During our work with project owners and financers, particularly those that have a limited experience and low maturity in terms of project management, we have realized that they don’t always understand their actual risk associated with industrial projects. Moreover, they often live under the delusion of having transferred their risk to a turn-key contractor. In our new White Paper 2022-01 ‘Why the Owner Always Takes the Most Risk in an Industrial Project’ we re-establish that most of the risk always lies on the owner side, and therefore that it is its own responsibility to setup an adequate organisation to manage this risk proactively.
Although the owner can only transfer to contractor a very small proportion of the actual risk it takes, owners and financers too often live under the illusion (or delusion) of having transferred their risk to a turn-key contractor and they tend to minimise involvement into risk management activities. This is particularly the case of financers with limited technical knowledge that often live under the delusion of risk transfer by requiring all contracts to be turn-key lump sum contracts. Lump sum contracts don’t fare better in terms of project execution performance than other contract forms; any change is an opportunity for a claim from the contractor that will inflate cost; and contractors may fall prey to the temptation of diminishing quality to save costs which may affect the long-term reliability and operability of the facility if not properly monitored by the owner during project execution. Therefore, turn-key lump-sum contracts are not a panacea, and they are actually only usable for mature technology and well-known project circumstances.
In general, risk should only be sustainably transferred to another party if that party is much more competent or capable in addressing the risk. In reality, due to competitive pressures or market habits, risk can get transferred and accepted by contractors that may not be much more able to manage it than the owner. When the parties to which the risks are transferred are contractors, they will only be able to bear the risks to a limited extent which is much less than the impact of the risk on the owner. Therefore, risk transfers only work when the risk remains limited but always fail when it grows beyond a certain proportion. Even when the risk has been accepted contractually by the contractor, if such a risk were to occur, the contractor could potentially go bankrupt or be forced to default so as to limit the exposure to the cap. In either case, the owner would have to change contractor, incur substantial delays, potential quality issues and substantial costs.
Ideally, the owner would hope to transfer risks that can be controlled as much as possible to other parties. Unfortunately, the owner will in all cases continue to bear a large majority of the risks associated with the project. Therefore, the owner must implement a thorough risk management process covering all types of risk from its perspective. This requires resources and specialist personnel, since it remains deeply necessary to really understand the amount of risk taken and to monitor and manage it appropriately. Read our new White Paper 2022-01 ‘Why the Owner Always Takes the Most Risk in an Industrial Project’.
If you can’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2022-01_how_owner_always_takes_most_risk_v1.pdf
