Explorer

• Risk Management
  • Introduction to Risk Management
  • Mandatory Process
  • Corporate Risk Management
• Risk Management Documents
  • Introduction to Risk Management Documents
  • Risk Management Terminology
  • Risk and Opportunity Management Strategy
  • Risk and Opportunity Management Plan
  • Risk Register
• The Four Stage Project Risk Management Process
  • Introduction to the Project Risk Management Process
  • Identify
    • Identify Stage
    • Categories of Risk
    • Project Areas Affected by Risk
  • Analyse
    • Analyse Stage
    • Qualitative Analysis
    • Quantitative Analysis
  • Plan
  • Manage (Implement)
• Opportunity Management
• Three Point Estimating and Confidence Figures
• Risk Management in Acquisition
  • Business Case Approvals
  • Optimism Bias
  • Contracting for Risk Management
  • Assurance
• Risk Tools
• Competences and Training
• Common Terms
• Contacts

Contracting For Risk Management

The contractual route selected should transfer risk to the contractor as far as is reasonable and practicable and provide a path to minimise the remaining risks. In practice this tends to mean financial risk is passed to the contractor via fixed or firm prices but performance and timescale risks remain largely with MOD as these cannot effectively be transferred.

The intention is that the MOD will manage and understand the risks without being unduly risk averse. Contract incentives and damages provisions may encourage the contractor to spend his own money to meet objectives if things go wrong but only while his commercial interests are being served. Once a financial limitation for liquidated damages is reached for example, the incentive disappears and the MOD is left with the consequences.

The contract strategy must be developed in parallel with, and as part of, the procurement strategy. Both the MOD and the contractor need to undertake separate risk management activities but will need to establish a constructive dialogue, eventually involving access to each others processes.

How is Contracting For Risk Strategy Successfully Carried Out ?

It is important to draft a contract to maximise risk transfer e.g. inclusion of milestone payments against demonstrable achievement, ensure that the specification(s) is/are adequate and the terms and conditions of contract are taut. Consider the inclusion of option clauses and review points.

Areas to watch particularly are:

• Government Furnished Assets (GFA) include Equipment, Facilities and Information. Wherever possible MOD GFA should be specified and tested as working together with other existing equipments, rather than meeting a paper specification. Alternatively, allowances should be made for the integration risk in the timescale and funding. Moreover potential savings offered by the incorporation of in-service equipment should be balanced against the cost of refurbishment and the additional technical and timescale risks involved. The Project Manager (PM) and contracts branch should ensure that the responsibilities for GFA are recognised, and appropriate arrangements are in place.
• Package deals, including initial support and reliability demonstration, versus individual contracts for each project stage.
• Liability.

Consideration should also be given to the risks associated with contractor selection and tender evaluation. In terms of contractor assessment, the IPTL will need to make value judgements on the level of identified risks and should include as a minimum:

• Current performance on existing work
• Current and future available capacity
• Stability of contractor’s organisation, staff and finances
• Carrying out Pre-Contract Award Evaluation (PCAE) to identify potential areas of weakness
• Appropriate certification
• Contractor’s previous experience
• Whether the contractor has a competent design organisation, or has been identified as a “Design Authority” (particularly if the requirement is for the manufacture from a Technical Data Package
• Whether the tenderer has underestimated the risks (compare the tenderer’s risk management plan, review his resource assumptions).

With regard to tender evaluation, it is considered essential that Risk Assessments are undertaken early in projects to provide maximum visibility of problem areas and how it is proposed to deal with them. The identification and analysis of risk, coupled with sound risk management plans, should be taken into account when evaluating the realism of tenders; the use of PCAE (see further instruction/guidance within AOF) is recommended to assist the tender evaluation for procurement where high risks have been identified.

Contractual Conditions

When a requirement for a Risk Assessment is issued the clauses reproduced below should be inserted into the associated Invitation to Tender (ITT) and Contract.

Example Clause for Insertion in the ITT

"Risk assessment is a project management function only. It does not affect the legal relationship between the parties. The requirement for the tenderer to provide a risk assessment and the process of risk assessment generally, including without limitation, the identification of (or failure to identify):

• particular risks and their impacts; or
• risk reduction measures, contingency plans and remedial plans;

shall not in any way limit or exclude the Tenderer’s obligations under any contract which it may be awarded (the “Contract”) and shall be entirely without prejudice to the Authority’s rights, privileges and powers under any such Contract. In the event of a Contract being awarded, the risks identified as a result of the risk assessment and by the risk assessment process generally will remain the risks of the Contractor and will not be assumed by the Authority except to the extent that the Authority expressly and unequivocally accepts those risks under the contract.”

Example Clause for Insertion in the Contract

“The Contractor acknowledges that any risk assessment which has been, or may be, undertaken in connection with this contract has been, or will be, a project management function only. Such risk assessment does not affect the legal relationship between the parties. The requirement for a risk assessment and the process of risk assessment generally, including without limitation, the identification of (or failure to identify):

• particular risks and their impacts; or
• risk reduction measures, contingency plans and remedial plans;

shall not in any way limit or exclude the Contractor ’s obligations under this contract and shall be entirely without prejudice to the Authority’s rights, privileges and powers under this Contract. The risks identified as a result of any risk assessment and risk assessment process generally remain the risks of the Contractor and are not assumed by the Authority except to the extent that the Authority expressly and unequivocally accepts those risks under the contract.”

Change History

1 July 2010

Deletion of Contractors Requiring Special Attention (CRSA) in text as the process is no longer valid.