CIVIL CONSTRUCTION PROJECT RISK AND MITIGATION


Samuel Johnson famously wrote that ‘to build is to be robbed’. Facing the same challenges, but with the benefit of hindsight, Pope Pius II praised his architect for ‘lying about the costs’ following budget overruns on the building of Pienza Cathedral, which threatened at the time to bankrupt the Vatican.

Both of these experiences suggest that clients have been and continue to be exposed to a significant degree of cost risk when undertaking construction projects. Invariably, they also pick up much of the financial consequences of decisions, omissions and mistakes made by others working on their behalf.

Decisions made at the outset of a project: investing in land, selecting one project opportunity in favour of others; confirming a brief; or establishing project governance could all potentially have a substantial impact on project outcomes, and as a result carry significant risk. Unfortunately, many of these early decisions have to bemade without the benefit of a considered design response and may, as a result, be sub-optimal.

Whilst it is important that advice given to clients early in a project should give the team some ‘wiggle room’ to develop a preferred solution, it is also important to work within project disciplines once these are established. Effective teamwork during the design development process between the designer and cost consultant can help to mitigate many of these potential risks.

Design stages
As a client’s brief and concept designs are developed, a greater degree of fixity in terms of the design solution and predicted costs can be provided by the project team. This process is discussed in more detail in the section focused on cost planning.

However, as the design develops and cost certainty increases, so does the cost of changing the design, and the client and project team’s resistance to change.

Risk and risk transfer
As a project progresses to the appointment of contractors, the client’s overall financial commitment becomes better defined. More risk can also be transferred to third parties if the client so wishes.

Whilst under most procurement routes the client is required to accept risks associated with design performance, they will generally seek to transfer commercial and construction risks to the contractor through some form of a fixed price, lump sum contract.

Quite clearly, if the design information upon which the client obtains a contractual commitment is not complete, is ambiguous or is not fully coordinated then, not only will the client retain outstanding design risk, but will also find that the basis of his commercial risk transfer to the contractor is weakened.

Evidence from Construction Key Performance Indicators, published by the DTI, indicates the scale of this potential problem, showing that fewer than 80% of projects are completed with #10% of their original tender sum. Moreover, only around 50% of projects are completed within #5% of the tender sum.

Whilst some of this cost variation may reflect client changes, or problems on site, it is likely that some of these increases will have resulted from the consequences of continuing design development. In order to mitigate the client’s risk, it is incumbent upon the team to ensure that the design is completed to the appropriate level of detail and fixity required by the procurement route. To do otherwise risks rendering some of the effort expended in design development and cost-planning abortive.

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