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Managing project risks during tender

We live in a world of risks

Risks are unavoidable in any project. Certain "common" risks are


inevitable (for example, tax risks, interface risks, local site risks). Other
risks may be less likely to occur but would have a significant impact if they
did occur (for example, force majeure events, change in law).

Starting the project off correctly

The key to successful management of risks is to start the management


process right at the beginning before the contract is even signed.

If this is not done or not done properly, then trying to manage it or contain
the damage later on during project implementation is often less effective
and more costly often by that stage there is little that can be done to
address an ambiguous or (worse) an unfair or unwanted risk placed upon
your organization. Once signed, your rights and liabilities are governed
by the strict wording of the contract. About us
We are frequently called upon to assist Chinese Contractors, particularly An international law firm with over 50
in international infrastructure projects, as early as the tender invitation years experience, ranked top 15 in
stage. Because of our track record and experience and familiarity with UK.
the contracting language often used, we can quickly and cost-effectively
review (and immediately start to advise on) voluminous tender documents Widely recognised as the leading
and complex contracts. provider of legal services to the
construction & engineering, energy
Is it too early to incur legal costs? and infrastructure industries world-
wide.
Sometimes there is a misconception that by engaging us early, this will
increase legal costs. In reality and in practice, the reverse is true - the Over 260 partners and 900 lawyers in
later we are engaged (when certain key decisions have already been total worldwide.
reached and positions taken) the more expensive it is for us to do a
proper job, and also the less effective our services becomes to your According to Legal 500 a top tiered
organization. Projects and Infrastructure law firm
(Shanghai) for the past 2 years, and
a top tiered construction and
The other misconception is that by ascertaining project risks early this will
engineering law firm (Hong Kong) for
inevitably lead to an uncompetitive price in the market. However this view
the past 6 years.
underestimates the benefits which advance risk management and supply
chain management brings.
Asian Legal Business Construction
Managing Risks

Usual steps include:


Planning : The most
(A) Identification of risks realistically involved in the Project; important step...
(B) Assessment quantifying the risks, assessing likelihood of each
risk occurring and its potential impact if it does occur; in conducting a risk analysis is to
(C) Planning deciding whether (and what) action should be taken now identify methods by which the
to avoid or reduce the risk, and to reduce the impact if it does occur; Contractor's risks might be
(D) Monitoring constant monitoring of the situation for risks emerging, mitigated, avoided, transferred or
or changes affecting the assessment of existing risks, and dealing insured.
with these changes.
Contingency & mitigation plans
Identifying the likely risks in Stage (A) is relatively easy with experience ("to-do lists") should be devised
and access to project information. However the added value that we bring early so you are prepared to deal
to your organization is our wide international experience and the extensive with the risk if it should occur - this
accumulation of knowledge within our firm that we can rely upon during the ensures the project proceeds
other Stages, in particular Stage (B) to help you assess which risks are smoothly and your profit margin is
really vital, and Stage (C) helping you devise practical measures to mitigate protected.
or avoid your risks, reduce its likelihood, lessen the impact of its
occurrence, transfer the risks "back-to-back" to others, or insure your risks.
The Risk Matrix The Benefits

A valuable exercise is to capture the information gathered The risk matrix is a necessity in more complex projects,
from Stages (A) to (C) above in a risk matrix, which because the project team is better able to appreciate the
typically contains: totality of the risks, it makes for easier reporting to senior
management on critical risks, and ensures
a description of the risk
comprehensive insurance coverage is procured.
to whom the risk is allocated or shared
the relevant clause references in the Contract Most importantly, it minimises inconsistencies or gaps in
the likelihood of the risk occurring the manner the risks are allocated to other parties,
a description of the potential impact of the risk facilitates the transfer of risk to JV partners and sub-
the likely cost if that risk occurs contractors, enables negotiations to proceed logically
suggested actions to be taken now and by whom ("to- and forces the early formulation of contingency plans
do" list) and site measures to deal with specific risks.
suggested contingency plans to be formulated now so
A good matrix has a long "shelf life" - during
that your organisation is ready to act if the risk occurs
implementation it functions as a contract summary & an
suggested preventive precautionary measures to aide memoir for the project team.
avoid the risk or reducing its likelihood, or else to
reduce the impact of its occurrence Want to learn more?
what risks can be allocated to or shared with other
parties To learn more about our services and how we might be
which risks can be insured against able to help you, please contact
An academic risk matrix commenting on contract
provisions clause by clause is not useful. Instead, we Hew Kian Heong
prefer a functional Risk Matrix organized in a logical Partner, Shanghai
sequence, ordered chronologically (i.e. when the risk is T: + 8621 6321 1166
most likely to occur), and banding together risks of the E: hew.kheong@pinsentmasons.com
same nature or which are otherwise related.
The actual layout of the risk matrix will be tailored to suit Bernard Ang
your organization and how your project teams are Partner, Hong Kong SAR
organised. We recognise it is important that distinct T: + 852 2294 3336
sections of the lengthy matrix can be simultaneously E: bernard.ang@pinsentmasons.com
reviewed by say the Legal, Contracts, Finance, Design,
Construction and Project Management divisions of your
organization.

GRADE POSSIBLE RISK ALLOCATION


RISK
OF RISK IMPACT Owner Contractor COMMENTS ACTION LIST
OWNER'S
CREDIT
D Non or late
payment, 1. Conduct financial due diligence checks on the Employer's financial health before
signing contract. Usual searches include : (a) asset tracing; (b) immovable property
LOCAL LAWYERS
FINANCE DEPT
RISK negative cash searches; (c) litigation searches etc.
flow.
Clause xx
2. Exercise FIDIC Sub-Clause 2.4 and ask for evidence of financial arrangements this LEGAL DEPT
Specs X May not be able
is only possible AFTER signing contract - unless Contractor expressly asks the
BQ X to pay Employer for such evidence before the contract.
Drawing X subcontractors.

3. Impose Pay when paid clause on subcontractors place risk of non payment by PROCUREMENT
Employer on other subcontractors, or at least share risk. This is a clause to be added DEPT TO
to the subcontract. NEGOTIATE

LEGAL
RISKS
C Project not
proceeding or It is advisable to conduct due diligence checks on the Owner regarding LOCAL LAWYERS
& ACCOUNTANTS
Owner, Site, having to stop (a) its authority to enter into the contract,
Government midway. (b) its ownership of the project site, FINANCE DEPT
approvals (c) the legality of the contracts in question and on the contractual arrangements,
Idle machinery (d) whether any of the contracts require further government approvals.
Clause xx and manpower,
Specs X wasted costs.
BQ X Ask for a separate representation by the Owner or Parent company that Owner NEGOTIATING
Drawing X possess all approvals - if the project cannot proceed because of non-approval the Owner /PROJECT TEAM
is liable to Contractor for a false representation.

Check suspension clause. Negotiate more favourable position. NEGOTIATING


TEAM

Any Sub-contracts need to factor in this, and execute contingent Sub-contracts with a PROCUREMENT
price lock until this Contract comes into effect. DEPT TO
NEGOTIATE

Pinsent Masons 2007

LONDON BIRMINGHAM BRISTOL EDINBURGH GLASGOW LEEDS MANCHESTER BEIJING BRUSSELS DUBAI HONG KONG SHANGHAI
T (+)852 2521 5621 www.pinsentmasons.com

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