Best practice: risk management and allocation
The Playbook offers guidance on risk management and allocation, setting out examples of best practice and emphasising how allocating risk can maximise the long-term success of a commercial strategy.
Risk allocation should not be left open to interpretation, particularly where a situation has potential for change, affecting output requirements. The guidance underlines the importance of quantifying risk – both prior to, and during contracts – to help each project partner to gauge their respective risk exposure.
Don’t underestimate risk
Contractors and procurement teams often have a tendency to underestimate risk. As a result, planning conducted at the start may be insufficient. While this behaviour has many causes, the need for contractors to secure bids in an intensely competitive market is a key reason. A common propensity towards over-optimism, resulting in risk being understated at bidding stage, can also be detrimental to a project. Insufficient risk analysis and modelling makes risk harder to quantify, exacerbating the problem.
Some risk management specialists are concerned that the guidance provided by the Playbook may not go far enough, requesting evidence of its efficacy in practice. Through close monitoring and regular auditing, the implementation of the guidance can be measured fully at bidding stage and thereafter.
Simulating performance mechanisms
The Playbook’s guidance has the potential to be reinforced through simulation to help model performance mechanisms and service level agreements. This in turn informs the decision-making process for the service provider and procuring body.
Simulation can expose discrepancies and inconsistencies in the implementation of a service contract and its variables. Steps can then be taken to mitigate any risk factors at an early stage. When used just prior to bidding stage, project or contract simulation enables stakeholders to establish a commercially-sound service level agreement that is fair to all parties.
Minimising disruption from insolvency
The guidance recommends the use of ‘living wills’ and their function in minimising disruption to services and contracts in the event of insolvency. Designed to de-risk supply agreements, these clauses ensure that clearly-defined steps to manage the transfer of the service provider or contractor’s responsibilities where necessary.
The Outsourcing Playbook is a useful source of best practice guidance, presented in a constructive way. However, its true value in bringing about a change in behaviours across the construction industry, remains to be seen.