Contracting/Commercial Strategy/Risk Management
Contracting and Commercial Strategy are important tools in Risk Management.
At the very earliest stages of a project, it is essential that the Client organisation define the risks that relate to the proposed Project and decide who is best placed to carry those risks. To ensure that this exercise is as effective as possible it is essential that the Client team has Legal, Technical, Insurance and Contracts specialists involved to assist the Directors and Commercial/Management personnel involved.
It should be remembered that there are potentially several possible ways of dividing the risks. The potentials for apportioning the risk include the Client, the Consultants (if any), the Contractor, the Insurers and possibly others.
The effects of such apportionment are basically as follows:
Requires an allowance in the budget to cover the risk. This has the advantage that if the risk does not occur then the money remains with the Client, of course if it costs more the Client pays the overrun
Require a contingency in the price and or Professional Liability Insurance (usually limited in value). The form of Contract has top be chosen with care as most Consultancy Contracts are ‘Duty of Care’ rather than the more onerous Contractors’ ‘Absolute Duty’ possibly a good reason to select ‘Design and Build’ or ‘Turnkey’ styles of Contracting
Require a contingency in the Contract Price to cover the risk. This means that if the risk does not occur then the money remains with the Contractor, of course if it costs more the Contractor pays the overspend.
Can be used to insurer the potential overspend by any of the other parties but more especially CAR/BAR, Delayed Start Up and the like In all cases it is essential to deal with who is responsible for deductibles and any waivers of subrogation or consequential liability as part of the Contract Terms and Conditions
It is also possible to draft a Contract that utilises Insurance to cover almost all the risks. Such a Contract is particularly of use for Major or Complex or Strategic Projects where the availability of the Facility or resource (shop, hotel, etc.) is more important to availability and income stream than purely the ability to recover costs from the Contractor/Consultant.
It avoids protectionism and conflict by tying the Contractor/Consultant into an ongoing obligation to investigate/rectify any problem on a net cost only basis if it proves to be their fault and a cost plus basis if it wasn’t. The insurance for this would normally cover a number of similar projects or a portfolio of the Client’s assets and would be either run as a captive (possibly externally managed) or a club (similar to the Protection and Indemnity Insurance Clubs in the Shipping industry). Such a scheme should represent significant savings and an easier/quicker route to problem resolution and rectification. If you are interested in this type of arrangement David has a number of contacts in the insurance industry that would be pleased to assist in advising on such a scheme.