Construction Risk Management transcript
Transcript for the "Towards High Performance" webinar
Audio - Dean Kimpton
Welcome everybody. It's my real pleasure to be welcoming all of you today to this construction risk seminar. It is one of the first of webinars that we've been running as a Construction Accord, and we're very excited by the fact that Rick's going to leading out today and talking through some of the challenges and the opportunities that we have as a sector.
Can I just give you some background, first of all? I'm Dean Kimpton and I'm the transformation director for the Construction Accord. I've been working with Rick and the team over the last year as we've looked to both define what a really healthy and vibrant construction sector looks like in New Zealand, and the things that we need to do to transform that sector, alongside a series of work streams that are led by the likes of Rick as chief executive of Naylor Love.
Now, if I could just quickly share with you too what some of those work streams are so you've got a feel for the breadth of what we're doing, many of you will be aware generally speaking of the Construction Accord, but I remember it came... it was born out of the fact that there was a number, within the sector, struggling with performance. And we saw that that issue was occurring, not only within vertical construction companies but it was happening right across civil contractors, and there were challenges from procurement, through the supply chain, and from advisors.
The upshot was at the beginning of this year, the Construction Accord was signed between government and industry. That Construction Accord has just over six work streams, we've added a seventh most recently, but focused on leadership. What does great leadership look like? Business performance, how do we... What does great performance look like on an individual company by individual company basis? And that's what we'll be focused on today in that work stream.
People development, how do we make this industry an attractive industry for people to belong to? How do we attract the best and the brightest? Health safety and well being, keeping our people safe at work. The regulatory environment. How do we streamline it and how do we take out the bureaucracy? And procurement and risk. Equally important in the nature of our businesses.
The only other work stream I'd like to share with you that we've added in is one around environment and sustainability. We recognise the construction has a significant impact on our environment, and we're being thoughtful about that, in the same way have been about health and safety and have a lot to see how we've weaved that through all that we do.
So today's all about risk management and I'm really pleased to introduce you to Rick Herd, who's going to take you through some of the things that he's been working on behalf of the Accord, but also within the Vertical Construction Leaders Group. Rick, over to you, and thank you very much for the time and effort you put in to get us to this
Visual - Slide 2
Slide title: Goals of the webinar
- Illustrate how a contractor should manage risk
- Prompt ongoing debate on what this process should look like for:
- Specialist sub trades
- Client organizations and their procurement teams
- Horizontal infrastructure contractors
- Residential builders
- Construction consultants
- Prompt debate on who is best to develop and lead risk training and change management in these components of our sector
Audio - Rick Herd
Yup. Okay. This presentation's one I've done several times on behalf of registered Master Builders to their members and tried to improve the understanding of risk management in the vertical construction sector. But having said that, it applies... What I'm intending it will do is help stimulate debate about risk management generally across the industry. So I'll pop my screen up, I'll share my screen we'll get underway. I'll be presenting on the basis of risks associated with being a main contractor, but the parallels with other sub-trades, client organisations, particularly procurement teams, horizontal infrastructure contractors, residential contractors and consultants, is very much there.
The aim is to understand those parallels and I've already engaged with the specialist sub-trades and SME's and so had conversations with the horizontal construction sector. The aim is that they will develop similar presentations for their members and then ultimately will develop this into some workshops that can be used for training purposes with people of the industry.
Visual - Slide 3
Slide title: Rick Herd's employment history.
- 10 years at Ministry of Works
- 15 years at Mainzeal Construction
- 2 years as CEO N&B Group, Marine Contract Engineering
- 5 years as General Manager level for Nelson Pine Industries Limited
- 8 years as CEO for Brightwater Engineers industrial mechanical contract engineering
- 7 Years as CEO for Naylor Love Construction
Audio - Rick Herd
Okay, so I've been through the goals of the seminar and what gives me the qualification to stand in front of you and embarrass myself with IT is the fact that I've been in the construction industry for 47 years, particularly in contracting. Started at the time with the Ministry of Works and learnt a lot about contract administration, 15 years of Mainzeal construction. In fact, the whole time I've been in contracting and risk management one way or another. Even my time with Nelson Pine Industries, I was involved in contracting, because what was production position I managed the construction of the facility and managed contracts with suppliers and subcontractors through that whole process.
Visual - Slide 4
- The underlying problem is not unfair allocation of risks
- It is more often the parties don’t recognise of understand the risks
- Risks must be recognised and understood to be allocated and managed.
- Construction management is risk management
- Building stuff is one part of a construction business
- Risk management is the other.
Audio - Rick Herd
Now, risk is not about unfair risk allocation in itself. There's been a lot of talk in the media, particularly during the times of the failures of some of the larger construction companies that the issues was unfair risk allocation. That in itself is not the issue. The problem is with the parties don't often understand or recognise the risk. And risks must be recognised and understood before they can be allocated and managed. So construction management is risk management. It's not a new add-on, it's an inherent part of what you do as a contractor. So building stuff is one part of a contracting business, risk management is the other.
Visual - Slide 5
Slide title: Three essential rules of contracting.
- Do not make an offer unless you have the right people to review and analyse the project technical and contract risks
- Do not make an offer unless you have available the key members of a team capable of delivering the project
- Do not make an offer where you have not thoroughly assessed the technical and commercial risks and have effective mitigating strategies.
Audio - Rick Herd
The three essential rules of contracting, in my book, do not make an offer unless you have the right people to review and analyse the project's technical and contract risks. One of the reasons why construction companies fail in the good times is because their people are out there delivering projects and often are over-committed and not in a position to assist with the actual assembly of tenders. That means you often have junior and unexperienced people putting bids together and they particularly do not understand the risks, so that is one of the reasons why project companies get into trouble during the boom times. When things are quiet they tend to have the good people and strongest, most experienced people available to actually work on the tender teams.
Secondly, do not make an offer unless you have the available key members of the team to be capable of delivering the project, that is, unless you've got the core site management, project management, and quantity surveyors available or going to be available at the time of the contract's going to hit delivery, don't bid the job. I've seen too many situations where contractors have failed, where they think they'll get the job and then find the people to do it. They'll end up putting a scratch team together of people off the street, or one or two people from their own organisation, and that's a situation or recipe doomed to failure.
And thirdly, don't make an offer unless you have thoroughly assessed the technical and commercial risks and have effective mitigating strategies.
Those are three do-not rules.
Visual - Slide 6
Slide title: 8 must haves of construction risk management.
- Delegations of authority policy
- Effective processes and regular process validation open bracket, audit, close bracket
- One person accountable for the delivery of the bid
- A robust detailed construction programme
- Thorough handover of all tender detail to delivery team
- One person accountable for the successful delivery of the project
- Monthly regular project progress, financial and performance interrogations
- A plan to complete.
Audio - Rick Herd
Three must-haves or eight must-haves, I should say, of risk management. Delegations of authority policy. I'll talk about in some detail a little bit further down the presentation. Effective processes and regular process validation. That's audit. That's prove yourself as a company or an organisation that people within your team are doing what they say they're going to do and adhere to your own internal processes.
One person accountable for the delivery of the bid. That's a project manager. One person who is accountable for delivery of that bid just the same as they would be if it was a project. In fact, they are the project manager for the bid. A robust, detailed construction programme, based on the considered methodology that your team have come up with, that is the optimum way to build, or they believe is the optimum way to build. It's very important to have thorough handover of all tender detail. So the delivery team from the estimating team or the project tender team.
One person accountable for the successful delivery of the project and then ongoing through the project delivery, monthly project progress, financial and performance interrogations, what we call monthly contract reviews. And a plan to complete.
So in summary, really only two things you need. Proven systems and skilled and highly dedicated people. Now I understand any questions coming through will be emailed to me and I'll stop at a couple of points through the process and answer questions that might be emailed through.
Visual - Slide 7
Slide title: Delegations of Authority Policy
This is a table showing who gets the authority of policy in an organistation.
The values assigned will reflect the capacity of the organisation and skills and experiences of their people and teams.
Audio - Rick Herd
Now, delegations of authority policy I mentioned. This was an absolute vital part of the pre-construction management and general management of risk in any organisation. So this is a table that looks something like the delegations of authority policy at Naylor Love, and I imagine it'll be fairly consistent for a larger organisation.
Smaller organisations where there might be only a small one man band operation or a father and son operation type of situation, you'll only have one person who's essentially accountable for all these actions. But then across a larger organisation or just may we pursue the project? In other words is this a project we're going to have a look at?
And so I would suggest that normally a project team wouldn't have authority, a regional management team may have but only up to a certain value I would expect. An executive or overall construction management group may have a level of authority and otherwise would go to the board of directors. May we prepare the bid? In other words, once we have got to the point of putting a bid in, who has their levels of authority at that? So the approval to bid and I'll talk a bit about that approval process a little bit later in the presentation. Pre-construction negotiations, who has authority to sign off on the changes that are made to the bid offer through those negotiations? Who attends the handover from the construction tender team, sorry from the tender team, to the construction delivery team? Who has authority for subcontract engagements? In some larger projects, subcontractor values can be several million dollars, so that needs to be clearly understood who has authority to overview those and sign off and might engage. Who attends the monthly reviews? Is it the regional manager, contract manager, CEO, operations manager, or even the board in some situations where a project might be particularly large, complex, and maybe all getting into trouble. And if there are issues, legal issues or otherwise, who has the authority to deal with those issues?
So the values assigned at each of these categories is very much reflective of the organization's skills and its levels of ability and experiences of people on the teams.
Visual - Slide 8
Slide title: Effective processes a.k.a procedures, systems
Subtitle: Must cover the three primary components of a project.
- Opportunity identification and tender offer – preconstruction
- Project hand over and delivery – construction
- Project completion – post construction
Subtitle: Who develops the process?
- The people that use them otherwise no ownership
- Must have continuous improvement opportunity
Sub title: Must validate adherence to process
- Regular operational audits – internal and external
Audio - Rich Herd
Effective processes, or procedures and systems as they're sometimes known, is also an absolute key to successful construction risk management. At Naylor Love we split those procedures into three basic headings: opportunity identification and tender offer, that's the pre-construction side of it. The project handover from the pre-construction team, the estimating team to the project delivery team. And then finally project completion, which is an aspect of projects that a lot of people lose site of. I'll talk a little bit more about that in a minute. Who develops the processes? The people that use them must, otherwise there's no ownership and people do not necessarily buy into procedures and processes imposed on them by others. Obviously the executive CEO and directorship of an organisation has an authority or responsibility to sign off on the processes, but those that actually use the processes are those with the most skill or most appropriate to actually develop the process in the first place. They know where the levels of authority should be. So they should develop their processes on that basis.
At Naylor Love, we run what we call factional groups where we have the commercial managers from all the regions get together and review and develop these processes, or authorise change where change has been suggested. Some of the operational groups, estimating groups, etc. So it's the most experienced, skilled people in each of those functional areas, are the people that work with their teams to develop the processes. And there must be a continuous improvement opportunity.
I know when our processes at Naylor Love are being observed when there's constant change in those processes. What it means, if there's a suggestion for change coming through, it means people are using them, they're not just gathering dust on the bottom shelf. But in this day and age with electronic control and IT methodology, it's not necessary to have the old bible sitting in the bottom drawer gathering dust, this information is now readily available and should be available instantly on intranet for everybody within your company.
I believe personally that constant validation and adherence to process, so that is regular operational audits. We run internal and external operational audits at Naylor Love, we don't have our systems pre-qualified or certified to an ISO-9000 for example, but we could do that very easily. But most importantly we run very regular internal audits and that is part of the integrated reporting system, as our success in those audits and our adherence to process is something that I take a great deal of interest in. No questions have come through yet from Tanya but please email them through and I'll be very happy to answer or we can leave that till the end.
Visual - Slide 9
Slide title: Process example Preconstruction
This is a flowchart displaying the process of preconstruction process for estimating and tender. It follows through from pre-tender, to tender and then handover.
Audio - Rick Herd
This is what our process diagram looks like at Naylor Love. If you go to our intranet site, that's an internal site, not that you'll be able to get this one the website. We go to processes and open up under project management, this is the first one you'll see. This is the pre construction process, this is the flowchart, and if you click on any one of those cells, blue cells, behind that there's a plethora of information. There might be some forms that need completion electronically and description what needs to happen of each of those process. Always harking back to the delegation of authority policy, which is the keyfundamental document that drives this whole system.
So we have two other, as I mentioned. We have three essential operating systems, the pre construction, and then we have a similar system for construction and a similar system for post-construction. Now it's the information behind this that's our intellectual property, that I won't share with you all, but this is what our system looks like on face value, on the surface. Any larger organisation should be running a system something like this and have this information readily available. In our case, through our internal intranet site, which is available to anybody in the company and anyone who can access it through either a laptop or an iPad.
Visual - Slide 6
Slide title: Tender Bid Process
The bid start up meeting – assign essential tender task accountabilities
Essential tasks include:
- Is there enough time to undertake the following is an extension needed?
- Construction methodology
- Construction programme
- P&G assessment
- Risks and opportunities – register
- Subcontractor bid reviews
- Contingency assessment
- Margin strategy
- The tender review interrogation
- Bid writing
- Pre-contact negotiation
- The handover meeting – bid team to project team.
Audio - Rick Herd
The tender bid process I mentioned, and it's important to assign one person per team leader who's accountable. Now these are the tasks that are involved in a typical tender. For those of you who are in procurement, you need to understand that these are the processes in most tender situations or all tender situations where a contractor has to identify.
So if we've got $100 million bid, he has to do a lot of work in a four or five or six week period that's given to actually develop a thorough understanding of the bid, of the project. He needs to have built it in their mind, they have to develop the construction methodology and the programme. We need to understand that before we can price it.
So P&G assessments, that's the assessment of all the supervisory staff, cranage, scaffolding, etc, etc. Estimating is part of it, that is the measuring of the costs and the negotiation with the sub-trades. A risk and opportunities register has to be run and I'll talk about that in some detail. All the subcontractor bids need to be received and reviewed for risk and holes that might get between subcontractors and double ups. There needs to be a contingency assessment and there needs to be a margin strategy assessment.
The tender review at Naylor Love, we interrogate the tender team and make sure that they have done everything they said they were going to do to follow our process, and then we discuss the risks, margin, and contingency strategies with them two or three days before. I'll talk a bit more about that. But writing precontract negotiation, somebody needs to be assigned to all these responsibilities, and then there's finally, if we're successful, the handover meeting from the bid to the project team. So who is responsible for that? The bid team leader is the man that coordinates all that.
Visual - Slide 11
Slide title: One person accountable for the bid process.
- I use the title "bid team leader"I use the title "bid team leader"
- The project manager of the bid
- Accountable for all aspects of the bid, must be given appropriate resource
- Construction report, methodology, programme
- P&G Assessment
- Sub trade tender assessments
- Risk and opportunities register and analysis
- If they are not given the resources people and support to reliably deliver the bid they have the authority to withdraw.
Audio - Rick Herd
So here he is, the bid team leader. The project manager of the bid. Accountable for all aspects of the bid, and must be given appropriate resource. As I've noted in our organisation, if that bid team leader feels that he's not given the appropriate resource or the people to support him, putting together construction report methodology, P&G assessment estimated, sub-trade assessment, they have the authority to withdraw from the bid. That's where I'm going back to my three original must do-nots. Do not enter a bid unless you have the appropriate people and resources to put that bid together. You'll notice that... This is quite deliberate, that most of the work associated with managing risk is done precontract. It's too late, once you've signed a contract and you do not understand the risks inherent in that contract then you cannot do much about it other than go maybe cap in hand begging to your client.
Visual - Slide 12
Slide title: Estimating
Ask your estimator what is the core responsibility of your role? They will probably answer to win the tenders. But is this right?
The estimators role, is to provide an assessment of the cost to deliver the job based on the methodology and programme developed and subject to the variability imposed by the risks and opportunities identified.
An estimator should not be manipulating rates to reduce the cost. If they see a risk or an opportunity–register it and analyse these separately and in the context of margin strategy.
Audio - Rick Herd
Estimating. A lot of construction companies estimators, they are the guys that win the jobs. I think that's a mistake. You ask an estimator what his core responsibility is, if they tell you to win tenders I'd suggest you sack them. The estimator's role is to provide an assessment of the cost to deliver the job based on the methodology and programme developed. In fact, the estimator can't start work until such time as your construction team have developed the methodology and programme to deliver that project. How could you price a project if you don't know how you're going to build it? During that process the whole team will identify risks and opportunities and they should be registered and then at the end of the process, the review team will get together and review that process and in light of the risks and opportunities, and that helps develop the contingencies... Risk contingencies and margin strategies. That is done at the end, it is not the estimator's job to assess on an intuitive basis where the risks might be and adjust rates accordingly.
Visual - Slide 13
Slide title: Risk Analysis Template.
A template for risk analysis. The seven pillars are:
- Person responsible
- Reference number
- The risk
- The impact
- The risk level
- Actions, strategy, proposed tag wording
- Closed out Yes or no.
Subtitle: Monte also analysis
- Moderates probability and consequence
- Requires experienced implementation
You cannot beat timely consideration and debate by an experienced team.
Audio - Rick Herd
This is what a risk analysis template looks like at Naylor Love. The opportunities template is just the same, except it's got a green line rather than an orange line across the top. So on a project of $100 million I would expect to see probably as many as 100, but not more, risks identified on this list. The work will be done during the tender phase to identify what those are and mitigating strategies will be suggested, they'll be prioritised in order of the potential impact or level of risk or the high impact risks will go to the top and those are assessed at the reviewing point prior to the contract being put through; the offer being made. Now, there are some systems around, Monte Carlo analysis being an example, where a contingency can be developed from this type of data. And I've used that before but it's a system that needs careful interpretation. Both of the information going in or the information coming out. There is nothing quite like having a team of very experienced, seasoned construction professionals, sitting around the table reviewing the risks and opportunities at the end. In my experience, that will give you the optimum result.
Visual - Slide 14
Slide title: Examples of common risks.
- Unforeseen ground conditions
- Design development costs
- Poor or uncoordinated design documentation
- Subcontractor performance and solvency
- Cost escalation
- Foreign exchange fluctuation
- Fit for purpose clauses
- Joint and several liability clauses
- Unproven building products
- Unproven project staff
- Time constraints
- Uncapped liability
- On demand bonds
- No guarantee of payment
Audio - Rick Herd
Here's some examples of common risks. This risk webinar this afternoon is not about to tell you about how these are managed, these are just examples. I'm talking about the process that we should have in place as contractors to manage these risks. Unforeseen ground conditions is a big one. Design development is probably one of the most common issues we have today when you've got poorly coordinated or in complete design at tender time. It does... some would suggest this creates an opportunity under a fixed price lump sum contract for a contractor to claim variations. But in my experience the biggest issue we have with time is where we've got poorly coordinated drawings and we'll continually having to go back to the consultants and ask questions, clarifying ambiguities, seeking details. It is not a situation a contractor wants to be in. In my experience, this causes huge amounts of disruption, reduced productivity, time delay, and that causes frustration and ultimately can end up in dispute with the client.
Subcontractor performance and solvency, that's a real big one. You can get all your processes and all your risks managed, everything in shape, but if your subcontractor falls over fighting that replacement will cost you money, particularly if they're halfway through the job, there'll be a whole lot of issues around guarantee and warranty that need to be determined, and sometimes all that risk will come back on to you as the main contractor.
Other issues are obviously cost escalation, foreign exchange fluctuation. Contractors do not like fit for purpose clauses or joint and several liability clauses and joint venture situations. Proven building products, proven project staff, time constraints, in other words unrealistic time constraints, unrealistic time expectations from clients, unkept liabilities, on demand bonds and no guarantees of payment. These are the sorts of things that I'm looking for in contracts when I'm sitting down at tender review with our teams.
Visual - Slide 15
Slide title: Margin vs Contingency
Margin is gross profit it needs to cover overhead outside the project to provide net profit and sustain the business.
Contingency is an assessment of the cost of a risk and should therefore be treated as a cost.
In a FPLS contract, if contingency is not spent it adds to margin, just as any labour or materials costs that were estimated as needed by not required.
Key point: Don’t let anyone tell you margin is to cover risk!
Audio - Rick Herd
Margin versus contingency. This is a very important point, in my view. The margin is the gross profit a contractor needs to cover his overheads and build some balance sheet to have a sustainable business. Contingencies and assessment of the cost of a risk and the issue therefore should be treated as a cost. In a fixed price lump sum contract, if the contingency is not spent it adds to margin. Just as if you are more productive than you think you're going to be on putting up a wall and the labour and materials costs are a little bit less than what you need it, then that goes to your bottom line. But nobody should ever convince a contractor or a contractor should not let anyone convince them that margin is to cover risk. A contingency is to cover risk. A risk is a cost.
Visual - Slide 16
Slide title: The Bid Review Interrogation
- Who attends is governed by the delegations of authority policy
- The more experienced people (from outside the bid team) the better to consider the risks
- Should be held 2-3 days before bid close
- The estimate of costs does not have to be complete
- Risk and Opportunities should be reviewed, mitigation strategies or contingencies established
- The Bid Team Leader presents, the Review Group interrogates
- The Review Group should satisfy themselves that;
- The recognised tender processes have been adhered to
- Methodology & Programme are appropriate
- P&G is appropriate
- Risks and Opportunities have been thoroughly assessed
- Margin Strategy is appropriate
- That subcontract offers are being fully assessed
Key point: The outcome should be approval to bid under defined conditions.
Audio - Rick Herd
The bid review, the interrogation. This is what we do at Naylor Love is when the tender team are getting close to the submission of the bid we will get together and sometimes if it's a larger project, the board might be present. I am involved in pretty much all of them, my regional managers have a delegated authority for projects up to a certain value, but generally I'm involved and my commercial team is and as I say over a certain value the board become involved. They should be held two or three days before the bid close, and the estimate of costs doesn't have to be complete at that time because the review, tender review or the bid review is not there to make sure that the arithmetic is right and the adding up of the numbers. It's there to review the risks and the opportunities and what are the mitigating strategies or contingencies that need to be established. I.e., is there going to be a tag put into the contract that points the risk out to the client organisation, are we going to discuss that risk with a subcontractor and pass it on to them? Or are we going to in fact carry the risk and with a mitigating strategy or potentially a contingency to cover the cost if that risk ever materialises.
So one team presents what they've done, and the opportunities and risks to the review group who do the interrogation. The review group need to satisfy themselves that the processes have been followed fully, the methodology and programme is appropriate, P&G is appropriate, depending on the type of contract. Risk and opportunities have been thorough assessed and then agree on margin strategy based on those contingencies and the risks and then also finding most importantly that the subcontractors are being fully assessed.
At the time the review group gets together, often the subcontract numbers have not been fully assessed because subcontractors normally don't put their prices until quite late in the contract. Which is always an issue because it takes a lot of last minute risk assessment based on their tenders. So the outcome of that review group meeting prior to the bid going in and the contract being signed is that there should be an outcome to approve the bid under some defined conditions.
Visual - Slide 17
Slide title: Pre-contract Negotiation
- If the bid (offer) is attractive to the client there will be a negotiation that may require compromise to the conditions authorised at the bid review.
- The delegations of authority will define who has authority to change the conditions of bid (offer).
- The negotiator must come back for that authority to change the terms of the bid (offer).
- This may require reassembly of the Bid Review team, depending on the complexity of the offer.
Audio - Rick Herd
So that bid goes in and the client organisation will probably come back and say, "We're happy to talk to you further but there's some issues we don't like about your bid." There'll be a negotiation take place. So it needs to be clearly understood who has the authority to make decisions on behalf of the bid team, and often that might require the change of a qualification to come back to the full review group.
I'm just checking if there's any questions come in. One question. Will you be seeing [crosstalk 00:27:06]... Yup. That's okay. Where does management or regulatory risk sit? Again, that is all part of the process. Regulatory risk will be applied during the tender by the tender team, so the tender team will identify things that might be an issue, for example are resource consent issues still outstanding or there's noise abatement issues within the area of the contract.
All those things will be considered and listed on that risk register and reviewed and determine how we're going to manage that at the end of the review date. What are the thoughts on collaborative construction contracts? So I'll talk about contract models at the end. The presentation I'm doing here is pretty much based on fixed price lump sum, which is your worst case scenario. Maybe not worst case scenario but the riskiest scenario, let's say, other than probably design and build.
But the same principles apply, whether it's negotiated ECI, P&G and margin, fixed price, lump sum, design and build. The principles are the same, it's just that the scale of the risk and the types of risk change under each different model. The procurement... What criteria do you use around product purchase, substitution, etc, and how all this factors in the soon to be introduced information obligations of product suppliers and manufacturers.
The issue here is we've been involved in projects where a new product's on the market, and it's unproven and you'll get a local agent, New Zealand agent for that product, saying this is the best thing since sliced bread, everyone should be using it, but you get a look at what the credibility, what's the financial capacity of that agency organisation if that product fails? And you as a main contractor are left dealing with that supplier. If that supplier is not in the position to stand behind that product, you might as well... you've made a huge mistake, you've applied great risk on yourselves.
So our view is unless you've got a great deal of confidence in the product you're talking about, you stay with the tried and true. It doesn't do a lot for innovation but it's the reality of the situation particularly through the leaky building situation. We've only got to look back at all those unproven products that we used and what that did to the market over time.
Visual - Slide 18
Slide title: The Handover
- The work done to date will be wasted unless there is a thorough handover from the bid team, to the delivery team
- Attendance Bid Leader & Team, Project Manager & Team
- All the elements of the preconstruction bid must be imparted to the project delivery team, particularly the risks and opportunities and the mitigation strategies
- On a large complex project the handover may take 2-3 days.
Audio - Rick Herd
Handover. This is an absolute vital part of the tender situation. It's when a contract has been awarded and the estimating and the preconstruction team have won the job and they've got their bundle of information, and it's handed over to the project team and the project manager, the delivery team. So many times I've seen all the good work wasted if there isn't a thorough handover between those that put the bid together and understand all the risks and opportunities with the project and impart that understanding to the project team.
In an ideal world, the project team have been involved in the bid. That is, the project manager and the site management group have been involved in the development of the construction methodology and programme. That way they inherently know how the project is going to be run. But often that's not possible in a contracting environment where those guys are normally in the later stages of a project which they're driving to completion and they're working 50, 60 hours a week getting that project completed. They haven't got time to put in to a tender on the site. So often that's assigned to others or specialists in those areas. So it's the imparting of the knowledge from those tender team to that project team is absolutely vital.
On a large project we handed over recently, was about a $200 million project, that process took two to three days. That just gives you an understanding of the type of... the volume of information that needs to be given to the project team. If it took two months to put the bid together, it's going to take a long time to impart that level of knowledge into the project team.
Visual - Slide 19
Slide title: The project delivery
- Successful delivery = profit for contactor + satisfied client + happy subcontractors + fit and health workforce + zero impact on environment
- The delivery team must be led by a single person fully accountable for the successful delivery, typically the Project Manager.
- The Delegations of Authority Policy dictates who must attend monthly contract reviews. Review
- Forecast cost to complete, hence margin
- Risk register, risk status and impact on cost to complete
- Subcontractor performance
- Client/Consultant relations and performance
Audio - Rich Herd
Now, there's only a few slides left. The point I'm making here is that all the bulk of this risk management is precontract. Now we talk about contract. So successful delivery, it equals profit for contractor, satisfied client, happy subcontractors, fit and healthy workforce with zero impact on the environment. Now, that has got to be determined through the planning process of the preconstruction, the methodology, etc, is a huge part of that. But the delivery team must be led by a single person accountable for the successful delivery of that project. The delegations of authority dictate monthly review process and who's at that and what needs to be seen at that monthly contract review. So at Naylor Love we're looking at forecast cost to complete and margin, risk register, what risks are still outstanding, what has crystallised, what hasn't crystallised, how is the programme doing, what does subcontract performance look like and how does client relations...
Visual - Slide 20
Slide title: Variation and delay management
- Keep thorough records of
- Daily activities, delays hold ups, critical information
- Requests for information
- Issues impact programme
- Client instructions and the impact thereof
- Do not be apologetic for claiming your rights
- No client surprises, be consistent, open, honest, transparent and timely
Audio - Rick Herd
If there are issues, we're talking about variation on delay management. This is absolutely vital through daily records, recordkeeping is absolutely vital. Daily diaries and quick and prompt information through to the client organisations. As contractors, we don't want to delay the project. We want to keep going, we want this to run as smoothly and as effectively as possible. Variations are not actually that attractive to us as an organisation, because they've got to be managed and the information relating to those variations has got to be imparted to the contract teams. The information request process and contract instruction process is absolutely vital and good recordkeeping around that is absolutely vital. One of the things I say to my teams is don't be apologetic for claiming your rights. We want a no surprises situation, we need to be consistent, open, and honest, and timely with our customers. There is nothing worse than thinking this situation is going to come right throughout the project and we'll sort it out at the end. That's never a good strategy. The best thing to do if there is an issue, get it out on the table, talk about it. Be open and transparent with your client, and see and develop mitigating strategies with your client.
Visual - Slide 21
Slide title: Delay Management
- Claims must be specific on the entitlement under the contract.
- Pursue each claim on its merits, do not wait and see how things work out at the end.
- Don’t be afraid to seek professional help if you are getting unreasonable pushback.
Audio - Rick Herd
So delay management. This is probably one of the biggest issues facing the construction industry today. Delays are there for a number of reasons as the pressure comes on our consultants to complete designs in quicker and quicker timeframes with less and less resource. The documentation is becoming more and more of an issue and the delay management for a contract is becoming quite problematic.
It's vital that we pursue each of these claims on their merits, in other words be be very clear on what we're claiming under. Do not wait to see how things work out on the end. The client won't thank you if you tell them about a month before completion that you're going to be three months late. You need to be working through and be completely open on these costs and delays, as soon as they come to your knowledge. And don't be afraid to seek professional help if you're getting unreasonable pushback.
What I mean by that is that the analysis of a detailed critical path programme is something that takes quite a bit of specialist resource. If you haven't got that inhouse sometimes you need to seek that externally and if that resource is available externally.
Questions and answers
Audio - Rick Herd
Some more questions. That's essentially the end of the presentation. So what I'd like you to do as individuals, and I'm happy to take any comments or please feedback to the Accord, and as I mentioned, I'm going to be talking to the subcontractors, SMEs, civil contractors, consultants, and client organisations over the next few weeks in looking at developing risk presentations, looking to develop particularly for your facets of the industry. Here's another couple of questions.
How do you suggest subbies manage the risk of holding retentions by a main contractor?
The subcontractors have got a right under the new legislation to expect that subcontractors hold their retentions in a trust should they fail. Unfortunately the architecture of that act was not particularly well done and as a contractor it is possible to hold what is not a legal requirement to hold that money in a separate trust. It should be. At Naylor Love we do hold that money in a separate account, which is clearly ring fenced for subcontractor retention. One of the things we're doing at Naylor Love, just going through... Sorry, not at Naylor Love, but it's the Vertical Construction Leaders Group, we're establishing a set of criteria about what a good contractor looks like. Over the next few months we're going to be establishing a website where our members can start... Or the members or the registered Master Builders can start putting into this base of information about what a good contractor looks like, from balance sheet, cash holdings, to health and safety performance, environmental performance, staff turnover, all those sorts of things that make up a good construction company. We have about 60 measures. So over the next couple of years we'll gather that information and we'll assess and we'll get to the point where we can benchmark off each other to determine what the best of us look like and where we need to improve as an industry.
I'm suggesting to the subcontractor organisations that they do the same thing. That information, particularly when we get this accredited, when we get to the point in the future where that benchmarking information can be audited by an external party at KPMG, at PWC, then contracting organisations become accredited. Maybe like a standard [inaudible 00:37:25] rating, a AA- or a BB+. So a subcontracting organisation can then look at the rating of the various contracting organisations and say, "Well I'm only going to go with a AA- or above contract because I'm not going to risk my business operating with a CCCor whatever it may be." My vision for the future and the Accord's vision for the future is that subcontracting organisations will have similar accreditation standards.
So then us main contractors can look and say, "Well, I'm not going to take on a subcontract without a BB+ rating because he is not financially viable, he could fall over, or his health and safety standards aren't what they should be to operate in our culture." So all these things are part of what the Accord was working through and how we need to look at the standards of performance in the industry.
Can I please use gender neutral language?
Sorry, I'm 65 years old, it's something that's inherent in how I operate, I apologise for that, I will try and use they, but it just doesn't come naturally to me.
I'll try and extend our tender open timeframes but I get pushback from the project managers, the contract really puts the bid together at the time of the timeframe. So there's no point in extending the open timeframe. What's your response to this?
As I said don't apologise for claiming your rights and don't enter a contract where you haven't got a situation where you can claim for time.
It's interesting about poorly prepared documentation, given that this documentation should have gone through the consenting process. Do you have a quality of documentation strategy that is favoured in your tender?
No, we look at that on a case by case basis, and that is part of the risk mitigation strategy and opportunity of strategy of each project.
What can client organisations do better to ensure the risk is properly understood and therefore managed through all stages of the project?
In ECI and negotiated type projects where the client and contractor are working together, the risks can be put on the table and discussed, and that's the optimum, that is the ideal situation. And more and more what I'd like to see in the future even under a fixed price lump sum tender, the client organisation requests the contractor to put their risks on the table. Effectively they do do that, they put the risks on the table through their construction tags, and that is a contractor suggesting this is a risk I'm not prepared to take.
And that is that time that the client organisation, the contractor organisation, have the opportunity to sit down and discuss what the risks are and how they are best managed, between both organisations.
All government organisations are now putting a strong focus on achieving broader social and sustainable outcomes through their procurement processes. How do you analyse these risks delivering higher value using a specific group of subcontractors?
Again, I think subcontractor prequalification and main contractor prequalification is absolutely vital to that process. It's refreshing to hear the value you place on the skills and experience of build teams and preconstruction risk management use. As I said it's impossible to bid a project without understanding how you're going to build the project. That is one of the foremost factors in putting a bid together, understanding how you're going to build it.
How did Naylor Love de-risk the choice of using an innovative product like CLT when it wasn't proven within Naylor Love?
From my perspective I understand engineered wood products pretty well, I've worked in that industry for five years. But that is not a major departure from normal construction techniques. New high build plaster cladding type products, like a rock coat and things, those are when they were introduced, that was far bigger risk than using a primary structure element of solid timber rather than framed timber. And other than the possible argument about treatment of CLT, it's really a no-brainer. So each innovative product or new product has got to be assessed on its merits.
How do you fairly assess, allocate client risk and construction risk in a way that doesn't drive total costs too high? Does it revolve around staff or tender response or risk profile of the project?
A risk is inherent in a project whether the client carries it or the contractor carries it. If it's not recognised then somebody's going to take a hiding, take a loss outside of the... Sorry, the client or the contractor.
So the risk and the cost is always there, the only way you will eliminate that cost is by working together to mitigate it. If a contractor has to put a contingency in, and that price is accepted for that contingency, then the client is paying for it. If the contractor doesn't recognise it or chooses not to put a contingency in, and that risk crystallises, then the contractor carries it. The cost is always there. So it's a matter of working together to find the optimum way to manage the risk. That's the ideal situation.
Got a few more. I'm probably going to run out of time, so what I'll probably do is I'll deal with a couple of these and then we'll probably wrap it up and what I'll do is I'll do my best to put some written answers out to these that we can then distribute to all the attendees.
I'm really interested in builder consent documentations, etc, don't seem to have great visibility in your process. Is this because the consent is less visible than in the residential developments, etc?
Yeah, that's probably a case, and also normally when we go to bid, the tender, the consent has been applied, certainly resource consent will be developed, unless we're in an early contractor involvement. But the actual building consent process, unless there's time delays, well that doesn't really provide a risk to the contractor per se, unless they are carrying the risk of actually applying the time it takes to do that but that would be very unusual.
Good point at the beginning about lack of understanding of risk, in many cases it seems the lack of understanding includes where it is best to sit. That is exactly right. Does that mean that sometimes the best person to manage the particular risk does not always hold that risk? I.e. unknown ground conditions?
That's exactly right. If I could make a point on unknown ground conditions, as I mentioned earlier in the process, the webinar, the contractor has an enormous amount to do in a relatively short space of time through a tender situation. The client presumably has held that piece of land for several months if not years prior to that, had all the opportunity in the world to undertake a very good, detailed geotech study, and get the ground conditions understood and either design foundations based on that understanding or provide the contractor all the detailed geotech information to let them to make that assessment. That's seldom the situation. So I don't think it's reasonable that contractors are asked to take on ground risk, given about four weeks to price a job with very little information based on that geotech. I see ground conditions as clearly something that would sit with the client under normal situations, unless it's early contractor involvement, a negotiated contract, or a model where the contractor's involved right at the beginning and has got the opportunity to undertake the geotech study themselves.
How should the industry embrace innovation while mitigating risk? Will the proposed building amendment address this?
Possibly. My vision for the industry in the longer term is that construction companies will become stronger, have stronger balance sheets, and invest in research and development. At the moment, because margins are so thin, construction companies tend to operate on cashflow, very little about great deal of asset backing. We get to the point where there's fewer but stronger contractors, more profitable contractors will be able to invest in research and development, and that will allow the industry to become more innovative and drive down costs. It's because we're so fragmented, because we generally have been for so long an unprofitable and unattractive industry, that we are so high in costs. We don't have the opportunity to innovate.
How do you recommend the industry look and use new products and installation methods coming through to address climate sustainability?
Naylor Love is a leader in promoting engineered wood products. We have developed a carbon calculator that can demonstrate how... And I'm selling Naylor Love here, I'm sorry, I should be selling the Accord and Vertical Construction Leaders Group, but the point is that the opportunity for innovation is there. Custom organisations are really looking for opportunity and ways to enhance their buildings, enhance their products for the long-term. They're looking for sustainable options.
We can demonstrate for example that using engineered wood products as your primary structured element, you can actually build a building which is essentially carbon neutral in respect to the carbon that's put into the atmosphere as opposed to using steel or concrete as your primary structural element.
What is your difference in the approach to managing risks with a lump sum traditional versus design and build?
Just the same. The processes are identical, the only thing is that you're taking on the design risk, so therefore you will have contingency built into your price that covers the design development. Typically what we would do in a fixed price lump sum situation is tag out design development costs. That is, any change and embellishment of the design, the contract proceeds as a risk to the client. So the process is exactly the same, it's just that with a design and build as a contractor, you need to assess yourself what risks is left in the design and what is likely to increase the cost of design through the construction process.
What are your thoughts about all the different prequalification systems that are for H&S?
My thoughts are one of the processes we're doing through CHASNZ, and this is part of the health and safety work stream of the Accord is to develop a single standard for prequalification. There is work being done by CHASNZ at the moment, which is in front of the contractors, there's quite a bit of work needs to be done to get that to a point where it can be brought out to the market. But I would like to think in 12 months or less we have a standard which all prequalification accreditation organisations can operate to. So that means a subcontractor or a contractor only and needs to go through a prequalification process once. That is the ideal and that is where the industry is heading, and that is one of the key drivers of the accord as well.
As your experience, what is a good way to assess quality and quantify the risk and client design information early? If you try to price at the outset, would you feel your income, feel your price would be uncompetitive?
Yes. If we see that we've got poor design, poorly coordinated design or incomplete design, we would normally tag the bid on that basis. As I mentioned earlier, some contractors could look at that as an opportunity to say there's a lot of variation so there's a lot of opportunity to make up additional cost through those variations. But my experience, poorly coordinated drawings only leads to frustration and lack of productivity. So you can put a contingency to cover that design development but that is not the ideal situation, you will become uncompetitive, yes.
There is already a building and player ranking system being trialled in New South Wales to rolled out over Australia and New Zealand led by New South Wales building commissioner and a credit rating agency.
Yes, we're aware of that, but our accreditation system will cover more than just financials, it will cover... as I say, the overall performance of the contractor, health and safety, environmental performance, staff management, wellbeing, all those aspects that make up a successful contractor.
So that's my time, everybody. Sorry about the IT issues at the end, I'm a technophobic, and I will try and do better next time. Over to you, Dean. Do you want to wrap something up?
Dean Kimpton speaking.
Audio - Dean Kimpton
Hi everybody. Thank you very much, Rick. You powered through that just nicely. And I think we all forgive you for the IT hiccups, and we certainly undertake, like Rick has promised to do better next time. All the best to each of you and your businesses, I hope you got a lot out of today, and if you wish to learn more about the Accord, how we can help and support, and some of the things that it's doing, including over this very challenging post-COVID-19 period, then we'd love to be talking with you. Thank you very much and farewell, everybody.