morning everybody welcome back my name's Neil Earnshaw from neconsult and I'm
here to talk to you about effectively tackling risk to avoid nasty surprises
we heard already this morning from a couple of large programs work where
hopefully nasty surprises are being be mitigated said to be earning from
Crossrail's point of view I think with that value of work that number of
conversation events to have got into such a strong position by the stages is
testament to the amount of work that's gone in and some of the the problems
that have been avoided that I'm going to talk to you about so yes I'm going to
talk to you about how to enter into contracts with appropriate risk
allocation that's clear understood and good value for money I'm going to
explain a bit about what the EC state about risk and compensation events and
how we should interpret this and then hopefully give you some practical tips
that help us deal with risk effectively in compensation events to reduce the
likelihood of them becoming I've used the word contentious okay so firstly
let's have a look at how well we are doing so my central question is here
does the industry really know how to get the most out of any c3 contracts through
managing risk effectively as I said we've seen some good examples this
morning from large programs of work where where that is being done well
however I was looking for some statistics but I put this talk together
to say well actually the large problems were that's absolutely fine you've got
the resources you've got the tip capacity and capability to be able to
have an impact but by value I sort of contention is I think that most of the
work that happens in the construction industry is not on projects like that
most of the projects that we're involved with are the sort of the small or medium
scale project you have things that are sort of you know the still millions of
parents maybe they're just tens of million instead of instead of billions
ok so so yeah but unfortunate I couldn't find any any stats to back me up the RHS
could have provided me all the data I could have spent months analyzing it to
try and work that those numbers out but I I decided at that point I'll just sort
of go with my intuition here so so yes so do we really now have set contracts
up so let's just take a step back and have a look at how we're doing
as you'll see a couple of quotes from a couple of fairly well-known people on
the screen for my constructing excellence report dating back to 2009
and it's positive isn't it as an industry we have transformed through my
career I have seen transformation in terms of how the construction industry
in this country performs however there is a kind of slightly disappointed term
to the both the comments up there I think that we could be doing better so
what's the problem okay again from the same report
published by Chris because routine excellence yes the house big significant
improvement the not on the scale that was anticipated the sorting excellence
demonstration projects putting them superior performance or well done to
them however there's quite damning review here that actually the commitment
is often skin deep scratch beneath the surface and you may find so-called
partners still seek to avoid or exploit risk to maximize their own profits and
find ways to share risk and collaborate genuinely so that all can profit so
that's quite damning criticism that that maybe we're not doing as well as we
think we're doing and maybe we're in danger of believe in our own hype
sometimes and to bring it down to a practical level you know let's be honest
with each other who's been in a meeting where the term
mutual trust and cooperation has been bandied around by people what yeah yeah
and what does it mean when that happens
do you think you're experiencing the exact opposite of that yeah that'd be my
contention that actually what the more you hear it the less of it you're
actually experiencing you shouldn't need to be said so so I do I do sort of agree
with this the constructing excellence report I do feel that on the projects
that I'm involved with as well and again just moving on from 2009 yeah again
we're doing great ministry we have massively improved obvious but we still
have a long way to go some of those indicators are moving backwards and
belief we look at time performance on projects that that's not very good at it
and if you're spending your own money I mean I'm not a gambling man but I
wouldn't gamble on construction with statistics like that would you with your
own money so we've still got a long way to go so really I'm just setting the
scene to say can we do better so if you're a client are your contracts
really linked to clear objective scope and constraints do you spend enough time
thinking about that a downside for the supply chain or your clients contracts
clearly enough define so you can give them your best pricing program and then
for the whole team to really understand how to deal with risk at a post contract
stage I threw the couple a taste of their
process so they're the areas I'm going to focus on you might all recognize this
club but I think I quite like the root cause analysis and whenever I think
about you know where do where did problems come from on the projects I
work on what are the weather things really stem from and it is usually as a
failure to prepare a failure to plan properly enough time hasn't been taken
to think things through at the outset okay so so yeah and that's what I call
creating the conditions for success so let's move into the first the first part
here we'll look at what we can do a pre-contract stage to improve the chance
of having a successful outcome from our projects you all recognize this there
isn't the true same for our contract put rubbish into them you likely to get
rubbish out of them okay how can we avoid that so how do we
develop effective contract strategies so simple for stage process if you like
firstly what are we trying to achieve how we've got clear objectives again
often enough time isn't spent at this stage thinking through what it is we
want a need working out what it is we need to be doing and isn't this why
procurements get abandoned or we need to adjust our budget or all-time
expectations partway through the procurement process when the market is
telling us now you can't have it for that it's going to cost you this or it's
never going to take that long isn't it yeah it's usually a failure to adjust to
clearly define what we're what we're wanting to achieve at the outset that's
of course so yeah so that does lead to nasty surprises the tender stage when
the price comes in too high all the time scales are unrealistic or the market
proposes a solution that we didn't want so it's about defining objectives then
planning the project and I don't just mean Glenn I don't just mean a project
plan here I mean thinking through you know what it is we're trying to achieve
how we're going to achieve it do we need to break the project down into discrete
stages do we need beneficial use of Sur tellement of the project before others
really putting a lot of attention and a lot of detailing at that stage and this
is a long time before we've put pen to paper before we've started to put our
contracts together for all the effort in at the front end and going to improve
the the chances of a successful outcome the name we should look at project risks
and I'll come back onto this in a couple of slides time but at that point once
we've done all that preparation work that's the time we should start putting
pen to paper that's when we're really in a strong position to start being able to
write our contract data our works information our site information because
we've already put the effort into deciding what we need we've planned the
project well so we know what we want and how it's going to be done and we've
identified the key risks and developed strategies for mitigating them because
when the risk management stage breaks down this is I think where we see these
things creeping in we heard in the Crossrail Turki talked earlier about the
question marks whether option C was the right thing to
be used all the time I think sometimes it's used because it's it's maybe the
trendy option and we don't use it for the right reasons maybe so if we haven't
thought about this before we've decided to contract strategy I haven't put
together an effective risk management plan then it's likely that we're going
to choose inappropriate main and secondary options inappropriate are
onerous that Clause is creeping into the contracts our contract data is going to
be completed correctly and we're going to get incomplete vague work information
insight information and also possibly this is where a lot of the legal
boilerplate comes from as well because the person who's put the legal
boilerplate there is at the end of the line the project team has already made a
lot of decisions about how the contracts going to be put together but the person
at the end of the chain has to try and solve all the problems that have been
created trying to mitigate risk for the client before we move forward so I think
a lot of ineffective risk management does lead to potentially unclear risk
allocation which in turn could lead to an increased number of compensation
events which is possibly going to lead to a greater chance of things becoming
contentious and isn't that where unintended consequences and nasty
surprises come probably so let's think about why does this happen again of my
words although I do agree with them government report from 2013 introduced
us to this concept of the optimism bias as you can see we have this term endemic
over optimism when we make decisions to commit to projects we have a form of
collective amnesia I think when were in the early stages of project only we
forget about all that but who do that we never get to it like that again while we
but then we forget about it we failed to actually implement lessons learn
effectively through risk management and we get all the same problems occurring
again so yeah this form of collective amnesia creeps in and this over
opportunism at this stage is like to undermine the success of a project and
lead to substantial cost overruns delays in completion of failure to deliver the
and I can see from some of the sort of expressions around the room if this
isn't just something that the government have come up with it this is something
we actually all recognize see and feel on our projects so ineffective risk
management where the things start to break down so you see the institution of
civil engineers ramp guide to give me some structure here again these are not
my words either their words but I fully agree with them for more I field
projects I work on that at the initiation stage we fail to understand
the objectives the scope and current constraints fully and completely the
identification stage when were identifying risks we don't understand
the underlying causes we develop generic risks we just say ground conditions okay
great but what's wrong with the ground conditions one of the specific risks on
this project what specific conditions or physical conditions are we actually
worried about yeah and then we put a strategy around those specific risks at
the evaluation stage well because we had flaws at the initiation and
identification stage were likely to get flaws in the evaluation as well okay and
also when we're planning responses to risks well I could come up with
nonspecific responses and that say I'm going to effect implementation stage
because how do you implement something that's generic so and you can see I
think how optimism bias creeps in throughout these early stages of risk
management when we fail to do this process effectively some more words that
I think are quite thirty-one here you some of you may have seen them before in
hindsight I sort of looking at the picture of Einstein they're thinking I
think Einstein would have made a very good contract ask us giving that with
something like that
so okay so we've looked at some of the problems we looked at what goes wrong
yeah so let's turn it into positive so the initiation stage yeah let's make
sure we spend a lot of time understanding what which I never achieve
understanding the objectives understand the scope understand the constraints
then when we're starting to identify risks let's get them
lying causes let's make them project specific yeah wooly vague risk
statements are of no use to anybody when we're evaluating them apply good
practice methodology and beware the bias that can creep into our decision-making
in that stage risk management is a turning to pseudoscience by some yeah
and at that point it starts to buffle people and they lose the commitment to
it they don't understand it become something that's remote from what they
actually do you can't really get to grips with it
so you know yes you know apply some good practice methodologies but beware of the
bias that can creep into the decision-making around that make sure
we're not being overly optimistic all the time look at the sort of worst-case
scenarios that you know the doomsday scenarios at the evaluation stage then
sorry at the when we're planning our responses then make sure they are
specific responses with actions allocated to individuals and that those
actions are time bound so we get accountability through doing that and
then we've got something we can manage we've got a tool then because then you
can follow people up can you have youth in what you're supposed to be doing you
said you were supposed to be doing this by this particular date how you getting
on with that you need any help with it yeah as opposed to just generic stuff
then it's the implementation stage release to make sure we implement the
plans we come up with and control the risks at this point it just becomes
management as opposed to risk management this is what good management's about
this is what our project managers should be doing for us okay so remember here
that we did we do recognize those things from many of our contracts and I contend
that most of them have come about as a result of an ineffective risk management
prior to that point and maybe if we got better at addressing
some of those issues that maybe we wouldn't have as many unintended
consequences or nasty surprises of our projects okay so just then now moving on
to look at the post contract side of things then so what can we do a post
contract stage to avoid nasty surprises or how can we deal with risk more
effectively in compensation events
yeah let's have a look at what the contract says so close sixty three point
six tells us yes we can include risking compensation event assessments sometimes
that's the barrier sometimes people don't think they should be risk but the
contract tells us yes they can include risk but what risk can we include well
the contract tells us it's risk that have a significant chance of occurring
and are at the contractors risk okay so that's some of the basics but what does
significant chance me isn't that where we have fertile ground for disputes and
disagreements between us in interpreting what significant risk means so I went
away in scratch in my head I dug into the ramp guide again and found some
words that might help us so the word significance it says is to be
interpreted as a risk whose potential consequence or expected value such that
it would have a significant effect on one of the objectives but the important
bit here is the final bit even if it only has a small probability of
occurrence so it's interesting isn't it so that's the word significant what
about the word chance okay well I always advise people if you struggling with any
other words in the contract the first place to look is a dictionary okay
there's nothing clever going on here the chance is a possibility of something
happening it's fairly easy but you're also when you look at Rand guy we talked
about the likelihood so hopefully this gives us a little bit more understanding
of significant chance as a Turk if you break it down into the two separate
words okay so it means that yes we have to evaluate all risks that could
potentially impact a computation event but maybe we need to do some analyses of
those risks to understand the likelihood of the them occurring and to include
that in our assessment but more on that in a second something linked to this are
project managers assumptions I
under if the clause is really used as well or as anything originally intended
in a proactive way again key words here if the effects are too uncertain to be
forecast reasonably he states assumptions okay so what are those
assumptions if we're not careful again we've heard about this already this
morning about storing things up to the end this is what the process is designed
to avoid is to enable parties to move forward to maintain certainty so yeah if
we're not careful that we can we can fail to if we don't deal with it
certainty effectively it Elita unnecessary time and costs being added
to compensation quotations and that in turn could lead to nasty surprises when
they're submitted for the person who's receiving them which in turn could be
responded to with a nasty surprise good net which is it gets rejected which is
not a place any of us want to be so so yeah so the more risk and unnecessary
risk reading to the quotation the more we have chances of things being rejected
and disagreements remember there is no place for contractors assumptions in a
compensation and quotation it only talks about project managers assumptions or
our contractors assumptions doing in the compensation event they're trying to
mess up the risk profile in the contract I think it's a way of trying to shove
risk back onto the employer I think this is again another area where people start
to get get confused and lose their way in in managing compensation events so
the effective project managers function is to transfer the risk to the employer
okay because that in itself the assumption will become a compensation
event yeah if the assumption proves wrong however you do hear quite a bit of
grumbling from all sides about these processes the contractor says she's too
complicated there's a lot to do here okay I'd say two contracts as well
you've managed to price the entire job at tender stage based on a few documents
that weren't very good and a quick look around site
how come you can't price a compensation event causation it's only for a very
small percentage of that value how difficult is it does it indicate that
there's some issue with the people who are administering the conversations
on-site do they really have the skills expertise to be doing this effectively
yeah from a project managers point of view you sort of hear the grumbles of
what I've never to compensation events to deal with yeah one for the actual
event and then one for the assumption about the event this is ridiculous
but why is he there it's there to help us to maintain certainty of outcome to
stay in control of cost in time so project managers what are you doing
if you're not doing this it's that it's fundamentally our role is to help stay
in control of cost and things in it okay so again and fundamentally this is about
not storing the problems for the end it's allowing us to to work together on
things to maintain certainty of outcome as far as we come to the contract rather
than just dealing with a big final account on site at the end so I've put
together a fairly simple process to help us work our way through the contract so
separate significance from likelihood in case significant chunks break that into
its separate parts so firstly identify risks where the consequence of the risk
could affect the outcome then decide is it reasonable for this risk to be
forecast if the answer is no then surely the protocol is you should be making an
assumption about it however if the answer is yes then the contractor can
estimate the impacts of it and include that in the quotation so once we've done
that we estimate the impact of it then we need to assess the likelihood of it
occurring and then the calculation is it is only publishing for in risk
management of multiplying probability by the impact to come up with a value to
include in the quotation remember risk management and apologies is there any
risk management practitioners in the room but this is more of an art than a
science okay so you know you need to make sure
you put together a simple process that is relevant to the size and scale of the
project okay don't turn this into all cottage
industry in itself otherwise you'll spend all your time instead of arguing
about conversation events quotations fundamentally you'll just be arguing
about well they shouldn't be at a three on that score it should be a two or it
should be a four yeah we're just moving the argument into
a different place so remember we do need to apply the spirit of mutual trust and
cooperation when applying this process
so just to make sure that we do understand and trying to just give you a
flavor here of what these terms mean so employers risk of the contract well all
the copper safety events are employers risk they're all things the employers
has retained but within those you get the employers risk them to cause a
two-point one as well and potentially if it's option C contract the sheriff pain
would be an employer's risk again there is a lot more to employers risk than
just the issues I've pointed out here but I was just going to give you a
flavor and then closing key one point one say the risk which are not code by
the employer occurred by the contractor so everything else that isn't an
employee's risk is a contractors risk
have a look at some examples of the employers risks I don't want to go to
all of these you can see I've pulled out the some of the compensation events that
get used quite frequently but also claims due to works negligence etc loss
of or damage or where to works in certain circumstances they're the cause
they want kinds of things they're all employers risks contractors risk then
everything else okay so it's all the stuff to do with productivity to do with
cost increases to his resource availability subcontractor performance
things breaking down things taking a bit longer than planned deliveries being
late materials getting wastage workmanship quality of workmanship and
defects in the works these are all contractors risk these are all things
that it is acceptable to be priced into a compensation that quotation
then think about the process is this what we do with them the contract uses
very binary language yeah submit accept reject well not like cept so okay
it uses very binary language and we tend to just follow the processes I mean
those of us who work us's or maybe engineers in the room we're good at
following processes army so we're just doing it system itself switch it what's
the problem isn't that we're a nasty surprise comes yeah we just we just fire
these things over the wall each other it is that an effective way of doing it so
I think this is where nasty surprises come from so just because the contract
uses words like that I think it's important that we remember and focus on
how we implement those words it's the behaviors around how we do that that is
important so maybe it should look a bit more like this yeah that we sit around
the table we talk about things openly we make decisions we make proactive
decisions about you know doesn't eat this a contract is written because it
can be priced in or does it need a project manager assumption why not have
those conversations openly between us so a few things that I think a good
practice in relation to compensation events are firstly at the start of the
job before you've had a compensation or worst case when you have your first
computation event agree the format for quotations okay that's just nothing more
than a template that's gained into the detail what is it we expect to see them
how much narrative do we expect to see in the compensation notification yeah
also you know how much detail do you want to see in the price leader a price
kind of things do we do it how much of a program do we need to see to support the
timer entitlements so make sure we agree what what the compensation event is
going to look like right at the start of the job then agree how we're going to
calculate cost and time risk so agreed up that simple methodology yeah and then
once we get a conversation went to deal with and we start around the table we
can then just implement them Dhaulagiri agree yes hopefully it will
lead to fewer nasty surprises having regular joint compensation event
meetings not just following the process doing more than that by the time to my
mind by the time a compensation event notification or quotation gets submitted
it should be a foregone conclusion that it's going to be accepted because you've
done all the hard work before it was submitted and you basically got it to
the point where it was agreed but then we have to follow the other part of ten
point one don't we act in accordance with the contract so we submit it and we
follow the process to make sure that we stay robust and that our governance is
good having discussions about what is reasonable to be forecasts this is what
needs to be a project managers assumption this concept of buying and
selling risks you know if the project manager is resisting well how about you
make an assumption about it mr. project manager well no I don't want to carry
the risk okay well please allow me as a contractor to include some risk in my
compensation yeah we can argue shades of grey on it but you know having a
sensible process will will will mitigate the chance of having that argument and
how about during the identifying and assessing and mitigating potential risks
yeah again making sure that we were training the conditions for success with
our computation like notifications and quotations so there's an increased
likelihood they're actually going to be accepted and then ensuring risk
allowances that we include in compensation rates are specific to the
event and quantified using standard estimating techniques not just adding
ten percent yeah what does that mean yeah who do that okay so again remember
this simple process simple methodology I showed you is appropriate to any value
of project it's just that maybe the level of complexity needs to adjust
depending on the value of the project maybe okay keep it simple stupid
something is something that somebody once said to me and I agree with that
thought really so so there's just a few thoughts if you would like to see some
further good practice guidance well what a great conference we've been putting on
because in previous years we have actually produced some useful guidance
so well done so everybody that's contributed
so previously you will find those glint on my writing scene you'll find them on
the gmh planning website yeah okay so if you want if you want further guidance
sounds like we're in a fishbowl so yeah if you need further guidance have a look
on gmh planning website you'll find me outputs from previous breakout sessions
at the NEC people conference and gives you a lot more but hopefully I've given
you a bit of a flavor of some of the big areas that we can can address to help us
improve the chances of getting things agreed and avoiding nasty surprises okay
and that's me thank you very much
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