Pre-Contract Risk Managementan ACE guide

Pre-Contract Risk Management - An ACE guide

Association for Consultancy and EngineeringAlliance House 12 Caxton Street London SW1H 0QLT: 020 7222 6557F: 020 7990 9202consult@acenet.co.ukwww.acenet.co.uk

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ContentsIntroductionPre-Contract Assessment ProcessStage I – IdentifyStage II – EvaluateStage III – MitigateStage IV - TransferAppendix

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© Association for Consultancy and Engineering No part of this report may be copied either in whole or in part without the permission in writing of the Association for Consultancy and Engineering.

Pre-Contract Risk Management - An ACE guide 03

The need for risk assessmentWhatever altruistic motives consultants may have, one of the primary objectives of operating a business is to generate profit, which enables business to reward proprietors and employees appropriately. Generating profit is a function of good management and minimising risk is one way of contributing towards making a profit.

Increases in premiums and excesses payable in respect of professional indemnity (PI) insurance have always received a considerable amount of publicity. Such increases are caused by factors such as the performance of the stock market, the attractiveness of PI insurance to insurers, and the industry’s and individual firms’ claims experience. Whilst the first two factors may be more difficult to address, the claims issue can be addressed through the implementation of more effective risk management systems. Furthermore, even where PI insurance is available, there are undoubtedly exclusions to such policies which need to be taken into account when taking on work.

The results of an ACE insurance/risk management survey showed that only 46% of responders have formalised risk management and quality assurance systems in place. A large majority (92%) do not have a full time risk manager who has no other job function.

Risk management practices should form an integral part of a consultant’s quality management system procedure for project appointment contract control. Good risk management requires senior management involvement and control as work progresses; it also requires increased project staff awareness and participation at project reviews.

It is for this reason that ACE has prepared a number of guides relating to project risk management. This first document relates to the pre-contractual stage of the project life cycle.

Introduction The followings headings and questions are intended to prompt the reader to consider the risks involved when considering whether to bid for or take on a new project. This list is not exhaustive and there may be other risks particular to your project that will need to be considered. When all risks are identified they can then be evaluated and a strategy put in place to either mitigate or transfer those risks.

It is essential to keep in mind that risk management is not a one-off exercise but a constant management process which needs to be repeated as often as the needs of a particular project require. Risk management does not cease until all disputes have been resolved and the files finally closed.

Where to go for further informationACE member companies who have further questions about contract terms and conditions can contact ACE on 020 7222 6557.

Pre-Contract Risk Management - An ACE guide

Should you look to win this contract?One of the first things that should be considered when invited to submit a tender is to consider pre-contractual issues and to decide whether you should even bid for a particular project. This decision can only be made once an assessment has been made of all the circumstances of the case.

The following process is generally used for the process of risk management, namely:

• Identify the risk• Evaluate the risk• Mitigate the risk by:

• Declining it• Accepting it (and costing for it)• Reducing it

• Transfer the risk

The process should be kept under constant review and revisited at pre-determined trigger points, e.g.:

• Expression of interest• Tender/bid stage• Contract issue stage• Design stage• Construction stage• Commissioning stage• Post project review, i.e. lessons learnt

The first step, when invited to bid for a particular project, is to consider the risks that may be associated with the project. This can be done by, for instance, asking the following non-exhaustive questions:

Consider the Contractual Parties

Do you know your client?

• Is this a new client? If they are an existing client, how good is your relationship?

• Are they prompt payers?• What is their interest in the project?• Is your client the contractor? If so, are they likely to

have adequate contingencies in the tender or are they known for lowest price bidding?

• What is their financial status? Are they financially sound?

• What financial information is available? Is it significantly out of date? If so, has the client provided a satisfactory reason for that?

• Is the client contracting through a special purpose vehicle (SPV) set up for this project alone?

• Do they have experience on this type of project?• Are they competent?• Will they understand their statutory duties?• Are there any cultural differences?• Is the nominated client a legal entity? If not, find

out who the correct contracting party is going to be. Ask the above questions in respect of that entity.

Is your client the ultimate client? If not, who is the ultimate client?

• Is it a private company?• Is it a public body?• Have you worked with them before?• What research have you done on them?• Where are they based?• Could they affect your reputation adversely?• How tight is their budget?

Pre-Contract Assessment Process

Stage I – Identify

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Pre-Contract Risk Management - An ACE guide

Do you know who else will be involved in the project?

• Will you be acting as a sub-consultant to another project team member?

• Will you be jointly and severally liable?• Do you know the PI arrangements of the other

parties?• Have you worked with them before?• Are there back-to-back contractual obligations?• Are there likely to be any software compatibility

issues within the project team?

Service Scope and Location

What are you being asked to do?

• Does this fit your business plan?• What are the objectives?• Is the brief/scope clear and complete?• Are the services required particularly risky or

unusual in nature? Would this affect your ability to complete the project successfully?

• Do any of the requirements amount to a fitness for purpose obligation as a matter of fact? If so, have you discussed the implications with your PI insurance brokers?

• What is the scope and complexity of the work? Is the complexity likely to grow or shrink?

• Is the location easily accessible?• Are there any environmental issues to consider

– pollution, etc?• Can you provide the services?• Can they be delivered on time?• Will you need to appoint specialist sub-

consultants? • Are there any regulatory issues, e.g. health and

safety, etc?

Have you done it before?

• Is this a new territory?• If yes, have you checked the territorial limits of

your PI policy?• If not, do you have sufficient similar experience to

give you confidence?• Are those with experience still with you or still

available?• Are you familiar with local legislation, taxes,

custom and practice?• What are the contractual requirements?• Does the project involve new technology?

Staffing Requirements

Do you have the resources and the competence?

• Does it require 24/7 support?• Will your resources be available in the right

timescale?• Will you have built in redundancy if a key source

goes missing? • Are you overly reliant on a specific individual?• Do you need to sub-contract?• Do you have a project manager?

Other Commercial Issues

Are the rewards worth the risk?

• Have you understood the risks?• What is the value of the contract to you?• If it is a loss leader, will it produce long term profit?• Can it affect your reputation negatively?• Have you considered changes in the economy/

market?• Is this state of the art/new technology?• What is the likely impact on cash flow?

Do you know the procurement route?

• Is the procurement/contract on the same basis from the ultimate client?

• How are the risks allocated further down the supply chain?

Who is the competition?

• How will you compete: through your fee or service?

• Can you realistically compete?• Have you completed a SWOT analysis?• Is your assessment of the competition truly

impartial?

Why are you doing this?

• Is it high profile?• Do you understand the business?• Are there reputation risks?• Is it a learning opportunity?

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Pre-Contract Risk Management - An ACE guide

Will you be paid enough?

• Are there any obstacles to payment that are outside your control?

• Will you remain cash positive or, alternatively, will the cash profile be acceptable?

• Are you aware of your tax liabilities?• Will your price be squeezed in future negotiations?• Is your level of profit adequate against inflation and

currency fluctuations?

What are your contractual obligations?

• Have you seen the proposed agreement?• If the proposed agreement is unreasonable, have

you accounted for the fact that legal advice may be required in your fees?

• Is there a ‘reasonable skill and care’ duty?• Are you being requested to indemnify and/or hold

the client harmless from particular losses?• Is there a fitness for purpose, liquidated damages,

or other penalty clause?• Is any kind of guarantee required?• Are collateral warranties required?• Are you being asked to concede copyright?• How is the team to be structured – JV/

consortium?• Does your PI policy meet the requirements of the

contract? • Will you be novated? If so, who will you be

novated to? For example, does the client generally use experienced contractors?

• Have you seen the proposed novation agreement?

What is your financial liability

• What is your financial limit of liability under the contract?

• Does your PI policy cover your financial liability under the contract?

Having identified the risks, you are in a position to evaluate their significance to your business. In financial terms, what represents a high risk to you?

Risk exposure

What is the maximum exposure to a loss arising from the risks identified?

• In financial terms?• In reputation terms? • In interruption risks? • Liquidated damages?• Fines and penalties?

Likelihood of risk occurrence

What is the probability of risk?

• High (for example, 80 – 100% probable)• Medium (for example 20 – 80% probable)• Low (for example 0 – 20% probable)

What is the impact to your business?

What might the impact of the risk be? This will relate to the scale of the project in relation to your total workload.

• High (for example, 80 – 100% probable)• Medium (for example 20 – 80% probable)• Low (for example 0 – 20% probable)

An example pro forma risk register is shown in the Appendix. This can be used independently to identify and manage your risks. An example of how the risk register can be used is also shown in the Appendix. The risk register should be a ‘live’ document and reviewed on a regular basis to track and update identified risks. High Probability/High Impact risks should be actively managed or avoided.

Stage II – Evaluate

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Pre-Contract Risk Management - An ACE guide

Stage III - MitigateAt this stage, you should consider whether or not it is possible to reduce or control the identified risks. Can the risks be reduced? If so, draw up an action plan.

Can the risks be controlled contractually?

• Are there liability caps?• Is there a net contribution clause?• Can the contract be made subject to reasonable

skill and care?• Are you being requested to indemnify and/or hold

the client harmless from particular losses?• Are you in a position to propose, or insist on,

amendments to the contract?• Should the risks or the project be declined?

Stage IV - TransferTransferring all or part of the risk can reduce the possible impact on your business to an acceptable level. This can be done:

• Through the contract • By outsourcing/sub-contracting• Through your insurance

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Pre-Contract Risk Management - An ACE guide08

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Pre-Contract Risk Management - An ACE guide 09

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RISK HIGH 3 Red (9) Red (6) Amber (3)

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Notes:1. The risk scores and classification can be amended to suit each contract.

Appendix: Example Risk Matrix

Pre-Contract Risk Management - An ACE guide

Risk ID

Description of Risk

Probability High/Medium/Low

Impact High/Medium/Low

INITIAL RISK SCORE

Risk Owner

Target Score

Risk Allocation (avoidance, reduction, transfer)

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Pre-Contract Risk Management - An ACE guide

AcknowledgementsThis guide was produced by ACE with support from ACE’s Legal and Liability Group.

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Association for Consultancy and EngineeringAlliance House 12 Caxton Street London SW1H 0QLT: 020 7222 6557F: 020 7990 9202consult@acenet.co.ukwww.acenet.co.uk