WORLD-GENERATION NOV/DEC 2015
23
PERSPECTIVE
Only one thing is certain in the 21st cen-
tury electrical utility industry – more uncer-
tainty. Whether the issues are regulatory,
environmental, economic, or political, the
players in the industry – utilities, vendors,
and contractors – all confront a daily land-
scape of complex decision making, com-
pounded by a lack of certainty among regu-
lators, politicians, and markets. Managing
construction in such an environment is chal-
lenging at best, occasionally virtually impos-
sible. The most successful owners, contrac-
tors, and vendors anticipate these difficulties
and in recent years have implemented
Proactive Risk Management, a series of risk
safety nets erected throughout the design
and construction process, from beginning to
end. The three phases should include
Commercial Assessment (CA), Project
Evaluation (PE), and Dispute Resolution
(DR). This article will address the first of
these phases, Commercial Assessment.
Project Evaluation and Dispute Resolution
will be the subject of articles in future issues
of World Generation.
Certain features of 21st century con-
struction have not changed much through
the years – the rules of engagement
between owner, contractors, and vendors
are determined by a contract that will
increase in importance in direct proportion
to the amount of dispute that develops on a
project. Successful construction is predi-
cated upon the successful management of
risk. Contracts allocate risk (ideally to the
party best able to control it). The best jobs
are those where the contracts are fairly
negotiated, thoroughly understood, and
completely respected.
The first phase of Proactive Risk
Management is Commercial Assessment,
an effort by owner and contractors alike to
make sure that as work begins, everyone
appreciates the importance of the contract
and how its integrated terms and conditions
operate both offensively and defensively.
Depending upon the scope and size of the
job, the owner or contractor will convene a
session of its project personnel, its business
development personnel, and usually coun-
sel to review the executed contract between
the parties. This is not a page turner – it is
intended to be an interactive discussion of
how the contract was derived and risk allo-
cated. Ideally hypotheticals are construct-
ed to show the project personnel how and
why certain terms and conditions are
important and how they operate. The con-
cept came from the contracting community
(contractors are called contractors because
they use and understand contracts), it use
is expanding to all elements of the con-
struction community, including as a best
practice among owners.
Only the naïve contemplate a construc-
tion project devoid of changes and even
claims. How these claims are handled and
resolved is determined by the contract and
its attendant allocation of risk. The purpose
of CA is not to generate claims or defenses,
but to acknowledge the reality of their exis-
tence and to insure their orderly processing
during construction. Scenarios discussed
during CA include the consequences of
incomplete scope, congested job sites,
delivery issues, design changes, frequency
of changes, bad weather, and differing site
conditions.
The final contract is scrutinized with an
emphasis on the important risk clauses.
First among equals is the operation of the
changes clause with a focus on how delays
or disruptions are to be handled and the
impact of force majeure events. Also
reviewed are payment provisions, order of
precedence language, and the changed con-
dition (or differing site condition) clause.
Scheduling obligations are important with
additional focus on warranty and the opera-
tion of the dispute resolution provisions.
Most critical to any CA is a review of
written notice obligations. Modern construc-
tion contracts are replete with such clauses –
“Written notice of a change must be given
with 7 days of discovery of the event giving
rise to the change or be waived.” Each
notice clause is reviewed and a summary of
the requirements provided. Notice is an
important part of contractual risk allocation –
equally important is that all concerned be on
the same page. CA ensures that. The result
– a well managed job.
Case studies are a fundamental compo-
nent of CA. Typical studies reference the
contract and pose realistic hypotheticals. Is
verbal notice acceptable? Is e-mail an allow-
able means of contractual notice? If verbal
notice is given, can a change order written
later affirm what was agreed to orally? If
there is not enough craft labor, is that a
basis for a force majeure claim? A claim for
more time and/or money? If there is an
inconsistency in the specs, who is responsi-
ble for the financial consequences? A criti-
cal run of pipe is not shown on the draw-
ings? Is that always the basis for a claim?
Partial lien waivers are required. Do they
preclude later claims? The number of
issues are virtually infinite, the point is to
encourage meaningful dialogue among the
project team about the contract and how it
will be used to effectively manage risk and
ensure project success.
For commercial assessment training
to succeed, the parties need to maximize
their understanding of how the contract,
properly understood, can benefit everyone.
A premium upon documentation in accor-
dance with the terms and conditions fur-
ther enhances the likelihood of ultimate
success. And if everyone understands the
contact, they are more likely to achieve
one of the most important principles of
successful construction, real time resolu-
tion of disputes. CA is a critical first tool
in project proactive risk management –
investing time at the beginning of a job to
make sure everyone understands the con-
tract will yield disproportionate benefits
during the job. Next is Project Evaluation,
real time evaluation of how well risk is
being managed during the process of con-
struction itself.
BACK ON CAMPUS WITH FRED LYON, CLASS OF 2003,TRICON POWER GROUP –THE LYON FIRM
PROACTIVE RISK MANAGEMENT
“MANAGING ENERGY CONSTRUCTION IN UNCERTAINTIMES”
