I had the pleasure of attending the launch of Blake Dawson’s Scope for Improvement 2011 report this week. The third in a series, this report looks at the consequences of risk allocation in the Australian construction industry (download the reports). The total value of projects surveyed for this report was approximately $55 billion with an average value for each project of $470 million.
The two key findings from the study were firstly the skills shortage identified in the 2008 report also has a significant effect on risk allocation and management.
The second more significant finding was the misallocation of risk by the client, typically by dumping all of the project risk onto the contractor, produces significantly worse outcomes for the client than taking a pragmatic risk management approach that allows risk to be properly priced and allocated to the party best able to manage it.
The failure to properly mange risk resulted in delayed completion, cost overruns, reduced quality and disputes. This data solidly supports the conclusions in a number of our papers (based in part on UK Government reports) including:
- Construction – A Risky Business (2005)
- Risk Attitudes in the Construction Industry (2008)
- The Meaning of Risk in an Uncertain World (2008)
The good news is most of the organizations surveyed considered risk management was improving, although the improvement was patchy.
One initiative that was highly recommended by the panel of experts at the launch was the ECI form of contract. ‘Early Contractor Involvement’ (ECI) is in effect a two phase ‘design and construct’ contract; in the first phase the design is resolved and the risk management strategy devised, in the second phase the contractor delivers the design based on an agreed price. If the contractor and client cannot agree a satisfactory price for phase 2, the phase 1 design reverts to the client for use in another tendering process.
I’m still digesting the report – watch this space for additional comments in a few days.