Contracting Policy & Risk Philosophy

 

Contracting Policy

By “Contracting Policy” we mean a set of guidelines regarding which program design and management elements the Owner anticipates will be performed by its in-house staff, which will be accomplished outside design or management organizations, and the types of contractual arrangements with these parities that are acceptable. Factors that affect an Owner’s contracting policy include availability of in-house expertise, current program schedule, budget and timing of availability of funds, desired level of Owner day-to-day involvement in the management of the program, and funding source requirements or restrictions.

The Owner’s Contracting Policy is the framework within which specifics for a given program are detailed. Who will be responsible for bringing the proposed facility from the conceptual stage to full operation? What is the scope of the proposed facility? When will it be needed? Where will it be located? The process of asking these types of questions and making decisions within the contracting policy framework shapes the Owner’s risk-philosophy.

Risk Philosophy

In pure risk-shifting, the Owner requires the designer or contractor to bear the full consequences of unanticipated events. In risk-shifting an Owner attempts to limit its cost and time exposure to the price and time stated in the contract, but must understand that in doing so, it may be paying a contingency premium built into the price. The contingency is the price paid to avoid future risk of additional costs.

In pure risk-sharing, the Owner is willing to take on the risk of increased costs in the future due to unanticipated events, in exchange for a contract price (today) that is, in theory, lower, since the designer or contractor did not have to include a contingency in the contract price for these unanticipated events.

Many Owners blend these concepts. An Owner with a limited budget and limited construction expertise may choose a higher degree of risk-shifting. This may also be true for an Owner that only occasionally has a construction project. On the other hand, an Owner with an ongoing large capital construction program may experience pressure from the construction community to accept more risk in order to have a larger field of bidders. Government regulations may also influence the Owner, particularly public agencies, toward the risk-sharing end of the spectrum due to competitive bidding and small business preference legislation.