Analysis of commercial and contractual disputes almost always discovers problems at their heart caused by uncontrolled or unallocated risks. Quite often, the parties to a contract either did not collectively consider or assess the project risks at the centre of the dispute, or one or more of the parties to the commercial relationship assumed that ‘someone else has taken care of it’!
If we are prepared to accept that uncontrolled risks are likely to be the underlying cause of significant cost overruns, extensions of time, contractual delays or, worst of all, serious personal injuries, then why isn’t a coordinated risk workshop the starting point of all commercial adventures?
Simply put, it’s not simple and can be hard work!
Project Risks Explained
We first need to define what is a risk and then apply affordable, practical, and communicated control measures. The following three key principles apply:
1. Risks are best controlled by the party with the greatest ability to control them. Sometimes this is YOU! Often contracts are written to absolve the principal or other party of as many risks as possible. However, this approach will lead to unnecessary costs, delays, and a greater likelihood that the risks will actually eventuate.
2. A risk is a combination of Consequence and Likelihood. Consequence is the magnitude of the damage / injury / loss that would ensue if the event were to occur and likelihood is the probability of the event occurring.
The higher the consequence and the greater the likelihood, the more essential it is to have appropriate control measures in place. We might also also decide that low likelihood but high consequence risks are just as important to control. Essentially, most Workplace Health & Safety legislation is based on this principle.
3. The Consequence and Likelihood of a risk event occurring are reduced by implementing control measures. These may vary depending on the type of risks to be controlled, but they typically include actions such as changing how an activity is carried out or reviewing ongoing risks.
Control Measure implementation is not a set-and-forget activity, but an ongoing cyclical process which includes active monitoring of project progress and continuous assessment throughout the project lifecycle.
At PBL, we take a holistic approach to risk management for our clients and we draw on the expertise and skills of our team. This means we can broaden and deepen the effectiveness and accuracy of the advice provided.
Over the coming months, we will examine some of the big commercial, contractual, and project risks and how to control them. See you then.
