As I reflect on this year’s DBIA conference, I was encouraged by the dialogue between owners and practitioners during the General Session “Finding Common Ground Through Best Practices.” The open and candid discussion centered heavily on the key role owner’s advisors (OA) and owner’s engineers (OE) play during the life cycle of the project, from procurement planning through delivery and startup.
As I referred to my notes during these discussions, one element of the discussion that warrants a deeper dive is the issue of the OE/OA’s role in the overall risk allocation of the project. Historically, my personal experience has been that the OE/OA role has been primarily to protect the owner’s risk. However, when does the OE/OA, in their duty to protect the owner, create a risk profile that is no longer in the best interest of the project?
The Opposing Force of Risk Profiles
As practitioners, the opposing force of risk profiles between us and the owner are always an area of concern when developing, proposing and ultimately delivering a project. This is even more evident when all risks – process, performance, design and construction – are subject to allocation under a single contract. A common misperception among owners new to design-build delivery is that all risks belong to the DB team.
However, when this approach is applied, the owner more often than not overpays for its carte blanche allocation of risks onto the DB team. Excessive limits of liability, consequential damages, biased terms related to remedies, and unbalanced risk profiles can add significant costs to the project through added costs of insurance on insurable risks or added contingency for identifiable yet commercially uncommon insurable risks.
Providing Best Value
One of the challenges for practitioners in DB and CMAR delivery is that we are tasked to provide best value through competitive design and construction solutions in a collaborative environment, but accept all the risks at the same time. This is not only adverse to the principles of collaboration, but also goes against the best interest of the project.
Where risks can’t be adequately defined, appropriately insured, or adequately priced, they become the subject of claims because risk elements are disproportionately allocated to the party least capable of managing or mitigating the risk. In my almost 30 years (man, I’m getting old) in this industry, I have never been involved in a claim that didn’t result from inadequately appropriated and/or managed risk.
No Industry standard
A truly collaborative environment involves all stakeholders, including the owner, the DB or CMAR team, and the OE/OA for the project. Furthermore, a truly collaborative environment places all things that matter on the table for discussion, even risks. I often hear owners, OEs and OAs ask for the industry standard on all things that are “risks.” My standard response is simple: there is no industry standard for each and every possible risk on a given project. Each project brings its own set of circumstances and situations that must be examined on a project-by-project basis (this applies to design-bid-build, DB or CMAR). Each deal must be crafted to the unique challenges applicable to the project.
Risk allocation is a big deal that shouldn’t be taken lightly, and it’s significant enough that it should be examined on a project-by-project basis given the specific nature and scope of the project. In my humble opinion, a single rule applies across the board in all situations: allocate the risks to the party most capable of mitigating or managing the risk.
The Opportunity at Hand
This is where the OE/OA role has a tremendous opportunity to influence the outcome of the project, through education and collaboration on risks. Together, we can manage our shared owner’s expectations, and we can together educate them on the true cost of risk shedding versus the best value achieved through the true collaborative nature of DB and proper risk sharing.