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Guide to risk
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1

Aim and
guiding principles

2

Underpinning
collaborative behaviour

3

Flexibility

4

Clarity

5

Other features

6

Informal
definitions

A

Appendix: Draft risk allocation schedule

5

Guide to use

Other features

5.1

Provision of information

Both Purchaser and Supplier are required to provide and share information in their possession which is necessary for, or which they each reasonably consider to be relevant to, the delivery of the Project.

5.2

Design obligations ("Services" only)

Two alternative design obligations are provided in clause 3.4, one for the exercise of reasonable skill and care, the other the obligation to carry out the design "such that it is reasonably fit for the purpose described in the Client’s Brief or (where applicable) the Purchaser’s Brief having regard to the practices and state of knowledge of the Supplier's profession or discipline at the time of the execution of the Works to which it relates".

5.3

"Lead Designer" and "Lead Supplier" ("Services" only)

The former is responsible for co-ordination of all design carried out by others and the latter is responsible for the co-ordination of all construction carried out by others. Although these roles might appear somewhat traditional under a partnering arrangement, they reflect the results of earlier studies that, unless they are performed, there is a danger that co-ordination of design and construction will be overlooked. Where a Supplier is providing both design and construction services, it is quite possible for him to act in both roles.

5.4

Use as a professional appointment ("Services" only)

Where used as a professional appointment, the Purchase Order provides that a number of the clauses in the Collaborative Construction Terms that relate to construction operations will not apply. These provisions are shown in italic type in the Terms.

5.5

Use as a subcontract

5.5.1

The Purchase Order provides for the identity of the "Client" (namely the person who is procuring the relevant project) to be identified where different from the person acting as Purchaser. Any subcontractor should therefore always know the ultimate client for whom the project is being provided. In addition, brief details of the Project should always be specified in the Purchase Order, thereby giving relevant information to the individual subcontractors who may need to consider issues of value engineering or the like in relation to the provision of the Services.

5.5.2

Where the Supplier is a subcontractor, it will be bound by decisions made under the contract under which the Purchaser is engaged ("the Purchaser’s Contract") provided that:-

• these decisions relate to the performance of the Supplier’s obligations under the contract (i.e its subcontract); and

• the Supplier has been provided with a copy of the Purchaser’s Contract (or at least the relevant provisions in it)

5.5.3

The Purchaser is obliged to use reasonable endeavours to pursue and enforce its rights and remedies under the Purchaser’s Contract "in circumstances where failure to do so could reasonably be expected to prejudice the interest of the Supplier under the Contract" [i.e. the subcontract]. For example, if the Supplier is seeking an extension of time to the Date or Dates for Completion due to the late issue of relevant information from the Client, the Purchaser will be obliged to use reasonable endeavours to obtain an extension of time under the Purchaser’s Contract, the benefit of which can be reflected under the subcontract.

5.6

Key personnel and Supply Chain

5.6.1

There is provision in the Purchase Order relating to the supply of "Services" to specify both key personnel of the Supplier and any members of his "Supply Chain".

5.6.2

The latter will comprise any members of the Supplier’s supply chain who will be responsible for the delivery of important elements of the Services. The definition of "Supply Chain" acknowledges that additional organisations may become part of the Supply Chain during the period of the contract if they are engaged to provide important elements of the Services. However, the intention is that Clients or Purchasers should be able to select Suppliers on the strength not simply of their personal expertise and experience but also that of their proposed supply chain.

5.6.3

The Supplier may not replace any of the key personnel named in the Purchase Order without the approval of the Purchaser (not to be reasonably withheld or delayed) provided that any replacement is suitably qualified to perform the relevant role.

5.6.4

Similarly, the Supplier agrees to work together with, and fully involve, his Supply Chain and to organise or take part in team building, project planning, risk and value engineering workshops involving all or relevant members of the Supply Chain and other project participants as necessary or appropriate to the stage of the project (clause 3.10 of the Collaborative Construction Terms).

5.7

The Risk Register ("Services" only)

5.7.1

Underpinning any successful project should be a robust system of risk identification and management. In this regard, readers are referred to the Be Guide to Risk Management. Many potential risks can be "removed" as continuing risks by insurance. Where this is the case, co-operation will enable insurance cover to be planned so that it provides cover not simply to the Purchaser or main Supplier, but also to other project participants. For example, it should be possible to arrange a single policy of insurance for the construction works to cover damage to all parts of the works without the need for each sub-supplier to take out separate insurance in respect of their individual works. All risks that cannot be covered by insurance should be allocated to the party best able to control the relevant risk, and not simply passed down the contractual chain to subcontractors and sub-subcontractors.

5.7.2

The Purchase Order will make clear whether the Supplier is responsible for preparing, updating and amending the Risk Register or whether it will provide support to this role. In either case, the Risk Register should involve input from all members of the Project Team and any other relevant project participants and should not simply be passed to the main contractor/Supplier, as traditionally happens. The Risk Register is a vital project management tool intended to identify potential risks relating to the delivery and performance of the Project, the probability of those risks occurring and their likely financial (and possibly time) consequences together with the naming of an individual or organisation who will be responsible for managing each risk. (Note that "responsibility" in this context means only responsibility for reporting back to the Project Team, not legal responsibility for the consequences of the occurrence of the risk.) Through regular review of the Risk Register the Project Team will have the greatest opportunity of preventing many risks from occurring and mitigating the adverse effects of those that do occur.

5.8

The Risk Allocation Schedule and Relief Events ("Services" only)

5.8.1

Whilst the Risk Register is a project management tool, the Risk Allocation Schedule represents a contractual allocation of risks between the Purchaser and the Supplier. The Risk Register must be regularly updated, however the Risk Allocation Schedule will probably remain unchanged throughout the contract and may only be amended with the agreement of both parties. An example of a Risk Allocation Schedule is attached to this note as Appendix 1. In a true collaborative situation, it should, ideally, reflect the Risk Register at the date of the contract. However, Clients or Purchasers may prefer to stipulate a risk allocation that will be applied regardless of the risks identified in the Risk Register. Alternatively, Clients or Purchasers may ask potential Suppliers to propose their own proposed risk allocation. Whatever approach is adopted, the Risk Allocation Schedule should show the amount of any risk allowance included in the Supplier’s Target Cost or Contract Sum (as the case may be). In addition, it should show the respective allocation of responsibility for that risk between them.

5.8.2

The use of a Risk Allocation Schedule allows the allocation of all foreseeable risks between Purchaser and Supplier on a project by project basis rather than by way of a fixed allocation of risks applicable to all projects. It also enables specified risks to be allocated partially between both parties: this is achieved by completing the Risk Allocation Schedule with a percentage allocation between 0% and 100% for each party.

5.8.3

5.8.3 Contrast this arrangement with traditional arrangements: the contractor will have included a contingency in his price (for risks occurring which will not entitle him to compensation for the client). The client will also have a contingency in his budget (to allow for the possibility that he may have to pay compensation to the contractor under the contract). Usually, both contingencies will have been arrived at more by rule of thumb than analysis of the potential risks, with the result that if risks do occur with adverse cost consequences to the Project, one or other of the client or contractor usually loses out. The use of the Risk Allocation Schedule allows both parties (together with other Project Team members) to consider in a more scientific way:

• what are the potential risks to the delivery of the Project?

• can they be removed at an economic cost (e.g. by insurance)?

• if not, can they at least be mitigated (e.g. by further site investigations)? and finally;

• who is best able to manage the remaining risks?

5.8.4

The Risk Allocation Schedule is closely linked to the concept of "Relief Events". "Relief Events" include:-

• any variation of the Services or the Project;

• an act, omission or default of the Purchaser;

• the occurrence of any risk set out in the Risk Allocation Schedule to the extent that the Risk Allocation Schedule does not apportion responsibility for the consequences of the risk to the Supplier "(provided that the Supplier shall only be entitled to recover additional costs if the cost consequences of the occurrence of the risk exceed the amount (if any) shown in the Risk Allocation Schedule as having been included in the Supplier’s Target Costs or Contract Sum and provided that the Supplier shall only be entitled to seek an extension of time to the Date or Dates for Completion if the time consequences of the occurrence of the risk exceed the period (if any) shown in the Risk Allocation Schedule as being the Supplier’s responsibility)";

• the occurrence of risk not referred to in the Risk Allocation Schedule which is not reasonably foreseeable and is beyond the control of the Supplier (excluding any act, omission, default of insolvency of the Supplier, any member of the Supplier’s Supply Chain or any other subcontractor of the Supplier).

In all the above cases, to qualify as a Relief Event, the event must have had, or be likely to have, an effect on the cost of performing the Services and/or the "Date or Dates for Completion" of the Services.

5.8.5

The Risk Allocation Schedule provides not only for the allocation of the cost consequences, but also for the allocation of the time consequences, of an identified risk. If considered too complicated, the columns in the Risk Allocation Schedule relating to the division of responsibility for the time consequences of an identified risk can simply be left blank. It is suggested that the pre-allocation of particular time consequences for the occurrence of particular risks may be particularly relevant where the Date of Completion of the Project is critical: for example completing works to an educational establishment before the start of term time. Alternatively, the parties may decide, for example, that the time consequences of the occurrence of a specified risk may be shared equally. In such a case, if the delay to the Date or Dates for Completion resulting from the occurrence of the risk is 2 weeks, the Supplier will be entitled to an extension of time equal to half this amount, namely to 1 week.

5.8.6

5.8.6 As an example of how the cost and time consequences of an identified risk may be shared, assume adverse ground conditions are considered to be a potential risk listed in the Risk Allocation Schedule. The total estimate of the likely cost consequence is agreed as £100,000 and the Purchaser and the Supplier have agreed that this risk should be apportioned thus:

Risk Allowance: £100,000
Risk Allocation:
Purchaser: 50%
Supplier 50%

Amount included in Target Cost/Contract Sum (TC/CS): £50,000

Column 2 of the Risk Allocation Schedule should state "£50,000" and column 4 should show "Purchaser: 50%", "Supplier: 50%"

Consider further that the parties have agreed that the Supplier will accept responsibility for the first week of any delay, but above this, the Purchaser will be responsible for any further delays. Column 3 of the Risk Register should state "1 week" and column 5 should show "Purchaser: 100%", "Supplier 0%".

If the risk does materialise, but the costs incurred by the Supplier in dealing with it are less than the share of the risk allocation included in the Target Cost or Contract Sum (i.e. £50,000 in this example), the Supplier will not be entitled to any additional payment. If the risk materialises, and the costs incurred by the Supplier in dealing with it (evaluated on an open-book basis) exceed the share of the risk allocation included in the Target Cost or Contract Sum, the excess will be shared between the Purchaser and the Supplier in the proportions indicated in Column 4 of the Risk Allocation Schedule (i.e. 50% each in this example). This is illustrated in the following table:

Since the Supplier’s share of the risk allowance is included in the Contract Sum regardless of whether or not the risk actually materialises, the Purchaser effectively pays for all costs arising up to the limit of the Supplier’s apportionment, plus half of any additional costs arising.

5.8.7

If the risk materialises but the resulting delay suffered by the Supplier is less than or equal to the period for which he accepts responsibility (1 week in the above example) he will not be entitled to any extension of time to the Date or Dates for Completion. If he suffers a longer delay (say 19 days in total) he will be entitled to the following extension of time:

(i) 19 days less the 7 days for which the Supplier is responsible = 12 days

(ii) Purchaser’s responsibility for the additional 12 days = 75% x 12 = 9 days

(iii) Therefore the Supplier is entitled to an extension of time of 9 days.

5.8.8

The total of the amounts in column 2 of the Risk Allocation Schedule (i.e. the total of the amounts for which the Supplier will be responsible for in the event of the occurrence of all the risks listed in the Risk Allocation Schedule) must be included in the Supplier’s Target Cost or Contract Sum. If the parties can successfully manage these risks so that, either they do not occur, or the cost of their occurrence is mitigated below the total amount of this risk allowance, in the case of a Target Cost arrangement, the surplus is shared in accordance with the sharing arrangements set out in the Purchase Order. In the case of a lump sum price (Contract Sum) arrangement, the surplus is kept by the Supplier.

5.8.9

The occurrence or likely occurrence of any Relief Event is to be notified immediately by whichever party first becomes aware of it to the other. The Supplier must then provide a statement setting out (in as much detail as is reasonably practicable) the effect that the Supplier considers the Relief Event will have on the cost of performing the Services and/or the date or dates for completion.

5.8.10

If the parties cannot reach agreement on the effect of the occurrence of the Relief Event, it will be determined in accordance with the dispute resolution procedure. Note however that, if the Purchaser decides that the effect of any Relief Event is too uncertain to be forecast with reasonable accuracy, it must agree with the Supplier the assumptions to be made to enable the estimate of the effect of the Relief Event to be made (clause 4.11 of the Terms). If these assumptions subsequently prove to have been wrong, the Purchaser and the Supplier are obliged to agree the corrections needed to be made to the original estimate. Again, any failure to reach agreement will be resolved in accordance with the dispute resolution procedure.

5.8.11

Great care is needed in completing the Risk Allocation Schedule. We recommend that legal assistance may be appropriate to ensure that individual risks are clearly expressed so as to avoid later disputes as to whether the event has occurred. For example, it would probably not be appropriate to list a risk simply as "ground conditions". This could cover a whole range of possible conditions, many of which might be entirely foreseeable but nevertheless cause delay because the Supplier fails to take usual or necessary precautions; for example, the Supplier omits to construct any site road and suffers delay because heavy vehicles keep getting stuck in mud. Make sure the expression of the risk clearly reflects what has been agreed.

5.9

Relief Event ("Products" only)

A slightly simplified version of the Relief Events provisions described above are included in the "Products" documentation. Rather than making reference to risks referred to in the Risk Allocation Schedule, reference is made to "the occurrence of any risk which is not reasonably foreseeable and is beyond the control of the Supplier (excluding any act, omission, default or insolvency of the Supplier or any subcontractor of the Supplier)".

5.10

Measurement of performance

It is recognised as an important element of most collaborative relationships that performance is monitored against appropriate Key Performance Indicators (KPIs) to guard against complacency and provide a benchmark for performance. Provision is included for the parties to specify their own choice of KPIs (whether one of the existing published forms of KPIs or a bespoke version). If KPIs are considered not to be appropriate (e.g. the cost of their administration would be disproportionate to the contract value) they can simply be omitted from the Purchase Order.

Measurement of performance should take place on a regular basis during the Project and not simply at the end. This allows the opportunity for poor performance to be acted upon before it threatens the successful delivery of the Project.

5.11

Payment provisions

5.11.1

Under the "Services" documentation, two payment options are provided for in clause 6 of the Terms, namely payment by reference to a target cost or costs or by reference to a lump sum.

5.11.2

The Target Cost option: this option is probably closer to the principles of collaborative working, certainly for contractors. An amount is agreed in respect of the Supplier’s profit, central office and site overheads and the like (the "Supplier’s Margin"). This sum is paid to the Supplier in separate instalments during the contract period. The Supplier’s "Actual Cost" (i.e. excluding amounts in respect of profit, central office overheads, administration and the like) is then refunded on an open book basis. Separate target costs may be set for different parts or sections of the Services and a Guaranteed Maximum Cost may also be agreed in relation to the provision of the whole Services. Where a Guaranteed Maximum Cost is specified, it cannot be exceeded although it may be increased by any additional payments due in respect of Relief Events. The target cost or costs and any Guaranteed Maximum Cost are calculated exclusive of the Supplier’s Margin.

5.11.3

The lump sum option: this has been included in recognition of the fact that, particularly for consultant appointments and simple subcontract services, a lump sum payment may be the more usual method of payment for such services and may be easier to administer. Where this option is chosen, the parties will need to agree, and attach as Appendix 6 to the Purchase Order, a "Payment Schedule" showing the payments due to the Supplier by reference to completed activities or milestones or progress against the project programme or any other method of assessing and paying instalments of "the Contract Sum" as may be agreed. Whilst the incorporation of provision for payment of monthly valuations is possible, it is not encouraged on the grounds that it is more likely to create adversarial relations in the agreeing of the monthly valuations.

5.11.4

5.12

Termination provisions

As drafted, either party may terminate their contract if the other party is in breach of their obligations or becomes insolvent. In addition, an optional right for the Purchaser to terminate on 2 months' notice is included in the Purchase Order. This has been included primarily in recognition of the fact that some clients, primarily in parts of the public sector, require a non-fault ground of termination to protect against possible budgetary or operational charges.

5.13

Dispute resolution provisions

These are very straightforward and provide for early notification of potential disputes, direct negotiations in good faith between senior executives with serious consideration being given to mediation if negotiation proves unsuccessful. Statutory adjudication under the Housing Grants, Construction and Regeneration Act 1996 is included, with litigation as the ultimate formal means of dispute resolution.

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