Comtech Whitepaper: Let's Talk About Risk - Some Considerations Toward Effective Risk Management of P3s
July 15, 2019
By: Charles Wheeler, Executive Vice President, Comtech Group Inc.
The delivery of P3 infrastructure projects can be negatively impacted if risks are inappropriately assigned or undermanaged throughout the lifecycle of a project. Truly effective project risk management requires a strategy that can also accommodate the uncertainty and variety of risks projects can be exposed to from the cradle to grave of a project, regardless of size.
Given this, it is never too early to start talking about, analyzing and mitigating project risks, because they inform the most important discussions on large and complex infrastructure projects, regardless of the type of procurement. The lack of management attention to cost, budget, schedule and scope risks is the Achilles heel of project management.
In fact, risk conversations should happen as often as possible, and in as many planning streams as possible, to ensure the sponsor is soliciting and receiving broad input from all stakeholders to inform the project’s risk register. For example, you can identify potential risks (and thoughts on how to best profile and mitigate them) through public consultation and engagement efforts, deliberations with senior executives and/or elected leaders, and as part of market soundings. Doing so allows sponsors to get a broader perspective and clarity on the project’s risks, as well as evolving market trends on risk tolerance as they relate to the project’s desired outcomes. Limiting the development of risk registry to only inputs from the project team is not a recipe for project success.
Every project is unique, and the goal of every sponsor is to design a procurement with strong risk protection and a risk regime that results in best value for taxpayers. This is achieved when risks are assigned to the party best positioned to manage, understand and accurately quantify them. When it comes to the task of assigning appropriate risks to respective parties, there is often good alignment between sponsor and contractor as it is in the interest of both to keep the project on budget and on schedule.
Further, opportunity and risk must be assessed together. It is therefore important to focus on both project risks and opportunities, as opportunities such as the potential for fast-tracking projects can often become a means to mitigate potential risks. All too often, project sponsors tend to focus on risk and, instead, spend very little time assessing opportunities. Every opportunity not assessed is a potential threat to a project down the road. The use of incentives to encourage contractors to accept the risks the sponsor does not wish to retain can be a powerful tool during the procurement phase to achieve project objectives. For example, pricing options can be used to incent contractors to move from a shared-risk approach to taking on full risk in circumstances where it makes financial or strategic sense.
Scope, performance and project outcomes all need to be well-defined. The same goes for risks. The risks need to be clearly identified with clear and concise contractual obligations in place to address responsibilities with respect to scheduling and completion dates, financial payments, force majeure (i.e., unforeseeable and/or uncontrollable circumstances that could impact cost and schedule),project milestones and operations and maintenance. This means sponsors need to develop and track responsibilities for managing and mitigating all risks and opportunities, regardless of ownership. They also need to monitor them based on the analysis of both qualitative and quantitative risks. And this has to happen while keeping in mind that risk management is an ongoing process, not a static one, with strategies, plans and dedicated resources in place from project initiation right through to close-out.
The vast majority of risks/claims on infrastructures projects tend to occur in the following eight areas: utility relocation and coordination; geotechnical risks; contamination; permits and approvals; bundled projects; scope changes; property related issues; and construction interfaces with other contractors. The following discusses recent approaches that have been taken to develop risk profiles in the first two areas listed above: utility conflict and relocation and coordination and geotechnical risks.
Utility conflict and relocation and coordination
It’s important to discuss potential risks broadly and early on in the project. Likewise, it’s important to launch early investigation works to inform the development of a project’s risk profile. Robust geotechnical investigations and subsurface utility engineering (SUE) are two critical tools to help determine whether risks can be efficiently retained, transferred or are better addressed through early works programs that can de-risk certain project elements prior to contact award.
P3 procurement models are evolving, and it is becoming increasingly obvious that the contractors bidding on these large and complicated projects cannot efficiently take on the full scope of risks related to utilities. Another tool that is being more commonly used to create a more effective risk regime for utilities is a Utility Baseline Report (UBR). As contractors are dependent on third-party utility providers to self-perform utilities work (including Provincially/Federally regulated private utilities) to clear utility conflicts, they are (understandably) not prepared to fully accept an unlimited schedule risk of this nature. Therefore, it is becoming common practice to institute a UBR process, which transfers some of this schedule risk to the project sponsor.
In specific terms, a UBR process includes listing all utility projects that support the project and providing the upset durations typically required to have these projects competed. If these timelines are exceeded such that they materially impact the contractor’s schedule, the contractor may be entitled to schedule relief and compensation (on a cost-sharing basis depending on the duration of the delay). In addition, UBR’s typically include a mislocated and unknown utilities regime to address schedule and risk costs that contractors may otherwise estimate and carry within their respective bids.
Conflicts with existing mislocated and unknown utilities can have a significant bearing on projects, particularly in urban settings. Often, it is not the actual cost for protecting and/or relocating the impacted utility, but rather the delay for executing the unanticipated work, that can have the greatest financial impact. With the contractors not entirely in control of these variables, they perceive this as a significant risk exposure that would otherwise come with considerable additional project costs in the form of risk pricing. With schedule relief and potential compensation on a cost-sharing basis informed by a UBR, these risks can be priced in a more accurate and efficient manner.
Geotechnical risk - It’s possible for sponsors to successfully transfer all geotechnical risk to contractors, provided the geotechnical investigations are completed in accordance with industry best practices. These investigations are not only necessary to guide preliminary designs, they also help reduce project risks tied to contingency budgets for unknown or unforeseeable subsurface and groundwater conditions.
But even with more robust and standardized data, one size does not fit all. And in some cases, optionality can be structured in bids whereby potential contractors can bid and receive procurement incentives in the open market period to take on full geotechnical risk. Whether the risk is fully or partially transferred to proponents, if there is an error in the geotechnical data reports that can be validated, the contractor may be still be entitled to compensation as per the terms of the contract.
New appropriate risk-sharing approaches - When addressing risk, sponsors should let the principles of appropriateness and reasonableness guide the way. And while fully transferring risks to the contractor through RFP incentives can work, it is not a panacea for risks the sponsor does not wish to retain.
The fact is, contractors are becoming increasingly skittish about taking on more risk. That calls for new appropriate and reasonable risk-sharing approaches to be established, as many high-profile cost and schedule risks borne by contractors in the past may not be tolerable or cost-efficient to transfer as the market continue to evolve. Establishing these new approaches will require starting many and multiple open, transparent and frank conservations about risk from the project’s outset.