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Topics: Construction, Cost Management, Risk Management
Risk Allowance Certification by an independent expert! Your Thoughts?
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In big and complex projects a proper risk allowance (based on a PM risk analysis) should be included in the Contract. In my opinion this allowance should (could) be manage by an independent expert using simplified version of DRB and Adjudicators procedures! In my opinion this procedure could reduce claims and conflicts during the execution of the projects and will contribute towards the good completion and success of the project!
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Antonio if you ask me go for PMI-RMP (Risk Management Professional) and this has lot of value and when one is in Director or Executive roles the decision maker it speaks a lot!
Thanks,
Vj
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1 reply by Antonio Louro
May 03, 2019 8:37 AM
Antonio Louro
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Thanks Vijay for the feed-back Best
Network:22008



Yeah. that's true. However, it is not necessary for all projects and situations.
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1 reply by Antonio Louro
May 03, 2019 8:36 AM
Antonio Louro
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Abolfazi. Yes I agree that's is why I did mention Big and Complex, Thanks for the feed-back
Network:89



May 03, 2019 7:47 AM
Replying to Abolfazl Yousefi Darestani
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Yeah. that's true. However, it is not necessary for all projects and situations.
Abolfazi. Yes I agree that's is why I did mention Big and Complex, Thanks for the feed-back
Network:89



May 03, 2019 7:13 AM
Replying to Vijay Vittalam
...
Antonio if you ask me go for PMI-RMP (Risk Management Professional) and this has lot of value and when one is in Director or Executive roles the decision maker it speaks a lot!
Thanks,
Vj
Thanks Vijay for the feed-back Best
Network:19



All-
I have never seen a Contract where the Owner recognized or included the Risk Analysis as part of the Prime Contract. I have experience in the Tier 1 Contract area where the Base Contract is anywhere from 500 pages to 1500 pages, Plus citations. While a Risk Analysis is usually required as part of the PMP, the Owner merely examines the Risk portion of the plan to gauge the competency of the PMP.
In my opinion, the Owner is paying for a General Contract service, with the result being the handover of the Deliverable. How that goal is achieved should be the responsibility of the Contractor, otherwise known as "means and methods".
As a Service to the Process, the Contractor is responsible for identifying, quantifying, and mitigating or eliminating those Risks. Some identifiable Major Risks are identified within the typical Contract within the "Force Majeure" clause in every Contract, and the method for assigning costs and time to those hazards is usually identified within that clause.
It is nonsensical to think the Owner should obligate himself to participate in the Risk Management process of the Project. This would add unanticipated costs to the Project from the Owner's perspective. The Owner hired a Qualified Contractor to worry about and manage the Risks associated with the construction process. That has always been an integral service to the Owner.
Change Management is another Subject altogether. Most of the Change Management process assigns Costs to additional Scope Items, and Costs associated with items that could not be foreseen by both parties- Owner or Contractor.

My opinion from the Trenches!
M
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1 reply by Antonio Louro
May 03, 2019 10:03 AM
Antonio Louro
...
Mark thanks for insights from the trenches!

Yes, what you say is in fact today´s MO!

Let´s see the reason for the “provocation” discussion topic! A competent contractor will no doubt include or not as the case (and competition ferocity dictates) may be! A proper risk analysis and resulting allowance into the contract!
Assuming that the Contractor does include a detailed risk analysis and respective allowance and at the end of the day part of the risks and costs do not materialize! The Contractor will make additional profit and the owner will pay additional costs! Correct!
On the other hand, assuming that the contractor does not include proper allowances for foreseeable risks, and they do materialize! (I have seen this scenario to many times!) The contractor will try to recover is costs by all and any means, claims will fly all over the way, conflict will eventually increase hence more costs to the project! So, at the end of the day the Contractor will loose, and the owner will end up losing as well.
Open book police is in my opinion the root for this proposal and it looks strange I agree, but it could really help (save money and time) in big and complex contracts!
Network:89



May 03, 2019 9:45 AM
Replying to MARK A ANNUNZIATA, Sr
...
All-
I have never seen a Contract where the Owner recognized or included the Risk Analysis as part of the Prime Contract. I have experience in the Tier 1 Contract area where the Base Contract is anywhere from 500 pages to 1500 pages, Plus citations. While a Risk Analysis is usually required as part of the PMP, the Owner merely examines the Risk portion of the plan to gauge the competency of the PMP.
In my opinion, the Owner is paying for a General Contract service, with the result being the handover of the Deliverable. How that goal is achieved should be the responsibility of the Contractor, otherwise known as "means and methods".
As a Service to the Process, the Contractor is responsible for identifying, quantifying, and mitigating or eliminating those Risks. Some identifiable Major Risks are identified within the typical Contract within the "Force Majeure" clause in every Contract, and the method for assigning costs and time to those hazards is usually identified within that clause.
It is nonsensical to think the Owner should obligate himself to participate in the Risk Management process of the Project. This would add unanticipated costs to the Project from the Owner's perspective. The Owner hired a Qualified Contractor to worry about and manage the Risks associated with the construction process. That has always been an integral service to the Owner.
Change Management is another Subject altogether. Most of the Change Management process assigns Costs to additional Scope Items, and Costs associated with items that could not be foreseen by both parties- Owner or Contractor.

My opinion from the Trenches!
M
Mark thanks for insights from the trenches!

Yes, what you say is in fact today´s MO!

Let´s see the reason for the “provocation” discussion topic! A competent contractor will no doubt include or not as the case (and competition ferocity dictates) may be! A proper risk analysis and resulting allowance into the contract!
Assuming that the Contractor does include a detailed risk analysis and respective allowance and at the end of the day part of the risks and costs do not materialize! The Contractor will make additional profit and the owner will pay additional costs! Correct!
On the other hand, assuming that the contractor does not include proper allowances for foreseeable risks, and they do materialize! (I have seen this scenario to many times!) The contractor will try to recover is costs by all and any means, claims will fly all over the way, conflict will eventually increase hence more costs to the project! So, at the end of the day the Contractor will loose, and the owner will end up losing as well.
Open book police is in my opinion the root for this proposal and it looks strange I agree, but it could really help (save money and time) in big and complex contracts!
Network:19



Antonio-
I agree with your premise that the Open Forum for Risks should be shared with the Owner, Contractor, and assisted by an independent third party. This is an academic exercise about Utopia in Construction, however unrealistic.
Many other factors are in play within the Tier 1 Contract world. 1) a 3rd party expert that decided in favor of the Contractor frequently would soon be banished by the Owner. 2) The Owner's Project Manager/Authorized Rep. would receive poor performance reviews if a 3rd party had ruled against him, and thus make the Contractor's performance of the Project difficult, and 3) In the Tier 1 environment where the financial impacts of assigning costs to risks not avoided are high, Major Disputes will be created and major drama will ensue- No Project Manager wants this to happen.
However, it has been my experience that the opposite logic to your premise is true. The smart Project Manager will manage to convert the unavoidable risk to a Change Request by utilizing conflicting Contract Language or convincing the Owner that the risk item exceeded the Contract Scope. This allows the parties to "save face" and avoid the Drama associated with your proposal.
Just my opinion!

M
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1 reply by Antonio Louro
May 03, 2019 11:08 AM
Antonio Louro
...
Mark

It is good to see that we agree that the proposal could in fact bring added value and as such reduce uncertainty and conflicts!

Now to the points where I have a different view / experience.

Early Independent Evaluation with a number of different structures and approaches is a recognized method with proven and accepted results! Dispute Review Boards used over the last decades by the World Bank is just one example of what I am saying! Adjudication and Independent expert evaluation also share the same results! Please bear in mind that this procedure will be part of the Contract and in all cases the parties agree that only after the completion of the contract they can challenge in court the decision! That only happen in less then 5% of the cases (DRB)! So, the owner banishing the expert can be dealt with by the contract!

To conclude were we agree again! Yes “smart project managers / contractors” will try to convert unforeseen and / or not allowed risks into claims! Using many times arguments and logics which an advised Client will not accept! So, conflict will increase and with it delays and costs will follow!
I am not a big fan of win / win culture and even less win / loose! I am a great believer that the true test of the success of the negotiations is the quality of the relationship formed thereafter. So, to guarantee a continuous relation the Client will want a contractor that delivers time, cost and quality no more no less.
In my opinion I really cannot see any drama in collaborative approaches because at the end of the days the objectives are no doubt the same!
Network:89



May 03, 2019 10:23 AM
Replying to MARK A ANNUNZIATA, Sr
...
Antonio-
I agree with your premise that the Open Forum for Risks should be shared with the Owner, Contractor, and assisted by an independent third party. This is an academic exercise about Utopia in Construction, however unrealistic.
Many other factors are in play within the Tier 1 Contract world. 1) a 3rd party expert that decided in favor of the Contractor frequently would soon be banished by the Owner. 2) The Owner's Project Manager/Authorized Rep. would receive poor performance reviews if a 3rd party had ruled against him, and thus make the Contractor's performance of the Project difficult, and 3) In the Tier 1 environment where the financial impacts of assigning costs to risks not avoided are high, Major Disputes will be created and major drama will ensue- No Project Manager wants this to happen.
However, it has been my experience that the opposite logic to your premise is true. The smart Project Manager will manage to convert the unavoidable risk to a Change Request by utilizing conflicting Contract Language or convincing the Owner that the risk item exceeded the Contract Scope. This allows the parties to "save face" and avoid the Drama associated with your proposal.
Just my opinion!

M
Mark

It is good to see that we agree that the proposal could in fact bring added value and as such reduce uncertainty and conflicts!

Now to the points where I have a different view / experience.

Early Independent Evaluation with a number of different structures and approaches is a recognized method with proven and accepted results! Dispute Review Boards used over the last decades by the World Bank is just one example of what I am saying! Adjudication and Independent expert evaluation also share the same results! Please bear in mind that this procedure will be part of the Contract and in all cases the parties agree that only after the completion of the contract they can challenge in court the decision! That only happen in less then 5% of the cases (DRB)! So, the owner banishing the expert can be dealt with by the contract!

To conclude were we agree again! Yes “smart project managers / contractors” will try to convert unforeseen and / or not allowed risks into claims! Using many times arguments and logics which an advised Client will not accept! So, conflict will increase and with it delays and costs will follow!
I am not a big fan of win / win culture and even less win / loose! I am a great believer that the true test of the success of the negotiations is the quality of the relationship formed thereafter. So, to guarantee a continuous relation the Client will want a contractor that delivers time, cost and quality no more no less.
In my opinion I really cannot see any drama in collaborative approaches because at the end of the days the objectives are no doubt the same!
Network:19



Antonio-
Have you been a Project Manager on a Major Tier1 or 2 Contract?
My experience running and managing these complicated and high-profile Contracts is that Logic does not always govern or rule the day. Your scenario is logical, however, it does not take into account the psychology of the people involved on both sides of the Contract. One of the highest Risks on any Project can be the Owner's idiosyncrasies and technical skills or lack thereof. Also, the careful Contractor must consider the sensitive nature of the Owner's Organizational Culture, and also within his/her own Organization...
Some of our Owner/Architect/Contractor progress meetings play out like a Soap Opera.

M
Network:89



Mark
Yes I have been fortunate enough to be PM and Commercial Manager of some multi million Euros and USD projects – just have a look at my profile – along with 2.5 decades as mediator, adjudicator, independent expert, court appointed expert and responsible for preparing, negotiating and defending multi million euros / usd claims related with Tier 1 and 2 Contracts.
So, have seen the psychology and inefficiencies of the people involved in these contracts the Owners and Contractors idiosyncrasies and technical skills or lack thereof and have been part of many Soap Operas!
That is exactly why I do believe that collaborative approaches – after all the objectives should be the same – can in fact change this Contracts by instead of hiding the risk allocation in the Contractor BOQ Lump Sums bring it into an open book police! I am fortunate to have as a friend with whom I did a couple of training sessions in Portugal – Steven S. Pinnell author of How to Get Paid!
He also knows and have seen all the faults and fixes of Constructions Projects and he also advocates and defend that collaborative approaches are by far the best way to ensure fair and reasonable risk and profit shares between clients and contractors!
My “Discussion topic” proposal is no doubt provocative and in many ways clashes with today´s MO - as you have said - but if we do not change today´s procedures you could see a lot more contractors bankruptcies and defaults because in a multi-million usd project a mistake in managing risks could be the cause for a Company shutdown.
Best
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