Pre-Contract Risk

Management
an ACE guide

Contents
3
4
4
7
8
8

Introduction
Pre-Contract Assessment Process
Stage I Identify
Stage II Evaluate
Stage III Mitigate
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
Process
Should you look to win this contract?
One of the first things that should be considered when
invited to submit a tender is to consider pre-contractual
issues and to decide whether you should even bid for a
particular project. This decision can only be made once
an assessment has been made of all the circumstances
of the case.
The following process is generally used for the process
of risk management, namely:
Identify the risk
Evaluate the risk
Mitigate the risk by:
Declining it
Accepting it (and costing for it)
Reducing it
Transfer the risk
The process should be kept under constant review and
revisited at pre-determined trigger points, e.g.:

Expression of interest
Tender/bid stage
Contract issue stage
Design stage
Construction stage
Commissioning stage
Post project review, i.e. lessons learnt

Stage I Identify
The first step, when invited to bid for a particular
project, is to consider the risks that may be associated
with the project. This can be done by, for instance,
asking the following non-exhaustive questions:
Consider the Contractual Parties
Do you know your client?
Is this a new client? If they are an existing client,
how good is your relationship?
Are they prompt payers?
What is their interest in the project?
Is your client the contractor? If so, are they likely to
have adequate contingencies in the tender or are
they known for lowest price bidding?
What is their financial status? Are they financially
sound?
What financial information is available? Is it
significantly out of date? If so, has the client
provided a satisfactory reason for that?
Is the client contracting through a special purpose
vehicle (SPV) set up for this project alone?
Do they have experience on this type of project?
Are they competent?
Will they understand their statutory duties?
Are there any cultural differences?
Is the nominated client a legal entity? If not, find
out who the correct contracting party is going to
be. Ask the above questions in respect of that
entity.
Is your client the ultimate client? If not, who is the
ultimate client?

04 Pre-Contract Risk Management - An ACE guide

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?

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?

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?

Service Scope and Location

Other Commercial Issues
What are you being asked to do?
Are the rewards worth the risk?

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 subconsultants?
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?

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?
What are your contractual obligations?
Have you seen the proposed agreement?
If the proposed agreement is unreasonable, have
you accounted for the fact that legal advice may
be required in your fees?
Is there a reasonable skill and care duty?
Are you being requested to indemnify and/or hold
the client harmless from particular losses?
Is there a fitness for purpose, liquidated damages,
or other penalty clause?
Is any kind of guarantee required?
Are collateral warranties required?
Are you being asked to concede copyright?
How is the team to be structured JV/
consortium?
Does your PI policy meet the requirements of the
contract?
Will you be novated? If so, who will you be
novated to? For example, does the client generally
use experienced contractors?
Have you seen the proposed novation agreement?
What is your financial liability
What is your financial limit of liability under the
contract?
Does your PI policy cover your financial liability
under the contract?

08 Pre-Contract Risk Management - An ACE guide

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?

In financial terms?
In reputation terms?
In interruption risks?
Liquidated damages?
Fines and penalties?

Likelihood of risk occurrence

What is the probability of risk?
High (for example, 80 100% probable)
Medium (for example 20 80% probable)
Low (for example 0 20% probable)
What is the impact to your business?
What might the impact of the risk be? This will relate to
the scale of the project in relation to your total workload.
High (for example, 80 100% probable)
Medium (for example 20 80% probable)
Low (for example 0 20% probable)
An example pro forma risk register is shown in the
Appendix. This can be used independently to identify
and manage your risks. An example of how the risk
register can be used is also shown in the Appendix. The
risk register should be a live document and reviewed
on a regular basis to track and update identified risks.
High Probability/High Impact risks should be actively
managed or avoided.

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

Risk score is 6 to 9

Risk score is 1 or 2

Green

Red

Low probability or impact

Risk Rating:

Accept appointment

Submit bid

RISK RESPONSE

Amber Risk score is 3 to 5

Risk Owner

Medium probabiity or impact 2

Key: High probability or impact

10

Description of
Risk

RISK ASSESSMENT
Probability
)High/Medium/
Low(

RISK IDENTIFICATION
Impact
)High/Medium/
Low(

DATE

Risk Allocation
(avoidance,
reduction,
transfer)

OPPORTUNITY/BID MANAGER

INITIAL RISK
SCORE

Submit pre-qualification

RISK MONITORING

Yes or no

Yes or no

Yes or no

Yes or no

Scoring would depend on the nature of the contract.

For instance, unlimited assignments on collateral
warranties may be considered higher than a 2 for
some contracts. Furthermore, poor scope definition
may also be considered higher than a 2.

CONTROL
MEASURE
or ACTION
REQUIRED

PROJECT REFERENCE

Target Date

Submit expression of interest

Review Date

PROJECT NAME

Target Score

GATEWAY/OPPORTUNITY STAGE

Risk Status
(open or closed)

Appendix: Blank Pro Forma Risk Register

Risk ID

08 Pre-Contract Risk Management - An ACE guide

Appendix: Example Risk Matrix

RISK PROBABILITY
HIGH

MEDIUM

LOW

Score

RISK

HIGH

Red (9)

Red (6)

Amber (3)

IMPACT

MEDIUM

Red (6)

Amber (4)

Green (2)

LOW

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

10 Pre-Contract Risk Management - An ACE guide

Poor scope
definition in contract
docs regarding the
design of basement
works

DP

HP 2

Risk score is 1 or 2

Green

Risk score is 6 to 9

SP

Low probability or impact

Red

Amber Risk score is 3 to 5

Risk Rating:

Medium probabiity or impact 2

Key: High probability or impact

10

Unlimited PI limit
required by contract
docs

Clause 2.2 requires

the provision of a
collateral warranty
with unlimited
assignments

Risk ID

RISK ASSESSMENT
Probability High/
Medium/Low

RISK IDENTIFICATION

Description of
Risk

Prequalification

SP

OPPORTUNITY/BID MANAGER

Impact High/
Medium/Low

PROCUREMENT STAGE

333-333

INITIAL RISK
SCORE

PROJECT REFERENCE

Target Score

Risk Owner

RISK RESPONSE

Accept appointment

Submit bid

Submit pre-qualification

Submit expression of interest

Transfer

Avoid

Reduction

Risk Allocation
(avoidance,
reduction,
transfer)

XX

Transfer design risk

to ground works
sub consultant.
Revise scope of
appointment. Check
PI cover.

Qualify bid and add

cap to PI liability

Qualify bid and limit

assignments to one

CONTROL
MEASURE
or ACTION
REQUIRED

PROJECT NAME

7/1/2008

7/1/2008

6/1/2008

Target Date

GATEWAY/OPPORTUNITY STAGE

RISK MONITORING

Yes or no

Yes or no

Yes or no

Yes or no

8/1/2009

8/1/2009

6/1/2008

Review Date

Appendix: Example Risk Register

Open

Open

Closed

Risk Status
(open or closed)

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

20