Managing Risks - Department of Public Works and Services

Managing Risk During
Pre-Tender Stages
Project Management Conference
Yellowknife, N.T.
November 17-19, 2009
© Helmut K. Johannsen, P.Eng., C.Arb.
Partner, Fasken Martineau DuMoulin LLP

Introduction
Some general principles of risk management
General Comments on Project Development
Process
Procurement Strategies
Procurement Process Issues
Managing risks < closing time
Some key contract risk issues
Managing risks < award
Project example
Practice tip
2

Some General Principles
Managing pre-tender risks means identifying
and addressing in advance:
General project development risks (e.g. land,
finance and regulatory approval issues)
Procurement process risks (e.g. non-compliant
proposals/tenders)
Contract performance risks (after contract award)
No “one size fits all” approach
In preparing procurement documents or in
deciding whether to bid, must understand
proposed risk allocation and contractual risk
transfer after contract award
3

Some General Principles (cont’d)
Every project is different
Size and complexity
Mix of new construction/expansion/renovation
Single project or staged construction/ turnover
Schedule/budget pressures
Number of construction/operation interfaces
Financeability issues and constraints
Effort required to identify and manage risks not
always dependent on project size or value
4

Some General Principles (cont’d)
2007-2008 Market Conditions:
Contractors, consultants and suppliers had
surplus of work
No time or willingness to review significant non-standard
contract terms at time of tender
No desire or need to tender on a project that appears
aggressively or unfairly weighted in favour of owner
2009 Market Conditions:
Receiverships, projects “on hold”, shortage of
work
But contractors, consultants and suppliers are
now more knowledgeable than before about risks
and thus risk averse
5

Some General Principles (cont’d)
Risk must be acceptable to lenders or
financing may not be available
Risk analyses/assessments by lenders will
likely differ substantially from that of
government party/private sector party
Parties may apply probabilistic approach to risks
(especially for cumulative risks)
Lenders may not use same probabilistic approach
and/or may look to “worst case scenarios”
Best strategy for financeability may not be
best strategy for design and construction!
6

Some General Principles (cont’d)
Risks must be understood before they can be
allocated
Risk management is a formal process that
enables identification, assessment, planning
and management of risks
Risk management is necessary in each
phase of a project:
Pre-tender phase
Tender phase to contract award
Post contract award/implementation phase
Identify – mitigate – control risks
7

Some General Principles (cont’d)
Basic risk management strategy:
Avoid risk – eliminate uncertainty
Accept risk
Transfer risk
Mitigate risk
Implement risk management strategy through
Proper planning
Clear, concise & consistent contract & specs
Comprehensive, integrated insurance program
Performance security: bonds (with riders?), bank
guarantees, letters of credit, “good” parent
company guarantees, etc.
8

Some General Principles (cont’d)
In theory, “risks should be borne by the party
best able to handle and manage the risk”
Distinction between:
“handling and managing” the risk; and
willingness or ability to bear consequences if and
when risk materializes
This distinction often over-rides the general theory
Optimum risk allocation is not maximum
transfer of all risks
Owners often fail to understand and take into
account that general contractors pass/push
risks down
9

Some General Principles (cont’d)
Risk matrix is critical risk management tool
Should a risk matrix be included in
procurement documents/contracts?
Often misleading in defining true risk allocation
Beware of reliance on risk matrix as
substitute for detailed risk review
Contract language can contain subtle differences
from risk allocation assumed from matrix
Matrix may conflict with contractual terms or fail to
fails to clearly identify retained risks (e.g. if
contract liability caps exceeded)
10

Some General Principles (cont’d)
No “one size fits all” approach
Risk allocation and contractual risk transfer
depend on many things, including:
Nature of contractual relationship
Market conditions
Each party’s ability and willingness to:
accept a risk
manage a risk
insure against the risk
A contract simply records final contractual risk
allocation and transfer as agreed to by parties
11

Some General Principles (cont’d)
Risks often allocated to more than 1 person
E.g. subsurface risk
Owner allocates to contractor, who allocates to
subcontractor
But – contractor and subcontractor may have
liability caps and/or exculpatory provisions that
leave owner with some residual risk
E.g. “insured risks”
When risks transferred to insurers, there may be
limits of liability, specific exclusions and gaps in
coverage so residual risk remains to be borne by a
party to the construction contract
12

Project Development Process
Often involves “Three Tracks”
I: Environmental/Regulatory Process
II: Industry Competition/Procurement Process
III: Owner’s Other Commitments/Obligations
Each track has its own risks, and these can
impact other tracks as well, including through:
Schedule
Additional obligations/liabilities
Project viability
Alternative Development Strategies
Run tracks sequentially
Running tracks concurrently
13

Project Development Process (cont’d)
Example of Concurrent Tracks
DESIGN -- EVALUATE -- BUILD
TRACK I - Environmental / Regulatory
Public, First Nations & other consultations
Environmental approvals, regulatory licenses
TRACK II - Industry D-B Competition
Base Concept EOIs Proposal Competition
Final Evaluation
D-B Contract
engin. & constr.
shortlist
technical & legal requirements
feasibility & viability
award & build
TRACK III - Owner’s Commitment
Planning, infrastructure works, power sales,
facilitation agreements, modeling, financing
DEVELOPMENT
PHASE
CONSTRUCTION
PHASE
14

Project Development Process (cont’d)
Track I: Environmental/Regulatory
Owner working with the public and government
Objective: regulatory approvals necessary for
project to proceed
Track II: Industry Competition/Procurement
Process
Owner working with industry engineers, architects
and contractors
Objective: quality/cost optimized project & viable
construction contract
15

Project Development Process (cont’d)
Track III: Owner’s Commitments
Owner satisfying itself that all other requirements
for project to proceed have been met and
obtained, including rights to lands, temporary work
spaces, other infrastructure that may be required
(e.g. access, utilities, etc.), financing, internal
board approvals, etc.
Objective: project facilitating financial and physical
resources, sales arrangements, and other legal
agreements as necessary
16

Project Development Process (cont’d)
Environmental/Regulatory Risks
Early identification of required Permits, Licences
and Approvals is essential
Does the Project require Environmental
Assessment? French Translations for CEAA?
Scope of Assessment?
How to deal with design-build & P3 processes?
To mitigate risks must anticipate
environmental issues during review process
E.g. Project which had significant environmental
issues re sturgeon
Complex Computational Fluid Dynamics Model
performed to assess flow patterns in spawning areas
Inclusion of “sturgeon exclusion screens”.
17

Project Development Process (cont’d)
Procurement Process Risks
Request for Expressions of Interest (REOI)
Pre-qualification Process (RFQ)
Request for Proposals (RFP)
Request for Tenders (RFT)
Poor processes and/or poor risk allocation may be
obstacles to finding pool of interested and
qualified bidders
Consider doing market research before finalizing
processes for major projects
18

Project Development Process (cont’d)
Owner’s Commitments/Obligations Risks
Property rights – Permanent and Temporary
title, rights-of-way, easements, access, crane overswing
agreements, etc.
Other Agreements
E.g. Tenant Leases, Licences to Occupy, Energy Sales
Agreements, etc.
Internal board approvals
Other approvals
Municipal Council, Government Ministry, Treasury
Board, Risk Management Branch, etc.
Project Labour Agreements
19

Project Development Process (cont’d)
Owner’s Commitments/Obligations Risks
(cont’d)
Municipal/Regional District requirements
Development Permit/Building Permit process
Development Cost Charges
Municipal/regional infrastructure improvement
requirements as conditions of development
20

Project Development Process (cont’d)
To identify, manage and mitigate risks, all
risks should be in a Project Risk Register
Project Risk Register must be constantly
reviewed and updated as time passes to
reflect changes
If risks not identified, difficult to manage them
through the procurement documents
21

Procurement Strategy
Identify general procurement constraints
Stakeholder requirements/constraints
Regulatory/environmental permitting
and approval processes and requirements
First Nation issues
Requirements for public invitation or private
invitation
Public owner or private owner
Pre-qualification/short-listing
Competitive tendering/proposals vs. sole source
Contracting model and pricing model
22

Procurement Strategy (cont’d)
Select contract model that best reflects
desired risk allocation through a walk down
“Acronym Alley”:
PO: Purchase Order
D-B-B: Design-Bid-Build or “Traditional”
D-B: Design-Build or Design-Construct
EPC: Engineer-Procure-Construct
EPCM: Engineer-Procure-Construct-Manage
AC: Alliance Contract
BOT: Build-Operate-Transfer
BOOT: Build-Own-Operate-Transfer
BLT: Build-Lease-Transfer
FDBOM: Finance-Design-Build-Operate-Maintain
PPP: Public Private Partnership (P3)
23

Procurement Strategy (cont’d)
Select pricing model that best reflects desired
risk allocation:
Stipulated Price/Lump Sum
Unit Price
Cost Plus
Fixed Fee
GMP
Target Price
Combination of above
Note that pricing model/strategy largely
independent of contracting model/strategy
24

Risk Transfer
Shifting the risk
CONTRACT TYPE
OWNER
RISK
CONTRACTOR
Management Contracts
Construction Management
Traditional Unit Price
Bill of Approximate Quantity
Traditional Lump Sum
Fixed Price / GMP
Design and Build
Complete “Package”
Private Finance Initiative
P3 or DBFO
25

Design-Bid-Build or “Traditional”
Method of project delivery in which an owner:
contracts directly with a consultant to prepare the
detailed design, drawings and specifications for
the project; and
subsequently contracts directly with a contractor to
construct the project to the owner’s design,
drawings and specifications.
The construction contract is typically (not
always) administered by the owner’s
consultant
26

EPCM vs. Design-Bid-Build Approach
Method of project delivery in which an owner
contracts with another party (typically an
engineer) to:
provide design, drawings and specifications;
procure equipment and construction by entering
into contracts as agent for the owner with
suppliers and contractors, or prepare contracts
directly for owner’s signature; and
administer and manage the equipment and
construction contracts on behalf of the owner.
27

Design–Bid–Build or “Traditional”
OWNER’’S
CONSULTANT
PREPARE
DESIGN
OWNER
ADMINISTER
CONTRACT
$
CONSTRUCTION OF
OWNER’S DESIGN
CONTRACTOR
Trade Contractor
Supplier
Trade Contractor
D/B Contractor
28

Summary of Design-Bid-Build
Some Advantages
Well understood
Single design contract
and single construction
contract
Often fixed price
GC at risk for
Price
Schedule
Quality
OH&S
Single bonds
Predictable
Standard form contracts
Some Disadvantages
Difficult to fast track
Quality and completeness of
documents critical
Design
Specifications
Drawings
Contract
Change Orders expensive
(delays and extras)
Market dependent
Ill-suited for renovations &
expansions
29

Construction Management (CM not “at risk”)
OWNER’’S
CONSULTANT
PREPARE
DESIGN
OWNER
$
CONSTRUCTION OF
OWNER’S DESIGN
CONSTRUCTION
MANAGER
Trade Contractor
Supplier
Trade Contractor
D/B Contractor
30

Construction Management (CM not “at risk”)
Some Advantages
Fast track friendly with
“just in time” design
Flexible start and stop
Experienced CM assists
management of design/
construction interfaces
High Owner/Consultant
demands
Owner can weigh
trade/supplier pricing
against risk transfer
Some Disadvantages
Multiple
contracts/Interfaces/bonds
Cost, schedule, quality, OH&S
at Owner’s risk
Performance risk with Owner
Difficult to control cost
Requires experienced owner
knowledgeable of risks
Lack of project definition prior
to contract award
Patchwork quilt of bonds
31

Construction Management (CM “at risk”)
OWNER’’S
CONSULTANT
PREPARE
DESIGN
OWNER
$
CONSTRUCTION OF
OWNER’S DESIGN
CONSTRUCTION
MANAGER
$
TRANSITION FROM CONSTRUCTION MANAGER
TO GENERAL CONTRACTOR
CONTRACTOR
Trade Contractor
Supplier
Trade Contractor
D/B Contractor
32

Construction Management (CM “at risk”)
Some Advantages
“One Contract”
Fast track friendly with
“just in time” design
Flexible start and stop
Experienced CM assists
management of design/
construction interfaces
Owner can weigh
trade/supplier pricing
against risk transfer
OH&S at CM’s risk
Some Disadvantages
Risk of changes
Late design
Cost, schedule, quality at
Owner’s risk
Performance risk can still be
with Owner
Difficult to control cost
Requires experienced owner
knowledgeable of risks
Lack of project definition prior
to contract award
Patchwork quilt of bonds
33

Construction Management - General
Regardless of “at risk” or “not at risk”, must
clarify and then control:
Contract Team (bait and switch, departures)
Contract Fee
Disbursements (internal, from affiliates, markups)
Own Forces work
Sharing risk of savings and over-runs
Construction Management:
Theoretically superior - but theory not always reality
Often becomes “cost plus” in reality regardless of
pricing structure
34

Design-Build / Design & Construct
Owner contracts with design-build contractor
to design and construct a project
Design-build contractor is responsible for
design, procurement and construction
Owner or owner’s consultant administers the
design-build contract
Variations
Owner’s requirements can be prepared by owner,
owner’s consultant or design-build contractor
May be for entire project or only for specific parts
of a project (e.g. “water to wire”, turbine genset for
cogeneration or wind power, recovery boiler for a
pulp mill, etc.)
35

Engineer-Procure-Construct (EPC)
Method of project delivery in which an owner
contracts with another party (EPC contractor)
to:
engineer;
procure; and
construct
project to meet owner’s statement of requirements.
Some publications use Engineer-Procure-
Construct-Install (“EPCI”)
Most publications/authors define EPC as
“similar to Design-Build”
36

Turnkey
The “turnkey” arrangement, (also known as the “package
deal”, “design and build”, “clé-en-main” or “design and
construct”) places the duty to design and construct solely
on the contractor. There is no accepted definition for
each of these terms in the construction field. The term
“turnkey” tends to mean the most extreme form of placing
design and construction responsibility on the contractor,
such that after completion the employer need only turn the
key to commence operation of the constructed facility.
Notwithstanding this, the term “turnkey” will be used here
to describe the more general global arrangement of
placing both design and construction responsibilities on
one contractor” (emphasis added)
From Text “Understanding and Negotiating Turnkey Contracts”, by
Joseph A. Huse (Freshfields), Sweet & Maxwell 1997
37

Build-Operate-Transfer
Method of project delivery in which a private
company is given a concession to finance,
design, build and operate a facility
(powerplant, airport, toll road, etc.) normally
built and operated by the government. At the
end of the concession period, ownership
and/or operation of the facility is transferred
to the government. Variants include BOO (no
transfer back), BOOT, DBFO, FDBOM, etc.
38

P3/ D-B / EPC / Turnkey Common Themes
Performance obligations
Quality of overall product, performance of plant,
modules and equipment
Output - in terms of overall production/output
Schedule completion
Financing entities (banks, bond investors,
etc.) often insist on underlying D-B contract
for P3 and IPP projects
Significant exposure of D-B contractor to
damages
Many risks normally borne by owner assigned
to D-B contractor
39

Design–Build Relationship (Theory)
OWNER’S
CONSULTANT
ADMINISTER
CONTRACT(?)
PERFORMANCE
SPECIFICATIONS
$
OWNER
DESIGN-BUILD
CONTRACTOR
DESIGN TO PERFORMANCE SPECIFICATIONS,
PROCURE AND CONSTRUCT
LABOUR
SPECIALTY
SUBCONTRACTORS
MATERIALS
AND SUPPLIES
Note: Design-Build Contractor assumed to be a single integrated firm
40

Design–Build Relationship (Typical)
OWNER’S
CONSULTANT
ADMINISTER
CONTRACT(?)
PERFORMANCE
SPECIFICATIONS
$
OWNER
DESIGN-BUILD
CONTRACTOR
DESIGN TO PERFORMANCE SPECIFICATIONS,
PROCURE AND CONSTRUCT
DESIGN
CONSULTANTS
SUBCONTRACTORS
EQUIPMENT
SUPPLIERS
Note:
Design-Build Contractor is typically a joint venture,
consortium, special-purpose vehicle, etc.
41

Some Advantages of Design-Build
Single point responsibility
Opportunity for innovation and faster project delivery
Efficiency (design & construction expertise together)
Fitness for purpose
No real alternative for proprietary technology
Fewer changes and implementation simplified
Reduction of claims (or number of claims)
Increased flexibility to address changed conditions
Reduced administrative burden for owner
Cost savings and more certainty of final price
Improved risk management for owner
Greater ability to evaluate contractors on factors
other than cost
42

Some Disadvantages of Design-Build
Loss of control and reduced owner involvement in
design
Cost of tendering (to all parties)
Difficulty/time comparing different designs
Cost of risks and contingencies
Danger of Design-Build becoming Build-Design
Environmental/regulatory processes
Limited pool of qualified Design-Builders
QA/QC largely in contractor’s hands
Disputes tend to be larger and more complex
Management of long term risks
Some lack of project definition prior to contract award
43

Some Owner Considerations D-B-B/D-B
Design-Bid-Build
Multiple projects to spread
risks
High risk tolerance
High return on investment
Internal resources and
expertise
Complex environmental/
regulatory permitting
Owner can select “best”
engineer & contractor
independently
Design-Build
Single-point responsibility
“One-off” project
Low risk tolerance
Marginal project
No internal resources
Owner has limited
expertise
Need for proprietary
technology
Need for overall
Performance Guarantees
44

Some Contractor Considerations D-B-B/D-B
Design-Bid-Build
Civil contractor with no
design-build expertise
No design-build track record
No historical relationships
with engineers & suppliers
Low risk tolerance
Limited resources for
pursuit costs
Design-Build
Specialty supplier/
contractor
Integrated design-build
contractor
Design-build track record
Proprietary designs/
technologies
Substantial resources for
pursuit costs
Better control of destiny if
it controls architect/
engineer
45

P3 Relationship
(Typical for Infrastructure)
GOVERNMENT
PUBLIC
ENTITY
(“”OWNER”)
BOND HOLDERS
SENIOR
DEBT
EQUITY
EQUITY
$ FUNDING
DIVIDENDS
P3 CONTRACTOR
(Private Partner SPV)
$ FUNDING
INTEREST &
PRINCIPAL
BANKS/BONDS/INVESTORS
$
DESIGN BUILD
CONTRACTOR
O & M SERVICE
PROVIDER
DESIGN
CONSULTANTS
SUBCONTRACTORS
EQUIPMENT
SUPPLIERS
Note:
P3 Contractor is typically special-purpose vehicle (to be formed)
46

Public-Private-Partnerships (cont’d)
No universal definition of P3
P3s cover a wide range of projects,
depending on asset ownership, risk sharing,
financing and operation
CCPPP includes as P3 examples: Design-
Build; O&M Contract; Design-Build-Finance-
Operate; Operation Licence (e.g. IT projects);
Finance Only (e.g. bond issue for project)
Current economic climate creates challenges
for some P3 projects that involve large risk
transfer and significant financing
requirements.
47

Summary of Contracting Models
No universally accepted industry definitions
for D-B-B, D-B, Design-Construct, EPC,
EPCM, Turnkey, P3, etc. in terms of specific
scope of work or risk allocation
Use and Abuse of Standard Forms
“Adapting” standard form contracts to applications
other than those for which they were intended
Key Points:
It is contractual risk allocation, not title of contract,
that is determinative and must be reviewed with
care
In practice, terms often used loosely so it is always
prudent to clarify terminology before
misunderstandings arise
48

Procurement Process Issues
Disputes over validity and enforceability of
tenders is a thriving business for lawyers
Knowledge of current tendering law is critical
RFPs vs. RFQs vs. Request for Bid
Failure to properly address tendering law
issues in the invitation to tender and
instructions to tenderers can:
Expose owner/tendering authority to liability
Expose consultant who prepared tender
documents to liability
Disrupt and delay entire project
Feed the families of many lawyers
49

Procurement Process Issues (cont’d)
Threshold Issue: Use Request for Tenders or RFP?
Want mandatory use of same contract/performance
requirements?
Allow departures from contract requirements?
In tender/proposal?
In negotiations following identification of highest-ranked
submission?
Want submissions to be fixed price & irrevocable?
Want “bid security”? If so, what kind, for what purpose and
how will it be enforced?
Will there be Fairness Monitor/Process Monitor?
Willing and able to entertain bilateral meetings and
change commercial terms prior to closing?
50

Procurement Process Issues (cont’d)
Request for Tenders
Tendering process to which tendering law applies
Contract “A” and Contract “B”
Contract “A” imposes obligations on Owner
Limits
Flexibility
Discretion
Negotiations
51

Procurement Process Issues (cont’d)
Request for Proposals
Solicitation of interest (“invitation to treat”)
Very flexible
Limited obligations created (other than those
under the terms of the RFP)
Generally leads to negotiations
Negotiation risk high after selection of preferred
proponent
52

Procurement Process Issues (cont’d)
Use of term “RFP” or “Request for Tenders”
is not conclusive and courts consider:
Are terms “tender”, “bid”, “bidder” etc. used
anywhere in documents, correspondence, etc.?
Are proposals required to be “Irrevocable”
Are proposals required to give fixed price?
Are proposals required to conform to contract and
specifications issued by owner without exception?
Do tender documents refer to “award” of contract?
53

Procurement Process Issues (cont’d)
What are ramifications on process of:
“Short-listing” entities that do not exist until
contract awarded?
Changes in composition of proponent teams?
Changes in internal contractual structure from that
on which proponent was short-listed?
Are you evaluating the entities named, or
really their parent companies through
consolidated financial information?
Should procurement process allow designbuild
teams flexibility to change
members/arrangements?
54

Procurement Process Issues (cont’d)
Bid bonds & consent of surety
Questionable security or value in other than
traditional tendering situation
Perhaps useful for use as pre-qualification tool
Competition/Participation Agreements:
Contractual commitment by proponent to submit
conforming proposal, backed by appropriate
proposal security (e.g. L/C)
Contractual commitment by owner to pay
honorarium (if applicable)
Addresses owner entitlement to use ideas/designs
of unsuccessful proponents
55

Procurement Process Issues (cont’d)
Regardless of RFP or Request for Tenders,
minimize amendments to process/tender
documents
If substantial deficiencies/conflicts in design and
specs become evident, consider canceling tender
call
Beware of using question/answer series or RFI
responses to avoid amending documents
Dangerous to bind them into contract!
56

Procurement Process Issues (cont’d)
Alternates and Alternative Proposals
Consider whether alternates permitted
Evaluating alternates within base proposal
Evaluating alternative proposals
Defining winning criteria - Base Proposal or
Alternate Proposal
Opportunity for others to match alternates
Negotiation
Governed/limited by RFP/Request for Tenders
Bid shopping vs. negotiation
Sequential vs concurrent negotiations
57

Procurement Process Issues (cont’d)
Health Care Developers Inc. v. Newfoundland
(1995) N.J. No. 48 (S.C.T.D.
RFP to developers for design-build-lease of clinics
“Invitation to Tender” advertisement & RFP
documents used mixed language
Held: Tender Call, particularly because ad
required offers be irrevocable
58

Procurement Process Issues (cont’d)
Khoury Real Estate Services Ltd. v. Canada
(Minister of Public Works) (1996) 33 C.L.R.(2d) 294
(Fed.T.D.).
RFP to provide modern office space in Fredericton for
Federal Government
No overall standard of evaluation in RFP
Khoury applied for basis of scoring of its proposal
Held: Tendering rules apply. Owner must demonstrate it
acted fairly and disclose evaluation/scoring of proposal
59

Procurement Process Issues (cont’d)
Cable Assembly Systems Ltd. V. Dufferin-Peel
Roman Catholic Separate School Board (2000) O.J. No.
577 (Ont. SC)
RFP issued for cable plant & ethernet hubs in 88 elementary
schools & contemplated negotiation
Board met with 3 lowest proponents and then awarded to
other than Cable
Held: Board had duty to be fair to all “bidders” and to act in
good faith
Held: Cable was treated fairly as RFP did not limit
negotiations to preferred proposal
60

Summary - Procurement Process Issues
Tendering Law can extend to RFP
Court looks to substance not “style”
Duty of fairness may apply
Law applicable to tenders may or may not
apply depending on terms of RFP
Practice Tip: Draft RFP as true RFP but
then treat it as if it will be held to be a
Request for Tenders
61

Managing Risks < Bid Closing
Leading edge/bleeding edge
New technology? Pushing the envelope?
New application? European vs. N.A. practices?
History of comparable work? Bridges vs. schools?
Contract value > 150% of previous largest contract
No substitution for knowledge and
experience
Of consultants
Of contractors/subcontractors/suppliers
Of lawyers and other advisors
People experience vs. corporate experience
62

Managing Risks < Bid Closing (cont’d)
Schedule – Political or Real?
Allow sufficient time for preparation of bids
Allow sufficient time for performance of work
Consider environmental, noise & other restrictions
Set contract completion date in advance of
required completion date
Especially where occupancy/revenue generation is
critical
Provide some flexibility in subsequent contracts
that are dependent upon completion
E.g. leases, purchase contracts, production commitments
3 years to plan and design but only 30 days to
tender and then 3 months to construct!
63

Managing Risks < Bid Closing (cont’d)
Manage risks by appropriate pricing:
Use a mixture of lump sums, unit prices, cash
allowances, etc.
Obtain fixed price for part of the scope of work,
with cash allowance for other parts that are
incomplete or may require large contingencies
Bid Form/Price Breakdowns
Allow for unbalanced bids?
Influence on evaluation if broken down poorly?
Quantity variations?
Manage risks by “Early contractor
involvement”?
64

Managing Risks < Bid Closing (cont’d)
Specifications/Drawings/Construction
Avoid incomplete drawings and specifications
Coordinate to ensure free of internal conflicts
Recurring problem: 6” pipe in 4” wall syndrome
Ensure consistency of terms and terminology
Someone must be responsible for coordination
Too little time and often too little money increases
risks:
Use of inappropriate precedents
Too much cut and paste without conforming end product
Avoid reliance on “Design Intent” to cover errors &
omissions in drawings and specifications
65

Managing Risks < Bid Closing (cont’d)
Subsurface Conditions
No such thing as too much geotechnical
investigation prior to tendering
Consider joint geotechnical program during
tendering to manage the risk and reduce
contingencies regardless of who bears the risk
Consider risk sharing specific items
E.g. where slope stability or potential presence of rock is
an issue, perhaps:
Contractor bears first portion of additional costs
Owner and Contractor share next level of costs
Owner (or Contractor) bears remainder
66

Managing Risks < Bid Closing (cont’d)
Subsurface Conditions (cont’d)
Opportunity and time for investigation
Risk allocation/management
Baseline geotechnical report?
Field investigations funded by owner during proposal
competition?
Issues re disclosure of field investigations by other
proponents to owner/successful bidder
Failure to disclose information can change initial
assumed risk allocation
67

Managing Risks < Bid Closing (cont’d)
Labour
Assess open shop/union shop issues
Addressing and managing labour issues is critical,
especially for out of province contractors
Availability of skilled labour
Keeping the labour force when competition arises from
other projects offering overtime/longer hours
If longer work week/overtime required to keep existing
force or attract more labour, who pays?
If not available, is this force majeure?
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Managing Risks < Bid Closing (cont’d)
Change Order Process
Contracts must have workable processes for
changes
Colautti Construction v. City of Ottawa (1984),
46 O.R. 2d 46 (Ont. C.A.) (emphasis added):
“There is no doubt that this contract, drawn as it was to protect
taxpayers, attempted to limit the liability of the City to such an
extent that one would expect that not even the ordered rotation of
the seasons could be reasonably anticipated by the Contractor.
The problem with contracts such as these is that they are so
rigid and so restricting that the parties tend to amend them by
their actions during the course of the contract. That was the
situation in this case. There were several significant changes and
additions as to the work ordered by the City during the contract.
None of these were in writing. All but the items in dispute in this
case were paid for by the City.”
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Managing Risks < Bid Closing (cont’d)
Owner and Contractor must both consider
some additional key contractual risk issues,
including:
Performance Guarantees
Performance Specifications
Liquidated Damages
Consequential Damages
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Performance Guarantees
Heart of the contract but often poorly drafted
Especially true in industrial contracts
Close collaboration required between lawyers
and consultants
Rarely can consultants or lawyers working alone
draft clear and enforceable performance
guarantees
Enforceability dependent on quality and
completeness of drafting
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Performance Guarantees (cont’d)
Focus on inputs and outputs
If inputs not to spec, are outputs guaranteed?
Two levels of Performance Guarantees
Performance of Facility as a whole
Performance of individual components,
equipment, subsystems and systems
Keep the distinction clear throughout the
documents!
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Performance Guarantees (cont’d)
Key questions for performance guarantees
What is guaranteed
Performance tests
Who develops them and when?
When are tests performed?
Who performs tests?
How are measurements taken? Frequency? Number?
Use average of all or discard highest and lowest?
Consequences if tests stopped or fail?
Due to shortages/problems attributed to owner
Due to deficiencies/problems in equipment
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Performance Specifications
Often not well drafted
Often fail to address “Big Picture”
Establish logical structure and simplified
section referencing
For each component part of project, identify
overall performance requirement separately from
detailed requirements
Use consistent numbering format throughout!
Only specify details where critical to Owner
Detailed specifications can undermine
performance specifications and enforceability of
performance guarantees
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Performance Specifications (cont’d)
Use of general reference “standards”
“Standard Industry Practice”, “Prudent Utility
Practice” and other “Motherhood Provisions”.
Public Utility vs. IPP
“Current Practice”
Define what you mean
References to Codes and Standards
Some codes contain discretionary items or require
contract to specify certain requirements.
Application of Code where items not specified.
Additional load factors or capacity reductions for
codes and standards
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Liquidated Damages
Liquidated Damages vs. Penalties
Two edged-sword – represent the maximum
amount recoverable if the event to which they
are tied occurs
Sample Contract Definition:
“Liquidated Damages” are not a penalty but represent the
amount(s) agreed to be paid by the Contractor to the Owner
as the result of the happening of a specified event, which
amount(s) the parties have agreed to be not a penalty but to
represent a genuine and reasonable pre-estimate of the
damages that the Owner will suffer as a result of the
happening of the specified event, and which the parties have
agreed in advance would be difficult or impossible to quantify
upon the happening of the specified event.”
Relief from forfeiture
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Consequential Damages
“Neither party shall be liable to the other for
special, indirect, consequential or punitive
damages resulting from or arising out of this
Contract, including without limiting the
generality of the foregoing any loss or
damage resulting from loss of use, revenue,
profit or opportunity…”
Often inconsistent with Liquidated Damages
No universal definition of “consequential
damages”!
In the absence of a universal definition, difficult to
assess exposure/risk to parties
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Managing Risks < Award
Harmonize Contract Documents prior to
contract execution
Ensure precedents within documents have been
properly adapted/modified to suit contract
Applies to specifications as well as
commercial/legal parts of contract
Integrate results of bid clarifications and
negotiations
Exclude “Extraneous” Material
Q&As
Pre-Tender Minutes of Meeting
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Managing Risks < Award (cont’d)
Include or Exclude Contractor’s Proposal?
Should proposal be merged with
Performance Specifications?
Including proposal in contract:
Contractor’s perspective/hope:
qualifies & defines/limits
scope/responsibility
Owner’s perspective/hope:
expands scope/responsibility
Often forms basis of disputes and claims, and
raises issues of liability/responsibility
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Managing Risks < Award (cont’d)
Letters of Intent and Limited Authorization to
Proceed
What is the “Intent”?
Award of contract?
Or merely intention to negotiate? Exclusivity?
“Agreements to agree” generally not
enforceable at law
Letters of Intent can be binding or nonbinding,
depending on terms
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Project Example: Roadwork
Custom D-B-B contract over budget
Project broken down into components by
contract type:
Logging
Clearing and grubbing
Fencing
Relocation of watermain and service connections
Relocation of hydro, telephone, etc.
Provision of alternate access for local residences
New roadworks
Lighting and traffic control
New specifications based on standard form
MoT and municipal specs
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Project Example: Roadwork (cont’d)
Result:
Potential for disaster averted as major survey
error discovered during performance of the work
Re-packaging provided opportunities for local
specialized and First Nations contractors and thus
more competition
Project completed within schedule
Net savings of more than 40% over original price
in single D-B-B contract
Potential for claims mitigated by contracting
strategy
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Practice Tip
Three R’s for identifying and managing risks
Read the tender documents carefully and
thoroughly after properly identifying, assessing,
planning and managing the risks, and before
issuing them for tender / submitting tender
Read the complete contract carefully and
thoroughly before executing the contract
Read the contract carefully and thoroughly
whenever a dispute arises and then comply with
the contract regarding notice periods, etc.
Scanning is not reading!
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Questions?
Helmut K. Johannsen, P.Eng., C.Arb.
604 631 4819
hjohannsen@fasken.com
DM_Van#7461943v1