Before the construction at the tendering stage, the contractor should do a proper risk assessment. There are two kinds of risk in the construction process. First one is the risks which can quantify (quantifiable risks). And the other one, which cannot be quantified (unquantifiable risks). Where risks can be quantified, mathematically is considered as measurable risks. Whenever element or construction process is uncertain or mathematically unable to quantify, those risks are treated as unquantifiable risks. Mainly the reasons for the unquantifiable risks are due to the lack of information. Information is lack because the client does not present them, or the given data to obtain that information are not sufficient (or either contractor cannot understand the provided information).
Understanding the Risks at tender stage
There are three types of risks which a contractor can found at the tender stage.
- Risks due to the nature & condition of the project– Normally, the nature of the project can cause severe threats to the project itself. A SImple example, A contractor who is an expert in building contracting should not work on road construction because the contractor lacks proper tools, machinery and workmanship required to execute a road. Some amended terms and condition in the contract can create severe damage to the contractor at the construction stage.
- Risks which can be created by the consultants– Improper designs, lack of information provided by the consultant can be usual at the tender stage. Contractors should always be aware of these risks.
- Risks arise from the improper estimation process– Improper estimation process can always cause risks at the later stage. Inexperienced estimation personals, Avoiding critical pieces of information are the most typical reasons for the improper estimation process.
Construction risk assessment at estimation and tendering stage
Whenever risk identified, A contractor should have a systematical method to measure it and assess it. Most of the contractors are using their previous experience and thumb rules to calculate these risks. But some contractors are using analytical and systematical systems to calculate the specific risks before the submission of tender.
A simple example of the proper risk evaluation showed below,
RP = p1R1+ p2R2+ p3R3+ … + pnRn
Where, RP is the risk premium
p1, p2… pn are the probabilities of occurrence of each risk
(0 < pn< 1)R1, R2… Rn are the costs involved for each identified risk.
After the risk assessment and identifying the particular risk or risks at the construction stage, Contractors should manage those accordingly. There are four ways to manage risks at the tender stage.
How to manage risk at the tender stage
- Eliminate– If the risk is critical, It should eliminate at the earliest. As an example, A client wants to complete a renovation project within 60 days. But the production time of the unique carpet specified in the project is 40 days. And logistic and delivery time is 7 days. So time to deliver material is 40+7=47 days. And the contractor realises that they are not able to install this carpet withing balance 16 days. Thus he is raising this point to the client, and asking to change the material specified. By doing it, the contractor is eliminating the risk of delaying the project.
- Reduce or treat– As an example, most of the clients are asking unreasonable delay charges and time frame for tender, which cannot achieve. So smart contractors are negotiating these conditions with clients and reducing their risk.
- Insure or transfer– One of the safest ways to deal with risks is insure against the expected risk. Contractors usually getting insurances for workers and plants against accidents. There is a new trend that the client and the contractor are appointing a third party for the payment process whenever the client is avoiding the payment this third party is agreeing to pay fees which contractor is due.
- Contain(tolerate)– Nobody can win a tender without containing possible risks. A smart contractor can always abide or include compensation in his cashflow for acceptable miniature risks.
For more insight-Check, the thesis done by JOHN-NICLAS AGERBERG & JOHAN ÅGREN Risk management in the tendering process.