Areas of risk and causes of risk
Below are mentioned few areas and causes of risk. The term „operator? used in this listing means the owner (you) who awards the contract to the contractor. The areas mentioned need attention in the contract that you prepare for the project.
Contractual risks: The risks are:
- Operator group and contractor group property and personnel: The contract should define the costs of loss of or damage to the parties.
- Project works including both operator and contractor supplied items: The contract should define the responsibility for loss of or damage to the project works.
- Pollution: The contract should define responsibility for the effects of pollution and contamination emanating from the contractor groups.
- Third parties: The contract should define the legal liability for third parties? losses caused by each including in circumstances where a contractor is required to perform work in an area of close proximity to any existing facilities.
- Consequential losses: The contract should define the indemnities for each party?s group?s respective indirect or consequential losses howsoever caused or arising (including negligence) - whether or not foreseeable at the date of the contract.
- Warranty obligations: The contract should define warranty obligations and defective performance liabilities in terms of magnitude, time and remedy.
- Unlimited liability/damages at large: The contract should define or limit the contractor group?s total cumulative liability to enable him to assess his overall exposure resulting from, for example, liability for delay, damage, rework, re-performance and so on.
- Insurance cover: The contract should define full details of the insurance policy terms, conditions, limits and exclusions.
- Force majeure and suspension: The contract should define the rights for both parties, if the condition exceed a specified time because of force Majeure.
- Delay: The contract should define contractor?s liability for delay and
- liquidated damages both under contract and at law.
- Variation orders: The contract should define the contractor?s obligations to perform the variation orders taking into account other existing commitments.
- Access to worksite: The contract should define the access to the work site and remedies as a result of restricted access to the work site by the operator or any party
- Intellectual property (IP) rights: The IP rights in terms of the party who developed those IP before or during the project should be clearly identified.
- Termination by operator for convenience: If the operator terminates the whole or part of the work for his convenience then the contract should define the entitlement to payment for all work performed, materials including cancellation costs relating thereto and termination fee.
- Operator's obligation to pay contractor: Payment by the operator to the contractor is a material term of the contract and time critical.
Performance risks: The risks are:
Scope, nature and duration of work: This includes:
- Lack of clear definition of scope, nature and duration of work in bid document.
- Insufficient time given to bidding contractors to understand and quote.
- Wrong information in bid document.
- Scope outside the bidding contractor?s knowledge.
- Schedule interactions: This includes owner initiated schedule changes and contractor initiated schedule changes.
- Size: Large size of contract increases chance of the above two risks.
- Safety and environmental performance: Operator and industry safety performance targets not defined in bid.
- Weather: If contractor is able to absorb this risk up to a limit, the contract should specify this limit.
- Soil and foundations: Risk cannot be fully measured by contractor prior to commencement of work. Hence risk should be generally borne by owner.
External influences: Risks which are outside contractor's control like:
- Interfaces with owner and other contractors.
- Risks of interference and disturbance.
Owner and influences at time of bid: This includes:
- Incomplete information at time of bid.
- Contract being re-bid or renegotiated over an extended period of time leads to lack of continuity in the bid process and amongst personnel and these impact negatively on contractor?s performance.
Financial risks: Risk that needs attention in the area is the profitability, value of contract - size, balance sheet debt, off balance sheet debt, level of exposure, foreign currency exposure, terms of payment, owner creditworthiness and insurance.
Political risks: Risk that needs attention in the area is the interference by government, local disturbance, breach of confidentiality, delay in permits and licenses.
Technical risks: Risk that needs attention in the area is the quality of Front End Engineering Design (FEED) and understanding new technology.
Geographical risks: Risk that needs attention in the area is the location of the work, weather and soil and foundations.
Operator risks: Risk that needs attention in the area is the operator areas of influence, insurance and problems which impact the operator can impact the contractor.