Managing Enhanced Risk in the Mega Project Era (2022)

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4 NCHRP LRD 86 allocating risks within contract documents can prevent signi- cant ramications to the project from the occurrence of a risk, since the party with primary responsibility for managing the risk is identied prior to the commencement of construction. Contract provisions should be carefully draed based on risk assessment and allocation models. Specic procedures could be used to identify “red-ag clauses” that are oen encountered in construction contracts and that may result in unintended con- sequences if the contractual language is not specic and clear. Researchers also recommend “must have” contract clauses such as diering site conditions, in addition to noting the importance of lessons learned from previous construction projects. C. Effect of Project Size and Complexity on Project Risk Profile Although similar risk management strategies may be uti- lized on a wide variety of transportation construction projects, eective risk management strategies can dier signicantly depending on the complexity and size of the project. Results of the projects studied show that rights-of-way (ROW)13 and utility risks were the biggest risk factors in high and medium cost projects, while geotechnical risks appeared to be the biggest risk identied for low-cost range projects. In complex projects, risks have been categorized into three main types: market re- lated (including demand, nancial, and supply risks), comple- tion related (technical, construction, and operational risks), and institutional related (regulatory, social acceptability, and sover- eign risks). ese risks may be allocated to specic parties as a method to control and cope with risks in larger projects.14 Risks could also be categorized pertinent to the phases of the projects. Subsequent sections of this legal digest will be divided based on these phases and their pertinent risks. Each subsection will dis- cuss the impact of the size and complexity of a project on the allocation of various types of project risks. D. Effect of Choice of Project Delivery Method on Project Risk Profile Along with the size and complexity of a project, the project delivery method aects the risk prole and allocation of a transportation project. e necessity of thorough risk assess- ments when choosing project delivery methods is crucial, as is addressing and allocating risks through properly draed con- tracts.15 us, understanding the types of risk factors inher- ent in dierent project delivery methods is crucial to proper contract formation. Research on three major project delivery methods, DBB, DB, and CM/GC, has revealed that the four risk factors with the most inuence on all three delivery methods were (1) unexpected utility encounters, (2) third-party delays, 13 In this digest, the abbreviation ROW is used for both the plural “rights-of-way” and the singular noun/adjective “right-of-way.” 14 Miller & Lessard, supra note 11. 15 Nancy C. Smith & Stephanie W. Kam, Risk Sharing and Transfer Using Alternative Project Delivery Methods and Contracting, TR News 316 (July 2018). managers from various transportation agencies. is digest discusses in detail how various contract provisions are used to allocate risks in transportation mega projects, considering the project delivery method, the size and complexity of the project, and pertinent legislation. It provides excerpts of example con- tract provisions used on these mega projects to allocate risks. Appendix B includes six case summaries regarding projects of varying sizes, locations, and project delivery method use repre- sentative of the 35 projects studied. A. The Risk Management Cycle Understanding how risk management is generally ap- proached in transportation construction projects is a signicant starting point when navigating best practices for risk allocation through contract documents. Managing risks includes the pro- cess of assessing, analyzing, mitigating, and controlling risks to ensure that projects are delivered successfully, on time and within budget. Key elements to the successful management of risks in transportation projects include a well-organized risk management program, a culture that extends to all agency em- ployees, and the proactive implementation of these programs to improve outcomes.10 e performance of early risk assessment is a recurring theme in many articles, reports, and publications; demonstrating how construction projects are more successfully completed when risk factors are managed prior to the com- mencement of the contractor’s work.11 is same theme was found weaving through the interviews that were conducted with project participants for this legal digest. More than 75 percent of the projects included a formal risk management process. e formal processes were conducted by outside consultants, or by utilizing the transportation agency and/or FHWA standard risk management process. B. Contracts as Vehicles for Allocating and Managing Risks A plethora of literature discusses the importance of properly constructed and carefully worded contract clauses to prevent the misallocation of risks in construction projects.12 Properly 10 Matthew R. Hallowell, Keith R. Molenaar & Bernard R. Fortunato, Enterprise Risk Management Strategies for State Departments of Transportation, 29 J. Manag. Eng. 114 (2013). See also, interviews and surveys conducted with transportation agencies across the nation, as part of a study prepared for the American Association of State Highway and Transportation Ocials (AASHTO) Standing Committee on Planning, David Rose, Keith R. Molenaar, Amy Javernick-Will, Matthew Hallowell, Christopher Senesi & Tim McGuire, Successful Implementation of Enterprise Risk Management in State Transportation Agencies, NCHRP 08-36, Task 121, AASHTO, April 2015. 11 Roger Miller & Donald Lessard, Understanding and Managing Risks in Large Engineering Projects, 19 Int’l J. Proj. Mgmt. 437 (2001); Shawn L. Kildare & George P. Blank, Implementing Risk Management on Transit Mega-Projects, AACE International Transactions, R131 (2006); Jungeun Park, Beomsuk Park, Yongwoon Cha & Changtaek Hyun, Risk Factors Assessment Considering Change Degree for Mega- Projects, 218 Procd. Soc. Behav. 50 (2016). 12 Scott R. Fradin, Properly Draed Construction Contracts Can Limit Development Risks, 24 Real Estate Fin. 19 (2007).