates X Experience
 Mobile Equipment (At Shop, On Job-sites, In Transit)
 Hired, Borrowed and Rented
 Crane Overload
 Installation
Umbrella or Excess Liability Coverage's
& Costs186

187. Safety Issues - Accident Pyramid
Lost Time Injury
First Aid Cases
Near Misses
At -Risk
Behaviors
Severity
Frequency
Accident
Potential
Situations
Major Accident
187

188. Management of Safety Issues
 A successful safety program focuses its efforts on the bottom of the
pyramid
 Reducing at-risk behaviors and near misses will result in lower claim
frequency and severity rates over time
 Establish a corporate climate of eliminating at-risk behaviors
 Develop internal protocol to allow for site/project specificity safety
procedures
 Critical components of a successful safety program;
 Top management support and commitment
 Foreman/Supervisor involvement and accountability
 Recognition/Reward for meeting and exceeding expectations
 Safety issues demand your attention. Meaningful Numbers;
 Million XX man-hours without a lost-time injury
 Million XX man-hours without a “major” injury
188

189. Safety and Loss Control Programs
Specifications (Discretion of Owner)
• OSHA/MSHA
• Establish minimum safe workplace standards, often
exceed Contractor safety standards
• Conduct workplace inspections for compliance
• 29 CFR 1926 Standard applies to road construction
operations - Table of Contents is nine pages long!
• 29 CFR 1910 applies to general construction
189

190. Environmental Requirements
 Owner or Contractor responsible
 Owner or Contractor statutory liable
Air Pollution
Water Pollution
Hazardous Materials
 Not Covered by Insurance

191. Contractors Pollution Liability
 Since the general liability policy is not designed to provide coverage for
pollution conditions arising out of a contractor operations, many contractors
purchase a separate contractors pollution liability policy.
 There is no standard contractors pollution liability policy. Each insurer has their
own unique manuscript policy form.
 Who is insured?
 Contractor
 Newly acquired or formed organizations
 Joint ventures
 Named joint ventures only
 Blanket joint ventures (preferred)
 Executive officers, stockholders and employees
 Covered Operations
 Blanket coverage (preferred)
 Designated activities
 Subcontractors operations on insured behalf (recommend for all general
contractors)
 Remediation operations
 Completed operations

192. Contractors‟ All Risks (CAR) Insurance &
Wrap-ups / OCIPs
SECTION 1- Covers
ALL RISK basis
against
unforeseen and
sudden physical
loss or damage to
the insured
property
SECTION 2 - Third
party liability
where the Insured
becomes legally
liable to pay as
damages
consequent
192

193. CAR Insured Matters & Parties
 CAR may be taken out for all building and civil engineering
projects, such as:
 Residential and office buildings, hospitals, schools, theatres
 Production facilities
 Infrastructure facilities, airports
 Bridges, dams, tunnels and harbors (wet works)
 CAR insurance should be concluded for all parties concerned to
avoid overlaps or gaps in cover:
 The principal (employer) &/or
 The main contractor &/or
 Subcontractors &/or
 Project managers &/or
 Suppliers.
193

194. CAR PERIOD OF COVER
Cover ATTACHES from
 the commencement of work or
 after the insured items have been unloaded at site or
 the inception date as specified in the policy
 Whichever is later
And TERMINATES when
 the completed structure is taken over or
 put into service or
 the expiry date specified in the policy
 Whichever is earlier
194

195. CAR SCOPE OF COVER – Two Sections
SECTION 1- Covers ALL RISK basis against unforeseen and sudden physical
loss or damage to the insured property (Material) from ANY cause other than
those specifically excluded ; examples of cover:
 Contract works (permanent and temporary works forming part of the contract)
 Removable of debris
 Professional Fees
 Free issue materials
 Construction Equipment (Site offices, storage sheds, silos, scaffolding, utilities)
 Construction machinery (earthmoving equipment, cranes, site vehicles)
 Principal‟s existing property
SECTION 2 - Third party liability (Bodily injury & Property Damage) where the
Insured becomes legally liable to pay as damages occurring in direct
connection with construction works insured under Section 1 consequent upon:
 Accidental bodily injury to third parties
 Accidental loss or damages to property owned by third party.
195

196. CAR General Exclusions to Scope of
Cover
 Political risks, war or warlike operations, SRCC
 Nuclear, radioactive contamination
 Willful act or willful negligence of the insured or
their representatives
 Cessation of work whether total or partial
196

197. CAR General Exclusions to Section I & II
Exclusions to section I Cover;
 Consequential loss of any kind
 Faulty design
 Defective material / workmanship (faulty part only)
 Mechanical and/or electrical breakdown
 Wear and tear, corrosion, gradual deterioration
 Road vehicles, waterborne vessels and air crafts
 Inventory losses
Exclusions to section II Cover;
 Property insured or insurable under Section I
 Vibration, removal, weakening of support
 Liability for bodily injury to employee/ workmen of insured parties
 Liability for damage to property belonging to insured parties
 Motor , Marine & Aviation liability
 Contractual liability
197

198. Principle Extensions To Basic CAR Cover
Section I Extensions:
 Strike, Riot and Civil Commotion
 Maintenance Visits Verses Extended maintenance
 Expediting Expenses
 Airfreight expenses
 Offsite Storage
 Inland Transit
 Designer‟s Risk
 Contracts works taken over or put into service
Section II Extensions:
 Cross Liability
 Third Party Liability (TPL) cover during maintenance period
 Vibration, removal or weakening of support
198

199. Calculation of Sum Insured
 Standard Insurance must be equal to the amount stated
in the building contract plus a value of any free issue
material
 Contractually, insured contractor may be required (e.g.
Under FIDIC contracts) to include 15% of Construction
Value towards costs of rectification, removal of debris
and professional fees
 Separate sums insured for:
 Construction machinery and construction plant and
equipment (equal to NRV)
 Existing property and clearance of debris (Loss limits)
 Third party liability – Section II (as per contact conditions)
199

200. USA Wrap / CIP ?
 In 990s wraps witnessed significant increase in popularity in the United
States on commercial and public works projects. In Late 1990s – start of
use on residential projects.
 Sponsor (owner or contractor) provides insurance to all parties (including
subcontractors) who work on the project under a single program for
general liability for the term of construction and beyond into completed
operations period. Many types;
 CIP – Controlled Insurance Program
 OCIP – Owner CIP
 CCIP – Contractor CIP
 Owner or GC responsible for premium and SIR (self-insured retention) or
deductibles but will spread cost through contract “deducts” and/or
indemnity provisions for deductible and/or SIR obligations
 Single carrier for all claims will presumably enable ONE lawyer to
represent all parties for any claim.
200

201. Benefits of Wraps
 Covers all defined project risks under one policy.
 In theory, limits the number of parties, attorneys, and
claims professionals on any given claim.
 Reduces uncertainties arising from subcontractor
insolvencies
 Reduces uncertainties arising from insurer insolvencies
 Reduces uncertainties arising from varying
subcontractor insurance (Montrose - excluding liability
known at the time the policy takes effect) , residential
exclusions, prior work exclusions, etc.)
201

202. Wraps – Legal Considerations
 All relevant documents need to be carefully coordinated
through legal counsel familiar with wrap issues.
 Type of project; contract indemnity provisions
 Self-insured retention (SIR)/deductible provisions
 Warranty provisions
 Contract insurance provisions
 Non-wrap exposure insurance and indemnity provisions
 Even the wrap policies themselves may require modification
based on the program involved.
 Complications;
 Underwriting information on insured's – history needed
 Setting premiums
 Aggregates and limits of insurance
202

203. Disputes & Killer Provisions In Contracts
& In Insurance
Owner often attempts to
expand liabilities to
include “Killer
Provisions”.
This is true of insurance
risks as well, whether
specified in the Prime
Contract or inherent in
the Contractor‟s program
design.
Contract provisions,
clauses and conditions
need to be reasonable
and bondable.
203

204. Strategies to Avoid Disputes
 Clear drafting of the contract
 Know what the Contract says
 Identifies roles and responsibilities
 Entitlements
 Procedures
 Timeframe
 Steering committee
 Senior individuals
 Peer pressure
 Wider forum for ideas / proposals / solutions
 Good project management & Risk register
204

205. FIDIC Dispute Resolution Clauses
 Stepped Dispute Resolution Procedures
 FIDIC 1999 Red Book
 Dispute Adjudication Board
 Amicable Settlement
 Arbitration
 Alternative Dispute Resolution
 Mediation
 Expert Determination
205