AfDB New Procurement Policy:
Training Program for
the Bank’s Procurement Staff
In the absence of a contract, all
risks
are the
owner's
Contracting is a process of
risk allocation
between
the two contracting parties: The Employer & the
Contractor
The more risks transferred to the Contractor, the
higher the contract price
There are many RISKS relating to Construction
Contracting
The impact of those RISKS if they materialize is
financial,
damage to the project, and/or
injury to persons
It is paramount to identify
risks
so that the
probability of such risks materializing may be
assessed, and thus such risks may by allocated
Sources of Risk in Construction Projects – cont'd
Physical:
Loss or damage by fire, earthquake, flood, accident, landslip. Environmental
Ecological damage, pollution, waste treatment. Design
New technology, innovative applications, reliability, safety Detail, precision and appropriateness of specifications Logistics
Loss or damage in the transportation of materials and equipment
Availability of specialized resources – expertise, designers, contractors,
suppliers, plant, scarce construction skills, materials
Sources of Risk in Construction Projects – cont'd
Financial
Availability of funds, adequacy of insurance Adequate provision of cash flow
Losses due to default of contractors, suppliers Exchange rate fluctuations, inflation
Taxation
Legal
Liability for acts of others, direct liabilities
Local law, legal differences between home country and home countries of
suppliers, contractors, designers Political
Political risks in countries of owner and suppliers, contractors – war,
Sources of Risk in Construction Projects – cont'd
Construction
Feasibility of construction methods, safety Industrial relations
Extent of change Climate
Quality and availability of management and supervision
Operational
Fluctuations in market demand for product or service Maintenance needs
Types of Risks in Construction Projects – cont.
First: Risks relating to Physical Works
Physical Conditions
Changed or differing Site Conditions
Instability of natural or constructed slopes soft ground, rock
Groundwater
Artificial obstructions
underground services
Types of Risks in Construction Projects – cont.
First: Risks relating to Physical Works – cont.
Adverse weather and natural disasters
affecting site conditions surface flooding, erosion
acts of God: earthquakes, volcanic activity, typhoon
Types of Risks in Construction Projects – cont'd
Second: Risks relating to Delay
Late Site Possession
Late Drawings, Instructions Loss of Productivity
Delay Outside the Parties' Control
Shortage of Staff, Labour, Plant, Materials,
Finance
Types of Risks in Construction Projects – cont'd
Third: Risks relating to Direction & Supervision
Incompetence, Inefficiency, Unreasonableness Lack of Communication
Loss of Productivity
Types of Risks in Construction Projects – cont'd
Fourth: Risks relating to Damage to Property
Due to negligence or breach of warranty of
contractor/subcontractor/supplier in designing or building temporary or permanent works.
Due to negligence of consultant or employer in design
Due to matters outside the parties’ control, but which are
insurable (e.g. fire, theft, vandalism)
Due to matters outside the parties’ control, but which are not
insurable (e.g. war)
Consequential loss arising from above
Types of Risks in Construction Projects – cont'd
Fifth: Risks relating to Government Policy & Public
Interest
Changes in taxes, labour and safety or other laws Delay or refusal of planning approvals, building
permits, etc.
Types of Risks in Construction Projects – cont'd
Sixth: Risks relating to Conflict
War, unrest, etc.
Malicious damage, intimidation
Seventh: Risks relating to Labour Demands
Types of Risks in Construction Projects – cont'd
Eighth: Risks relating to Payment
Varying rates of exchange.
Delay in settling claims, certifying and effecting
payments, and release of retentions.
Types of Risks in Construction Projects – cont'd
Ninth: Risks relating to Inflation / Escalation
Any element of cost or profit not covered by a price
fluctuation clause.
Replacement cost of plant and equipment.
Tenth: Risks relating to Disputes
Delay and cost of resolving disputes Lack of records.
Risk Assessment
The importance of Risk Assessment
Risk Assessment
can be done through the
evaluation of the probability
of occurrence and the
potential severity
Risk Allocation
The general principle is that all risks are Employer's risks
except those that are explicitly transferred (allocated) to the Contractor in the contract against a reasonable price.
The principles governing the allocation of risk to either
party of the contract relate generally to the following factors:
Which party is more able to control the risks?
Which party can better forecast and evaluate risks?
Which party can better bear the consequences of risks
materializing?
Which party better benefits or bears damage in the final outcome
Risk Allocation – cont'd
In the application of the above principles, and with regard to the risks that are to be transferred (allocated) to the contractor, the following points should be considered:
The contractor being capable of evaluating the allocated risks. The contractor being capable of controlling the allocated risks
and reducing the probability of their occurrence.
The contractor being financially capable of withstand the
Some Risks Borne by the Contractor
Availability and cost of labour, materials, and equipment Timely completion
Default of subcontractors and suppliers
Errors in construction and non-complying work Compliance to safety requirements
Normal weather conditions (time and cost) and
exceptional weather conditions (costs only)
Some Risks Borne by the Contractor – cont.
Correct setting out
Protection of the works
Trade marks and intellectual property Notices for claims
Issuance and evaluation of Variations Delayed payments
Dispute resolution procedures
Changes in cost of labour, materials and plant Structural warranty
Some Risks Borne by the Employer
Issuing drawings, instructions and approvals.
Design faults (except contractor's design as per
contract).
Issuing information relating to subsurface and
hydrological conditions.
Unforeseen physical conditions and obstructions
Safety, security and environmental protection with
regard to work carried out by employer.
Damages to the works resulting from the employer's
Some Risks Borne by the Employer – cont.
Suspension of work. Site possession.
Justified extension of the time for completion. Issuance and evaluation of variations.
Payment to nominated subcontractors
Cost of finance, slowing down and suspension, and
termination of contract if payments to contractor are delayed.
Assignment of subcontracts if contractor's
employment/contract is terminated.
Some Risks Borne by the Employer – cont.
Dispute resolution procedures.
Changes in costs of labour, materials and plant,
changes in legislation and changes in the currency rates of exchange.
Structural warranty.
Termination of contract for the employer's
Conclusion
Risk allocation between the two parties to the contract should
be carried out in accordance with the principles set out above.
Proper allocation of risk is very important to minimize loss and
damage to both parties to the contract.
The awareness of both parties to the contract of the risks
