Contract Risk Research Articles

Fast and Simple – Cost Efficient Façade Refurbishment

Energy performance improvements in existing buildings are the next step towards energy efficiency according to the EU directives. Especially buildings built in the sixties or the seventies, before the energy crises, provide potential for improvements. The facades of these buildings are often in a need of a refurbishment. One major issue is that these buildings must be refurbished at low cost, not to increase the rents too much. The refurbishment process should be conducted with limited disturbance of the tenants. Existing façade renovation methods can be improved to decrease inefficiency and risk for contractors. The business situation is unclear, due to unclear means for refurbishment. One aspect of this problem is that there is a need for new business models. This paper studies the market and process optimization and proposals for information management aspects considering the need for developed business models in refurbishment. The study is part of a larger project about façade renovations with prefabricated wooden elements. The main contribution in this paper is to propose a new business model with standardized products, logistics and project management, discussing different aspects of efficient business models. There is a need for clear distribution of risks for the business partners and a clarification of potential co-benefits. Basically we propose a contract model with a contractor taking the full responsibility towards the client, including the detailed refurbishment design and project management.

MANAJEMEN RISIKO DALAM PROSES ESTIMASI BIAYA PADA PROYEK KONSTRUKSI GEDUNG BERTINGKAT DI KOTA DENPASAR

Abstract : On the implementation of the construction project, financing is the main consideration due to the number of large and vulnerable to various risks. Cost control is the beginning of the estimates. An inaccurate estimation could have a negative impact on the whole process of construction. Because of estimation is reference in preparing the budget and used as control of the cost of projects, then required to major risk analysis that can be used as a basis in the mitigation. This research was conducted with qualitative descriptive method by interviews and survey. Data was collected by distributing questionnaires to the respondents using purposive sampling method, which simply selecting respondents who were competent and expert about the possible risks. The number of respondents was 25 who represent 8 construction project belonging to the government which is located in Denpasar. The results showed that there were 40 risks identified, from literature identified 16 risks and from brainstorming identified 24 risks. Than from 40 risks there are 34 major risks which was 9 risks classified as unacceptable and 25 risks classified as undesirable. Most dominant risks were the risks of estimator team and project. There were 16 mitigation measures at an unacceptable risk and 41 mitigitation measures at an undesirable risk. Most dominant risks were the risks of contractors and owner.

Optimal Maintenance and Rehabilitation Policies for Performance-Based Road Maintenance Contracts

AbstractPerformance-based road maintenance contracts (PBRMCs) are an effective mechanism to transfer risk and responsibility of road maintenance activities to the private sector. Proper structuring of performance indicators and the extent of penalties and incentives in the contract has a significant effect on the overall cost and level of service (LOS) provided to the public. This research develops a series of mathematical optimization models and a computational tool that allows road agencies and contractors to better structure the following contractual conditions in a performance-based contract (PBC) for road maintenance: (1) types of performance indicators to be considered; (2) their threshold levels; and (3) the appropriate levels of penalties and incentives. The availability of such models and tools will allow road agencies and contractors that are unfamiliar with PBRMCs to make informed decisions on their approach to contractual risk allocation. A case study of a major highway in Egypt is presented t...

An analysis of risk sharing in strategic R&D and new product development projects

While prior research regarding strategic projects recognizes the tension inherent in interfirm relationships, less is understood of the impact of risk sharing in the design of the contracts guiding those relationships. This investigation illuminates important performance elements of projects as they differ in the amount of contractual risk that is shared among firms. Through a multivariate analysis of 240 United States defense department R&D and new product development contracts, we found that defense contracts with partner risk sharing built in involve more change and growth than their concentrated risk counterparts. Our results suggest that projects, when managed through interfirm contracts, are more likely to involve strategic change when risk is shared than when either the buyer or seller assumes full design, technical, and/or financial risk. The results further suggest that projects containing shared buyer and seller risk enhance the prospects of joint gain through the generation of opportunities for learning.

RISK FRAMEWORK FOR ENERGY PERFORMANCE CONTRACTING BUILDING RETROFITS

Energy performance contracting (EPC) has emerged as a useful project financing and delivery tool for building retrofits, particularly among building ownerships which have experienced reduced funding for capital projects. Through EPC, a contractor (called the EPC contractor or the energy service company) guarantees minimum energy savings performance and enables the building owner to finance the project using utility savings over the length of the project (which is typically 12–15 years, or longer). Despite its growing use, there is a dearth of literature regarding a contractor's risks related to the delivery and execution of EPC building retrofits. This is particularly important as the performance guarantee effectively transfers project performance risk from the owner to the EPC contractor. This research proposes a project factors-based risk framework for EPC building retrofits, initially developed through a comprehensive review of relevant literature and project documents and refined through the elicited expertise of 19 highly experienced EPC contracting professionals. A Delphi technique-based expertise elicitation strategy was used to confirm the findings of the a priori (literature-based) framework and provide additional analysis related to risk causes and control measures as well as relative risk importance. This information was used to construct a refined risk framework which provides insight into the lengthy project performance period during the earliest phases of the project's life cycle. This has the advantage of providing rapid screening of the project factors that can potentially lead to the greatest project performance risks.

Research on Power Grid Engineering Risks Assessment Based on AHP under EPC Mode

This paper analyses and summarizes papers about engineering projects in the domestic and foreign EPC mode, and researches the risk management of power grid project based on AHP under EPC mode. Firstly, the paper describes the application and research of EPC mode in China's electric power engineering, and analyses the existing risk management under EPC mode. Secondly, this paper expounds the basic theory of risk management, and puts forward the principle and standard of risk assessment, and defines the basic process and method of risk management. Thirdly, it introduces the analytic hierarchy process in this paper. At last, according to the process and characteristics of power grid construction in EPC mode and the use of risk identification and assessment theory, the paper empirically tests the application of risk management under EPC mode in Leshan substation engineering through the AHP. In the international general contracting market, EPC general contracting model is favored for its ability to transfer engineering construction risk, save investment and give full play to the leading role of design. It is gradually applied to large scale projects in various industries. The implementation of EPC in power grid project increases the controllable initiative of the general contractor, achieves the design, procurement, construction of internal coordination, mitigates the contradiction between the parties, and reduces the cost of coordination of the EPC general contractor, which is conducive to the overall progress of the general contractor's risk management. Therefore, EPC will become the mainstream mode of power grid project contracting. However, at present, the research on risk evaluation of power network based on EPC mode is less. Because of the successful application of EPC mode in all kinds of projects in China, experts and scholars realized that it will be used in the trend of power grid project, and strengthening the research on risk assessment of power grid project with EPC mode will give a technological favor to risk analysis. Some scholars pointed out that EPC can well solve some problems arise from China's power shortage and the limitation of power investment funds, elaborated problems should be noticed with the use of EPC model in wind farm projects from the owner's point of view, and on the basis built a set of risk assessment models. This paper stands at the owner's point of view, and the results will be very different from the perspective of the general contractor. There were also scholars who used evaluation method combined entropy method and sequencing method to analyze the risk factors that the domestic associated total contractors based on EPC mode may face, but the method cannot be completely copied in the power grid project. Some scholars have put forward the measures to reduce the risks of the general contractor based on EPC mode's connotation and advantages, and summarized the risks of the project. But the proposed solution is relatively simple and there is no scientific risk evaluation method as a support. On this basis, this paper adopts the AHP method, analyses and evaluates the risk of power grid project based on EPC mode, and provides methods and ideas on how to evaluate the risk of EPC project.

A case study of machinery maintenance protocols and procedures within the UK utilities sector

Failure to conduct periodic fixed-time-to (or scheduled) maintenance on off-highway plant and equipment represents a significant health and safety hazard and major litigation risk for utility contractors completing service excavation and reinstatement works on public highways. Mini-excavators are a ubiquitous mobile plant item used for such tasks and have recently been responsible for several major injuries and fatalities involving workers and members of the public in the United Kingdom (UK). The research utilises the method of triangulation to examine the maintenance practices of utility contractors in the UK. Findings from the research reveal that a combination of prevailing market forces and internal ‘company’ pressures have inadvertently removed knowledgeable and trained operators, site foremen and managerial supervisors from hands-on maintenance inspections. Rather, ‘virtual’ maintenance protocols and procedures are adopted by head office but rarely fully implemented on-site. The research concludes with pragmatic recommendations and direction for future research.

Stabilization Clauses in Investment Contracts in Developing Countries

Stabilization clause is a contractual clause commonly found in investment contracts such as concession agreements wherein the host country grants a concession i.e. a right to develop certain project to the investor. Stabilization clause is a contractual risk management tool that aims to maintain legal and economic equilibrium of the investment project by preventing unilateral actions of the host country in exercising its sovereign functions. However, when the host country is a developing one then stabilization clauses may adversely affect the development of human rights, labour and environmental laws. This paper argues that removal of stabilization clause is not an appropriate solution for a developing country seeking economic development through foreign investment. Instead, during negotiations host developing countries should narrow the scope and restrict the duration of stabilization clauses.

Open Price for Iran: The Bases for Reform

The rules of sale contract in many countries allow parties to conclude a contract without specifying the price at the time of formation. Such contracts are called open price sale (sale of goods) contracts and are of the needs of modern trade methods. As a result, parties enjoy the freedom to conclude their contract without contractual risks. The problem, however, is that under the Iranian rules on sale contracts, these possibilities do not exist. Such treatment by Iranian legislators on the issue of price in a sale contract has caused problems in national and transactional level. Adopting a doctrinal research method, the first aim of this study is to perform a review on the concept of open price term and the current Iranian law on this concept. The next objective is to explain the justifications for acceptance of open price term with regard to global evolutions, legal theories and Islamic theories and principles. DOI: 10.5901/mjss.2015.v6n4s3p166

Regulação do Direito ao Esquecimento no Ciberespaço: Heterogeneidade de Lealdades no Espaço Público de Postulação de Interesses Legítimos

Propósito – Este artigo tem por finalidade ampliar a compreensão da diversificação das responsabilidades públicas presente na intenção dos legisladores de regular o direito à privacidade e ao esquecimento no Projeto de Lei 7881/2014 e PLS 181/2014.
 Metodologia/abordagem/design – O texto adota raciocínio dedutivo, metodologia descritiva combinada com análise de discurso e referencial teórico na Teoria Geral do Estado para explicar o percurso da intervenção que deságua no Estado Regulador.
 Resultados – O estudo identifica a inspiração internacional e econômica das proposições legislativas que visam atender exigências da comunicação tecnológica em um novo mercado de apropriação de dados e informações pelas corporações.
 Implicações práticas – O artigo fortalece a tese da diversificação das responsabilidades públicas e aponta dificuldades para a efetividade da regulação proposta em face da complexidade técnica e da assimetria entre usuários e provedores de pesquisa relativamente ao acesso e uso dos conteúdos armazenados no mundo virtual.
 Originalidade/relevância do texto – O artigo aponta riscos contratuais do intenso fluxo de trocas na internet e alerta para a ausência de um Estado transnacional que faça a proteção global do direito à privacidade e ao esquecimento, frente ao poder das grandes corporações.

Impacts of uncertain project duration and asymmetric risk sensitivity information in project management

AbstractThis paper investigates the impacts of uncertain project duration and asymmetric risk sensitivity information on the structure of incentive contract and profits in project management where a risk‐neutral project manager (she) engages a risk‐averse contractor (he) to complete a project. The project manager offers a duration‐based incentive contract to the contractor to ensure that he invests his effort to shorten the project duration and reports his risk sensitivity information truthfully. Within the framework of principal‐agent theory, we first develop a duration‐based incentive contract model, and then derive the optimal contract mechanism by solving its equivalent optimal control problem with Pontryagin maximum principle. We show that if the contractor is highly risk averse and the project duration is highly volatile, the project manager should lower the penalty term to motivate the contractor to make duration‐reduction efforts. Moreover, comparing with the symmetric information scenario, we find that the project manager distorts the penalty term for all contractor's risk types (but the lowest) downward. Our results show that the project manager is more willing to acquire the contractor's risk sensitivity information under the uncertain project duration. The results also suggest that from the project manager's perspective, it is beneficial to have better information about the contractor's risk sensitivity by using a numerical analysis.

Managing risk and contractual liability. Part 1: Design defects

In the first of a new series from insurance broker Griffiths & Armour examining contractual risks and liability claims, we look at design defects and ways to avoid them.

Unfair Contract Terms Act 1977: does it provide a good model in regulating risk allocation provisions in oilfield contracts in Malaysia?

The unequal bargaining power of the parties in the oil and gas industry has lead to the imbalanced contractual risk allocation in oilfield contracts in Malaysia. In this regard, there is a prospect that the operators pass an unfair share of the risks on to the contractors. However, the contractors might still enter into such imbalanced agreement to secure a job and thereby assume these risks. In this paper, it is argued that a statutory controlling mechanism, such as Unfair Contract Terms Act 1977 (UCTA) in the UK, should be adopted to protect the liability of the contractor in relation to the risk allocation provisions of oilfield contracts in Malaysia. This paper seeks to analyse the deficiencies of the risk allocation provisions of oilfield contracts in Malaysia and to consider whether the principle of reasonableness test as provided in UCTA could provide a potential solution. It will employ a combination of case study and analysis.

Contractual risks in the New Zealand construction industry: Analysis and mitigatioin measures

While tendering for jobs, a contractor is expected to analyse the various risks in each prospective project and price them appropriately. Contingencies are included in the tender price to cater for the various risks based on their impacts on the project targets and profit margin. Currently in New Zealand (NZ), there is little or no information on the various contractual risks and their mitigation measures. This has led to contractors over compensating or under compensating for risks with costly consequences. This study aimed to establish priority contractual risks in the NZ construction industry, and their mitigation measures. The research was based on a questionnaire survey of consultants and contractors. Descriptive statistics and multi-attribute techniques were used in the data analysis. Results showed 21 risk factors which were segregated into 6 broad categories in diminishing levels of significance as follows: Site conditions, main contractor, pricing, subcontractor, external and client-related risks. Putting tags and conditions to risky price items in the tender bids, and transferring the risks onto other parties were analysed as the 2 most effective out of the 5 key risk mitigation measures identified. Being cautious of the priority risks and application of the identified effective risk mitigation measures could guide contractors and the project team to more appr

The Analysis of Contractor’s Risk Clause Based on the FIDIC Construction Contract

Contractors for the construction of the risk in the contract clause clear analysis is an important content of construction project risk management. Based on the 1999 edition of FIDIC contract conditions for construction of the demonstration text as the research object, according to the risk and responsibility on the contractor risk clause matching principle clear classification. To provide the contractor some experience for reference which the contractor could better control of engineering project contract risk.

Optimal sharing arrangement for multiple project outcomes

Purpose– The purpose of this paper is to address a shortfall in the literature dealing with optimal sharing arrangements. In construction projects, where the owner is concerned about multiple project outcomes (cost, time, quality, […]), there exist no guidelines in the literature on what a sharing arrangement should be between the owner and the contractor. This paper gives that arrangement, under defined risk assumptions on the contractor (risk averse ranging to risk neutral) and the owner (risk neutral). The sharing aligns the contractor's interests with those of the owner.Design/methodology/approach– The results are based on solving a constrained maximisation problem involving the expected utilities of both the owner and contractor. Construction practitioners were interviewed in a designed experiment to validate the results.Findings– It is demonstrated that, at the optimum, the proportions of outcomes sharing to the contractor should be higher for outcomes with lower effort cost and a lower level of uncertainty, and by increasing the correlation between outcomes, the fixed component of the contractor’s fee should increase and the proportions to the contractor should decrease.Research limitations/implications– The theoretical results assume that the contractor is risk-averse ranging to risk-neutral, and that the owner is risk-neutral. The theory is supported through conducting an empirical study based on interviewing a sample of practitioners working for medium-sized contractors, and hence the support is limited to similar situations, until further data are assembled.Practical implications– By providing a broader understanding of sharing arrangements within contracts, a contribution is made to the current practice of contracts management. The results may be used in the design of contracts, or as benchmarks, by which contracts designed differently, may be compared.Originality/value– The results address a shortfall in the literature and are an original solution to establishing an optimal multiple-outcome sharing arrangement.

The neural correlates of contractual risk and penalty framing

Standard economic theory treats contractual risk the same as risk experienced in a lottery, but the transfer of risk from principal to agent may change the perception of risk. Previous experimental studies have shown that positive and negative framing affects both gambles and incentive contracts. An agent’s perception of bonus and penalty framing in a contract can determine the extent to which lottery risk and contractual risk are similar. We designed an experiment that tested the effect of bonus and penalty framed contracts on behavior under an implicit chance of failure. Moreover, we used functional magnetic resonance imaging (fMRI) to observe brain activity while participants viewed the contracts and purchased precautionary measures. We found that the dorsal striatum was more active during a penalty frame than a bonus frame. The study suggests that risk experienced by agents in an incentive contract is not comparable to risk experienced as a lottery.

Developing a fuzzy risk assessment model for guaranteed maximum price and target cost contracts in South Australia

Purpose– This paper aims to develop a fuzzy risk assessment model for construction projects procured with target cost contracts and guaranteed maximum price contracts (TCC/GMP) using the fuzzy synthetic evaluation method, based on an empirical questionnaire survey with relevant industrial practitioners in South Australia.Design/methodology/approach– A total of 34 major risk factors inherent with TCC/GMP contracts were identified through an extensive literature review and a series of structured interviews. A questionnaire survey was then launched to solicit the opinions of industrial practitioners on risk assessment of such risk factors.Findings– The most important 14 key risk factors after the computation of normalised values were selected for undertaking fuzzy evaluation analysis. Five key risk groups (KRGs) were then generated in descending order of importance as: physical risks, lack of experience of contracting parties throughout TCC/GMP procurement process, design risks, contractual risks and delayed payment on contracts. These survey findings also revealed that physical risks may be the major hurdle to the success of TCC/GMP projects in South Australia.Practical implications– Although the fuzzy risk assessment model was developed for those new-build construction projects procured by TCC/GMP contracts in this paper, the same research methodology may be applied to other contracts within the wide spectrum of facilities management or building maintenance services under the target cost-based model. Therefore, the contribution from this paper could be extended to the discipline of facilities management as well.Originality/value– An overall risk index associated with TCC/GMP construction projects and the risk indices of individual KRGs can be generated from the model for reference. An objective and a holistic assessment can be achieved. The model has provided a solid platform to measure, evaluate and reduce the risk levels of TCC/GMP projects based on objective evidence instead of subjective judgements. The research methodology could be replicated in other countries or regions to produce similar models for international comparisons, and the assessment of risk levels for different types of TCC/GMP projects (including new-build or maintenance) worldwide.

International Taxation of Risk

The allocation of risk and of the income from risky investment and activities belongs to the central topics of international tax policy today. This fact is highlighted by the current BEPS initiative of G20 and OECD which casts doubt on the recognition of contractual risk allocation within multinational groups and its impact on profit allocation between separate entities within these groups. It is largely felt that “risk shifting” provides the basis for “profit shifting” by multinationals to the detriment of states and domestic competitors.This article tries to address the topic in a generalized fashion. Starting from the findings of economic research with respect to the interaction of risk and taxes in a domestic setting, it draws conclusions for the international situation. It analyses the fiscal interests of source states and residence states and points out that – while risk shifting is essentially tax-neutral – there are three major areas of concern which have to be discussed: asymmetrical risk allocation (i.e. lack of balance between upside and downside potential), taxation of risk premiums and the tax treatment of “hidden intangibles”, i.e. the distinction between risky income and rents. Furthermore the article supports the relevance of ownership and funding for the allocation of risk and income and warns against overstating the notion of “control” and “real activities” when it comes to the recognition of risk. Finally, it should not be overlooked that states benefit from the lack of full loss-compensation in their national tax systems which allows them to tax volatile profits while not giving full credit for volatile losses.

Joining supply and demand conditions of IT enabled change: toward an economic theory of inter-firm modularisation

This paper examines emergent information systems and technologies and explains under what supply and demand conditions inter-firm modularisation of information-based products and services and subsequent vertical de- integration of organisations is more likely. Research in organisational economics identifies transactional attributes such as coordination costs, asset specificity, and the economic non-separability problem to help explain and predict vertical de-integration. We extend this perspective by considering the modularisation of information-based products and services that is noticeable to the customer to develop a framework that joins the four cornerstones of (a) transaction-related efforts; (b) commitment-related contractual risks; (c) measurement-related contractual risks; and (d) modularisation-related impacts on value.