Pre-Contract Risk

Management
an ACE guide
 Contents
3 Introduction
4 Pre-Contract Assessment Process
4 Stage I Identify
7 Stage II Evaluate
8 Stage III Mitigate
8 Stage IV - Transfer
Appendix

Association for Consultancy and Engineering

Alliance House
12 Caxton Street
London
SW1H 0QL
T: 020 7222 6557
F: 020 7990 9202
consult@acenet.co.uk
www.acenet.co.uk

Association for Consultancy and Engineering

No part of this report may be copied either in whole or in part
without the permission in writing of the Association for Consultancy
and Engineering.

02 Pre-Contract Risk Management - An ACE guide

Introduction
The need for risk assessment
Whatever altruistic motives consultants may have, one
of the primary objectives of operating a business is
to generate profit, which enables business to reward
proprietors and employees appropriately. Generating
profit is a function of good management and minimising
risk is one way of contributing towards making a profit.
Increases in premiums and excesses payable in
respect of professional indemnity (PI) insurance have
always received a considerable amount of publicity.
Such increases are caused by factors such as the
performance of the stock market, the attractiveness
of PI insurance to insurers, and the industrys and
individual firms claims experience. Whilst the first two
factors may be more difficult to address, the claims
issue can be addressed through the implementation of
more effective risk management systems. Furthermore,
even where PI insurance is available, there are
undoubtedly exclusions to such policies which need to
be taken into account when taking on work.
The followings headings and questions are intended
to prompt the reader to consider the risks involved
when considering whether to bid for or take on a new
project. This list is not exhaustive and there may be
other risks particular to your project that will need to
be considered. When all risks are identified they can
then be evaluated and a strategy put in place to either
mitigate or transfer those risks.
It is essential to keep in mind that risk management
is not a one-off exercise but a constant management
process which needs to be repeated as often as the
needs of a particular project require. Risk management
does not cease until all disputes have been resolved
and the files finally closed.
Where to go for further information
ACE member companies who have further questions
about contract terms and conditions can contact ACE
on 020 7222 6557.

The results of an ACE insurance/risk management

survey showed that only 46% of responders have
formalised risk management and quality assurance
systems in place. A large majority (92%) do not have a
full time risk manager who has no other job function.

Risk management practices should form an integral part

of a consultants quality management system procedure
for project appointment contract control. Good risk
management requires senior management involvement
and control as work progresses; it also requires
increased project staff awareness and participation at
project reviews.

It is for this reason that ACE has prepared a number of

guides relating to project risk management. This first
document relates to the pre-contractual stage of the
project life cycle.

Pre-Contract Risk Management - An ACE guide 03

 Pre-Contract Assessment Stage I Identify
Process The first step, when invited to bid for a particular
project, is to consider the risks that may be associated
Should you look to win this contract? with the project. This can be done by, for instance,
One of the first things that should be considered when asking the following non-exhaustive questions:
invited to submit a tender is to consider pre-contractual
issues and to decide whether you should even bid for a Consider the Contractual Parties
particular project. This decision can only be made once
an assessment has been made of all the circumstances Do you know your client?
of the case.
Is this a new client? If they are an existing client,
The following process is generally used for the process how good is your relationship?
of risk management, namely: Are they prompt payers?
What is their interest in the project?
Identify the risk Is your client the contractor? If so, are they likely to
Evaluate the risk have adequate contingencies in the tender or are
Mitigate the risk by: they known for lowest price bidding?
Declining it What is their financial status? Are they financially
Accepting it (and costing for it) sound?
Reducing it What financial information is available? Is it
Transfer the risk significantly out of date? If so, has the client
provided a satisfactory reason for that?
The process should be kept under constant review and Is the client contracting through a special purpose
revisited at pre-determined trigger points, e.g.: vehicle (SPV) set up for this project alone?
Do they have experience on this type of project?
Expression of interest Are they competent?
Tender/bid stage Will they understand their statutory duties?
Contract issue stage Are there any cultural differences?
Design stage Is the nominated client a legal entity? If not, find
Construction stage out who the correct contracting party is going to
Commissioning stage be. Ask the above questions in respect of that
Post project review, i.e. lessons learnt entity.

Is your client the ultimate client? If not, who is the

ultimate client?

Is it a private company?
Is it a public body?
Have you worked with them before?
What research have you done on them?
Where are they based?
Could they affect your reputation adversely?
How tight is their budget?

04 Pre-Contract Risk Management - An ACE guide

Do you know who else will be involved in the project?
Will you be acting as a sub-consultant to another
project team member?
Will you be jointly and severally liable?
Do you know the PI arrangements of the other
parties?
Have you worked with them before?
Are there back-to-back contractual obligations?
Are there likely to be any software compatibility
issues within the project team?
Service Scope and Location
What are you being asked to do?
Does this fit your business plan?
What are the objectives?
Is the brief/scope clear and complete?
Are the services required particularly risky or
unusual in nature? Would this affect your ability to
complete the project successfully?
Do any of the requirements amount to a fitness
for purpose obligation as a matter of fact? If so,
have you discussed the implications with your PI
insurance brokers?
What is the scope and complexity of the work? Is
the complexity likely to grow or shrink?
Is the location easily accessible?
Are there any environmental issues to consider
pollution, etc?
Can you provide the services?
Can they be delivered on time?
Will you need to appoint specialist sub-
consultants?
Are there any regulatory issues, e.g. health and
safety, etc?
Have you done it before?
Is this a new territory?
If yes, have you checked the territorial limits of
your PI policy?
If not, do you have sufficient similar experience to
give you confidence?
Are those with experience still with you or still
available?
Are you familiar with local legislation, taxes,
custom and practice?
What are the contractual requirements?
Does the project involve new technology?
Staffing Requirements
Do you have the resources and the competence?
Does it require 24/7 support?
Will your resources be available in the right
timescale?
Will you have built in redundancy if a key source
goes missing?
Are you overly reliant on a specific individual?
Do you need to sub-contract?
Do you have a project manager?
Other Commercial Issues
Are the rewards worth the risk?
Have you understood the risks?
What is the value of the contract to you?
If it is a loss leader, will it produce long term profit?
Can it affect your reputation negatively?
Have you considered changes in the economy/
market?
Is this state of the art/new technology?
What is the likely impact on cash flow?
Do you know the procurement route?
Is the procurement/contract on the same basis
from the ultimate client?
How are the risks allocated further down the
supply chain?
Who is the competition?
How will you compete: through your fee or
service?
Can you realistically compete?
Have you completed a SWOT analysis?
Is your assessment of the competition truly
impartial?
Why are you doing this?
Is it high profile?
Do you understand the business?
Are there reputation risks?
Is it a learning opportunity?
Pre-Contract Risk Management - An ACE guide 05
 Will you be paid enough?
Are there any obstacles to payment that are
outside your control?
Will you remain cash positive or, alternatively, will
the cash profile be acceptable?
Are you aware of your tax liabilities?
Will your price be squeezed in future negotiations?
Is your level of profit adequate against inflation and
currency fluctuations?
Stage II Evaluate
Having identified the risks, you are in a position to
evaluate their significance to your business. In financial
terms, what represents a high risk to you?
Risk exposure
What is the maximum exposure to a loss arising from
the risks identified?

What are your contractual obligations? In financial terms?

In reputation terms?
Have you seen the proposed agreement? In interruption risks?
If the proposed agreement is unreasonable, have Liquidated damages?
you accounted for the fact that legal advice may Fines and penalties?
be required in your fees?
Is there a reasonable skill and care duty?
Likelihood of risk occurrence
Are you being requested to indemnify and/or hold
the client harmless from particular losses? What is the probability of risk?
Is there a fitness for purpose, liquidated damages,
or other penalty clause? High (for example, 80 100% probable)
Is any kind of guarantee required? Medium (for example 20 80% probable)
Are collateral warranties required? Low (for example 0 20% probable)
Are you being asked to concede copyright?
How is the team to be structured JV/
What is the impact to your business?
consortium?
Does your PI policy meet the requirements of the
What might the impact of the risk be? This will relate to
contract?
the scale of the project in relation to your total workload.
Will you be novated? If so, who will you be
novated to? For example, does the client generally
High (for example, 80 100% probable)
use experienced contractors?
Medium (for example 20 80% probable)
Have you seen the proposed novation agreement?
Low (for example 0 20% probable)
What is your financial liability
An example pro forma risk register is shown in the
Appendix. This can be used independently to identify
What is your financial limit of liability under the
and manage your risks. An example of how the risk
contract?
register can be used is also shown in the Appendix. The
Does your PI policy cover your financial liability
risk register should be a live document and reviewed
under the contract?
on a regular basis to track and update identified risks.
High Probability/High Impact risks should be actively
managed or avoided.

08 Pre-Contract Risk Management - An ACE guide

Stage III - Mitigate
At this stage, you should consider whether or not it is
possible to reduce or control the identified risks. Can
the risks be reduced? If so, draw up an action plan.

Can the risks be controlled contractually?

Are there liability caps?

Is there a net contribution clause?
Can the contract be made subject to reasonable
skill and care?
Are you being requested to indemnify and/or hold
the client harmless from particular losses?
Are you in a position to propose, or insist on,
amendments to the contract?
Should the risks or the project be declined?

Stage IV - Transfer
Transferring all or part of the risk can reduce the
possible impact on your business to an acceptable
level. This can be done:

Through the contract

By outsourcing/sub-contracting
Through your insurance

Pre-Contract Risk Management - An ACE guide 07

 Appendix: Blank Pro Forma Risk Register

GATEWAY/OPPORTUNITY STAGE
PROJECT NAME Submit expression of interest Yes or no
PROJECT REFERENCE Submit pre-qualification Yes or no
OPPORTUNITY/BID MANAGER Submit bid Yes or no
DATE Accept appointment Yes or no

RISK IDENTIFICATION RISK ASSESSMENT RISK RESPONSE RISK MONITORING

08 Pre-Contract Risk Management - An ACE guide

Risk ID
Description of
Risk
Probability
)High/Medium/
Low(
Impact
)High/Medium/
Low(
INITIAL RISK
SCORE
Risk Owner
Target Score
Risk Allocation
(avoidance,
reduction,
transfer)
CONTROL
MEASURE
or ACTION
REQUIRED
Target Date
Review Date
Risk Status
(open or closed)

1
2
3
4
5
6
7
8
9
10

Key: High probability or impact
Medium probabiity or impact 2
Low probability or impact
3 Risk Rating: Red Risk score is 6 to 9 Scoring would depend on the nature of the contract.
For instance, unlimited assignments on collateral
Amber Risk score is 3 to 5 warranties may be considered higher than a 2 for
1 Green Risk score is 1 or 2 some contracts. Furthermore, poor scope definition
may also be considered higher than a 2.
Appendix: Example Risk Matrix

RISK PROBABILITY
HIGH MEDIUM LOW
Score 3 2 1
RISK HIGH 3 Red (9) Red (6) Amber (3)
IMPACT MEDIUM 2 Red (6) Amber (4) Green (2)
LOW 1 Amber (3) Green (2) Green (1)

Notes:
1. The risk scores and classification can be amended to
suit each contract.

Pre-Contract Risk Management - An ACE guide 09

 Appendix: Example Risk Register
GATEWAY/OPPORTUNITY STAGE
PROJECT NAME XX Submit expression of interest Yes or no
PROJECT REFERENCE 333-333 Submit pre-qualification Yes or no
OPPORTUNITY/BID MANAGER SP Submit bid Yes or no
PROCUREMENT STAGE Prequalification Accept appointment Yes or no

RISK IDENTIFICATION RISK ASSESSMENT RISK RESPONSE RISK MONITORING

10 Pre-Contract Risk Management - An ACE guide

Risk ID
Description of
Risk
Probability High/
Medium/Low
Impact High/
Medium/Low
INITIAL RISK
SCORE
Risk Owner
Target Score
Risk Allocation
(avoidance,
reduction,
transfer)
CONTROL
MEASURE
or ACTION
REQUIRED
Target Date
Review Date
Risk Status
(open or closed)

1 Clause 2.2 requires M M 4 SP 2 Reduction Qualify bid and limit 6/1/2008 6/1/2008 Closed
the provision of a assignments to one
collateral warranty
with unlimited
assignments
2 Unlimited PI limit M H 6 DP 4 Avoid Qualify bid and add 7/1/2008 8/1/2009 Open
required by contract cap to PI liability
docs

3 Poor scope M H 6 HP 2 Transfer Transfer design risk 7/1/2008 8/1/2009 Open

definition in contract to ground works
docs regarding the sub consultant.
design of basement Revise scope of
works appointment. Check
PI cover.

4
5
6
7
8
9
10

Key: High probability or impact 3 Risk Rating: Red Risk score is 6 to 9

Medium probabiity or impact 2 Amber Risk score is 3 to 5
Low probability or impact 1 Green Risk score is 1 or 2
Acknowledgements
This guide was produced by ACE with support from
ACEs Legal and Liability Group.

Pre-Contract Risk Management - An ACE guide 11

 Association for Consultancy and Engineering
Alliance House
12 Caxton Street
London
SW1H 0QL
T: 020 7222 6557
F: 020 7990 9202
consult@acenet.co.uk
www.acenet.co.uk

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