We often advise our clients on the best allocation of contractual risks and provide contingency valuations. We find that many owners and operators’ first instincts is to offload risks to the supply chain – relying on tightly worded contracts to ensure that rights can be enforced if and when risks arise.
But here’s the rub – this strategy rarely plays out as intended. A sophisticated contractor simply values those risks and to the extent that they don’t have care and custody for the risk, they price it at the P70 value (or higher). Therefore, the owner / operator pays a premium for something that may never occur – or at least may never occur to the level of severity that the contractor had assumed.
The less sophisticated contractor, keen to win new work and impress the client, assures the owner / operator that all risks are valued in their lump sum offer (the lump sum offer that’s 20% less than the other bids). The owner / operator seeing bang for buck backs the low-cost horse, banking the savings, what could go wrong?
Weight lifting in the garage with my seven year old son was something I did a lot of during COVID-19 lockdown. He would do his ‘exercises’ (which usually involved hanging from bars). Whilst hanging there he would assure me that he could lift the 20 kilo dumb bell that I was attempting to lift, his face sincere, eager to show me how strong he was. I knew that if I passed him the weight he wouldn’t be able to hold it and he would probably drop it on his foot. Then I would have to explain to my wife why the little one had a broken foot.
It’s the same deal with the allocation of risk. The typical contractor’s balance sheet can’t withstand the occurrence of unpriced risks. They may tell you they can, but when push comes to shove they will have no choice but to challenge the contract and claim – and then you will have to explain to the MD why the supply chain has broken its foot. So here’s our advice – discuss the risks with the supply chain and be transparent (use a risk register), understand who is best placed to manage the risk, workout a reasonable contingency allowance and don’t ask the supply chain to lift something that’s too heavy.