Are Construction Contractors Taking on too Much Risk? 5

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Monday, August 10th, 2015
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As governments around Australia embark on a major push for new infrastructure, the subject of who should assume the majority of risk on large public sector construction projects has reared its head.

At a National Infrastructure Sumit organised by the Australian Financial Review in June, Lend Lease chief executive officer Steve McCann told the audience that contractors around the country were being forced to take on too much risk on public sector infrastructure projects, and that a trend to place more risk onto contractors was driving up pricing, impacting productivity and leading to a higher cost society.

According to media reports, McCann told the audience that the allocation of up-front risk between governments and the private sector was ‘asymmetrical’ and becoming ‘unsustainable,’ and that risks in areas such as workplace relations used to be owned by government but had shifted to contractors over the past quarter century.

The upshot, he said, was parties having to price projects without understanding the risks they are accepting and some businesses lacking the financial strength to absorb the impact of those mistakes.

He said Australia needed to rebalance risk so that governments accept more and contractors are responsible only for the factors within their control.

“In the infrastructure industry, the big risks which have materially impacted on the livelihood of contractors have been industrial relations [and] geotechnical risk, within which I will include contamination and weather,” McCann told the conference, according to the Australian Financial Review.

“None of these risks belongs to the contractor – they don’t own them and they can’t control them and in many cases they can’t hope to accurately price them – but it has become standard practice to absorb them and include some kind of cost contingency for them.”

Not all agree with McCann’s views, however.

Pedram Danesh-Mand, director of risk management at Aquenta Consulting and president of the NSW branch of the Risk Engineering Society, feels risks should be allocated between parties according to who is best placed to manage them. Danesh-Mand says the shift of risk away from the client and toward contractors needed to be considered in the larger context of changes in the delivery of public sector projects over recent decades. These include the growing complexity of projects, the reduction in the size and capabilities of many public sector authorities and the greater trend toward multi-disciplinary and multi-location integrated project teams.

“Considering all these trends, we start to understand the logic behind the trend of risk movements between smaller clients to bigger, more capable and IPT contractors,” he said.

Speaking of the weather risk referred to by McCann, Danesh-Mand acknowledges that no party can prevent storms or rain, but says it is the contractor who has the opportunity to plan earthwork and excavation during dry seasons if possible. Likewise, the contractor is also in the best position to assess the weather and likely consequences, plan to limit productivity losses and re-sequence activities after the event in order to best recover lost time.

Meanwhile, renowned construction industry adviser David Chandler OAM feels McCann’s calls are “a bit far-fetched.”

In terms of industrial relations risk, Chandler wrote recently on Construction Edge that many of the tier one contractors had tolerated overly generous conditions and unproductive practices in a bid to retain industrial harmony for too long.

As for the weather, Chandler has less sympathy still.

“Sure he (McCann) is not the wind and rain god, but what is Lend Lease doing to mitigate the effects of these conditions on their sites?” Chandler wrote.

“Just have a look at the way Lend Lease projects go up. Often there are over 20 floors between the leading construction edge and the facade enclosure. This means over 60 percent or more of the workforce is affected by inclement conditions. When they can’t work they get sent home on full pay.

“For 500 workers that’s over $300,000/day before you add the cost of static infrastructure. Is McCann suggesting all these costs should be borne by the client in future?”

Still, some empathise with the pressures contractors are under, talking of risks which turn out to be more significant than could be known at the time of contract and a lack of interest on the client side with regard to the genuine levels of risk the contractor is being required to undertake. In addition, risk associated with projects which are either bespoke in nature or new to the contractor in question present genuine challenges in managing and pricing.

With his call for governments to accept more risk, McCann has certainly opened up an interesting debate.

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5
  1. Sam

    Chandler is right. McCann is always looking after LL's interests. If the builder isn't the best placed party to manage industrial relations risk, who is? I agree that the builder can't control extra-ordinary weather events but I get sick and tired of them claiming weather related extensions of time when the programme critical path runs through services rough-in and the like! …and I can't see a single excuse for a builder planing a concrete pour in Sydney today when it poured in Adelaide two days ago! If weather risk has to be assigned somewhere, it should be with the builder even if by way of a finite allowance added to the programme.

  2. Peter

    If the client can't afford or won't pay for designed services drawings, then when things go pear shaped on the services install- they instruct the services contractor that it is a design & construct contract and it is their responsibility to install to the required building code. It is a false economy to think that by saving on the costs associated with employing professional services designers that – somehow service sub contractors will come up with a design & construct tender package that meets the PCA requirements based on the tender drawings supplied .

  3. Richard Rhimes

    If the contractor has risks hoisted on them, they don't understand that, do not have control over them and the ability to mitigate them, and the financial capacity to cover any realised risk, then yes they are taking on too much risk. Apart from potentially going bankrupt then I would expect the 'deepest pocket' to pick up the balance. I'm no lawyer but I think that could be the government.

  4. liaqat hayat

    In a turnkey contract based on standard format like FIDIC ,the contractor is bound to take most of the risks as it is party more experienced and with acknowlegded expertise in the field at premium rates.In other formats less risk but rates also more competitive.So choice with the contractor.

  5. David Nivala

    The perennial challenge is the apportionment/acceptance of risk in delivering projects. For example, keen bidders in soft market my take risks that they do not take at other times.