Insight – Risk   

Passing risk down the supply chain

Owners believe that risk should be borne by suppliers and contractors since they are being paid to deliver the design, the systems, the equipment and the constructed works. It is simply easier to hold this belief rather than to accept the fact that the project is the Owners baby which will have to be cared for the rest of its life by the Owner and not by the contributors who quickly disappear after delivery unless they get paid to stay around.

Contractors and Suppliers simply do not take on risks of their own volition or because they feel compassionately for the Owner. Risk costs money and in addition Contractors and Suppliers will always limit their liability to either exclude all consequential damages or at most limit them to their declared profit margin or what normally can be reasonably insured. These figures are typically only a small fraction of the value of the project. So in any case the Owner carries most if not all of the consequential costs. In addition as Owners attempt to pass on risk down the supply chain the Contractor and /or the Supplier will simply add a risk premium to its price as they perceive the risk not as the Owner believes is appropriate. On the other hand the Owner can also believe that in a competitive environment Contractors and Suppliers can be forced to accept higher risks and lower pricing. Unfortunately this only works in favour of the Owner, if at all, when the work is adequately defined and /or the Owner does not make post award changes when variations are no longer competitively priced. Also an unfortunate reality is that both adequate pre-award definition and post ward changes are rare commodities. In addition when definition is inadequate and the Owner is under pressure as Contractors / Suppliers chalk-up costs whilst they await clarification and/or direction, the Owner will increasingly make poorer choices or simply pass the decision making down the supply chain where it quickly deteriorates into a best endeavours albeit driven by mostly educated guessing. This may not be a major problem with mature technologies; however for first of a kind projects, it can be catastrophic especially if core aspects are involved. Clearly first of kind projects are inherently riskier than mature technology projects but primarily in the process area albeit utilities and services may also be impacted. Consequently technology developers need to take ownership of their projects, be more agile with more flexible contracting arrangements and above all Owners need to recognise and accept their risks and manage them diligently AND as early as possible.

Drop us an email or call us if you want to discuss any of these with us. We have over forty years’ experience in these areas. We may just be able to help. After all doing the same thing and expecting a different result is nonsensical