Identifying and assessing risk - a discussion document from IMCAPublications // September 15, 2006
The fact that in recent years the balance and handling of risk in some contracts is far from ideal has become clear to operators and contractors in the oil and gas industry. Moreover, for marine construction projects the technical, geographical and political risks keep getting tougher.
“The handling of risk in construction contracts varies considerably,” explained Hugh Williams, Chief Executive of the International Marine Contractors Association (IMCA). “Much depends on the nature and location of the work, the operator and contractor involved and the prevailing contractual climate. Each of these varies over time, and in addition, there are also outside influences such as banks, governments and the insurance market."
“In the light of this, IMCA’s Contracts Workgroup, following on from last year’s publication of the IMCA Contracting Principles, has published a discussion document ‘Identifying and Assessing Risks in Construction Contracts’ to promote dialogue between the parties and serve the long-term interests of all participants in the oil and gas industry – both on and offshore. This, in turn, will we believe, improve relations, increase efficiency and reduce overall costs.”
The target audience for the new discussion document is wide ranging and includes operators, contractors, sub-contractors, vendors, host governments and national oil companies as well as the financial and insurance markets. It contains discussion on specific risks, grouped under the main risk areas – contractual, performance, financial, political, technical, geographical and operator risks. IMCA is looking forward to feedback from them all.
“Each contract, project and client/contractor relationship is unique,” explained Williams. “Our slim 19-page document does not present a preconceived single solution or recommendation for or against contract styles such as EPIC (engineering, procurement, installation and construction) or ‘lump sum’.
“It comments on some of the issues that may need to be addressed in various contracting situations and focuses on identifying risk; identifying the financial consequences of the risk becoming a reality; helping the contracting parties to achieve their appropriate risk balance; trying to avoid parties accepting risks they don’t understand; and dealing with unknown risks."
“We want to encourage operators and contractors to use the document to identify areas where risk may threaten the integrity of a contract,” he added. “Parties to a contract often do not realise that the party who manages the risk under a contract may not necessarily be the party who carries the financial consequences of the risk becoming a reality. The risks should be allocated to the party best able to assume the risk.”
Copies of the discussion document can be downloaded free of charge from the IMCA website at www.imca-int.com/documents/core/contracts/IMCA-RiskGuideline.pdf