In last week’s blog, Construction’s No-Win, research data led us to the conclusion that risk cannot be effectively transferred in contract negotiations and that only highly competent contractors can manage risk for all stakeholders. “Risk is best managed through cooperation not confrontation.”
The Current Discussion
In the most recent edition of Engineering News Record, Milton Smith cautions the industry:
“As we move toward much larger project size, duration and complication, we’re witnessing the utilization of a multitude of delivery methods. With that, we’re seeing an attempt to shift more and more risk to the contractor contractually. This seems most prevalent in the infrastructure space, with large P3 and gap finance projects causing some to exit the P3 arena entirely… Therefore, it’s critical for the industry as a whole that we thoroughly read and understand the contract provisions we’re being asked to sign and take a stand against onerous provisions that might place us and our companies at any unnecessary risk.”
Smith goes on to conclude, “A truly sophisticated owner will understand that a more collaborative equitable contract benefits all parties in the end.” (Are We Accepting Too Much Risk? – W. Milton Smith, ENR, June 24, 2019)
“In a ‘deep dive’ assessment earlier this month, investment bank Credit Suisse analyzed metrics among large firms it tracks with recommendations for needed change to eliminate or reduce high-risk profiles…Bottom line, cost overruns associated with construction represent a huge repeatable industry issue,” says Jamie Cook, lead research analyst.“For investors to buy in, (firms) need to demand better contract structures to de-risk business models. This is long overdue, given limited competition in the space and…This is particularly important as contractors have been increasingly taking on fixed-price work…Early on, design-build margins on big projects were tremendous. Over time, with competition, margins have gone way down and are not commensurate with risk…If you’re doing fixed-price jobs, sooner or later you will have a bad one…” (Analysts Point to Contract Terms to Cut E&C Investment Risks, Debra K. Rubin, ENR, June 20, 2019)
At the American Institute of Architects Conference on Architecture in Las Vegas this month, Jeanette Shaw, the director of quality and sustainability for Powers Brown Architecture recommended an enhanced quality control program to minimize risk. “A successful quality control program must have a director and be integrated into a (Architectural) firm’s business plan. Consistent implementation and enforcement are necessary. Training and mentoring newer staff, and internal document reviews from design development forward also are important…And, we should educate the client to pay for a quality program that would improve construction documents,”she added.
The entire construction industry is currently talking about risk minimization. From slightly different perspectives, all stakeholders seem to be understanding that thorough planning, quality control, and equitable contract negotiations all play a part in risk minimization. The concept of cooperationfor effective risk minimization is beginning to take hold.
We will continue to follow developments and report back on this site.