What is a Contract Risk Analysis?
Based on a Contract Risk Analysis you are able to make careful decisions in contract and tender documents. The proposed contract or the general purchase conditions of the client is one of the documents based on which a contractor is invited to make an offer, also called a tender. In these documents, the client indicates its preferred risk profile associated with the execution of the construction project. In order to be able to assess these risks, it is advisable to analyze the proposed contract before you submit your tender. You do this by means of a Contract Risk Analysis.
How to identify risks?
Before signing any contracts, it is important to know the risks associated with your building and construction contracts. To identify risks, you make a risk profile that broken down into 3 types of risks:
- Operational risks
Who bears the risk of design errors, or late issuance of permits, or acceleration actions or penalty for construction delays.
- Financial risks
How realistic are the milestones proposed by the client, what is the payment term and how big is the risk of a negative cash-flow?
- ‘Legal’ risks
How big is the risk in case of a warranty, or direct or indirect damages and which party takes out which insurance?
Identifying risks with the traffic light model
You can establish the risk profile with the traffic light model from the book ‘Construction Contract Analysis’, going through questions. These questions cover all contractual provisions. For each question, the traffic light model color-codes the importance of the specific risk. This is the basis for the decisions you take in contract and tender documents.
Doing business means taking risks, right?
Every project has risks, but what if the risk profile is high? Then choose mitigating measures, such as a comment in the tender, adding a contingency amount or passing the risk on to a specialist, for example an insurer. It is not easy for a contractor in a competitive environment to convince the client of his qualities, in combination with a good price and also to propose risk limitations in case something does go wrong. Yet this is essential from a profit point of view.
Partner in Contract Risk Analysis
Vijverberg has been a partner in drawing up contract comments and negotiating them with clients for many years, with the conviction that all risks must be known before a contract is signed. From this conviction we have developed a systematic Contract Risk Analysis. In addition, we also support you in negotiating your proposed control measures.
Would you like to immerse yourself in Contract Risk Analysis? Then read the book Construction Contract Analysis.
Vijverberg is an independent Project Management company for complex construction projects and prepares expert reports on delay and disruption in projects and acts as an expert witness in this field.