The NEC3 suite of contracts expressly provide for maintaining a Risk Register but Risk Registers are commonly misunderstood and misused. This article explains how to use and maintain a Risk Register as a practical tool in the administration of an NEC3 ECC Option A form of contract.
What is a Risk Register?
A Risk Register is a list of risks that could affect a project and is a key tool in successful project management under NEC3 contracts. The NEC3 EEC contract requires the Project Manager to maintain a Risk Register.
The Risk Register should:
- list the risks that are either identified in the Contract Data or notified by the Project Manager or Contractor as an Early Warning matter
- describe each risk, the required actions to avoid or mitigate the risk, and which party is responsible for carrying out each action.
Importantly, the Risk Register does not allocate contractual responsibility for risks between parties. The fact that a risk is, or is not, identified on the Risk Register does not trigger any contractual consequences. It is purely a practical tool.
Maintaining the risk register
At the outset of the contract period, the parties will populate the Risk Register with the risks identified in the Contract Data. The Risk Register is likely to expand over time because of the Early Warnings regime. Both the Contractor and the Project Manager are required to notify the other as soon as either become aware of matters that could impact the time or cost of completing the project, or the use of the completed works.
The Contractor may also notify the Project Manager of matters that are likely to increase the Contractor's total cost.
Both parties have an incentive to give Early Warnings as soon as possible. The Project Manager is interested in avoiding additional cost and/or delay to the project. Meanwhile, if the Contractor fails to give an Early Warning, it will not be entitled to recover the costs it incurs by failing to do so (which will be "Disallowed Cost").
The NEC3 contract then provides that either the Project Manager or the Contractor may instruct the other to attend a risk reduction meeting. The purpose of the risk reduction meeting is to discuss how to mitigate the problem; it does not seek to apportion responsibility – this is left to the risk allocation within the contract.
At the risk reduction meetings the parties are obliged to:
- consider proposals that will reduce or avoid the impact of the registered risk
- seek solutions that will benefit all affected parties
- decide which party will be responsible for each agreed action
- decide if any risks can be removed from the Risk Register if they have now passed or been successfully avoided.
The Project Manager will revise the Risk Register and issue it to the Contractor after each risk reduction meeting. If the agreed action involves a change to the Works Information, the Project Manager should instruct the change simultaneously.
The recording of a risk in the Risk Register per se does not entitle the Contractor to additional time or money under the contract. This is dealt with separately.
A pre-defined list of risks remains with the Employer. Should any of these risks occur, the Contractor may apply for additional time and money under the Compensation Event mechanism in the contract. All other risks sit with the Contractor.
If, at the risk reduction meeting, the parties identify a risk for which the Contractor is responsible, an instruction from the Project Manager in respect of that risk will not entitle the Contractor to claim a Compensation Event.
A practical example
The difference between the Risk Register and risk allocation is best illustrated using an example.
Imagine that the list of Employer risk events in an NEC ECC contract includes ground conditions. If the Contractor discovers that the ground conditions differ to what was anticipated and this will delay the project, it is obliged to give an Early Warning to the Project Manager. The Contractor and Project Manager will then meet to discuss how best to mitigate the impact of this risk. They may conclude that this requires a re-design of the foundations, which the Contractor must complete. The Project Manager will update the Risk Register to record this activity. However, as ground conditions are generally a risk taken by the Employer under the ECC Option A contract (subject to certain provisos) the Contractor may still claim a Compensation Event in respect of any increased cost and/or time flowing from the ground conditions (and resulting change of design). The Contractor's entitlement is unaffected by the agreed approach to mitigate the delay entered on the Risk Register.
The Risk Register and Early Warning regimes allow risks to be addressed early, giving the parties the best possible chance of minimising any cost and time consequences. They do not shift the burden of those cost and time consequences from one party to another.
Parties should not confuse the two regimes but instead use the Risk Register as an interactive contract administration tool to mitigate risks on the project.
This article was written by Andrew Ross.
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