WK 4_TONY_RISK TRANSFER

We encounter risk in our everyday life. To sit on a plastic chair for example is a risk; it could break under your weight. Risk is an uncertain event that has a probability of occurance. According to Alan J. Chilcott 2010, Risk refers to those dangerous activities or factors that, if they occur, will increase the probability that the project’s goals of time, cost and performance will not be met [1]. This definition tends to see risk as having only negative impacts on project but risk can also have positive impact. Where the impact of a risk is positive it is an opportunity. To move forward with any project you need to manage the associated risks. Risks do not stop a project; they only help you take informed decisions on the project. In managing risk you can either, avoid, accept, mitigate or transfer the risk. To transfer risk is to move it to another party to handle. It is further defined as to contractually outsource the work or buy insurance to transfer the risk to a third party [2]. Risk should be transferred only to a party that can better handle it.
There is the problem of project owners retaining risk that are better handled by others. On a particular project a client paid tens of millions of dollars to a contractor as standby time claim as a result of security challenges. This huge cost could have been reduced if the contractor had managed this risk. I say this because the contractor would have done everything within its power to reduce the standby time since he has a fixed allowance in his contract to cater for this risk. Furthermore militancy which was responsible for this security risk is targeted at the Asset Owner and not the contractor. The contractor therefore would have a better deal with the militants.
Some reasons why project owners retain risk they ought to transfer are;
• False impression created by Project Owners in-house staff of their ability to manage all risks
• No good basis of estimating the impact by contractors
• High cost of transferring the risk.
Some alternatives to handling a security risk are:
1. To share this risk with the contractor with an agreed cost assigned to the risk, in case it occurs. If it does not occur the contractor retains the allowed sum and if it occurs and beyond the allowed cost, the contractor bears the extra cost. This will motivate the contractor to work towards the prevention of the occurrence of this risk and also minimise its impact if it occurs.
2. Transfer the risk 100% to the contractor and put in a line item in the commercial bid for this risk so it can be compared with other bidders to ensure it is reasonable. This should be deducted if the risk did not occur; where it exceeds the quoted sum the contractors bears the extra cost.
Both alternatives are good but alternative 1 with incentive is better as it serves as motivation to the contractor.
References
1. Chilcott, A.,Risk Management-A developing Field of Study and Application. Cost Engineering Vol. 52/No. 9 September 2010
2. Tate, K., and Stackpole, C., Pg 88 Managing Project Risk. The Advanced Project Management Memory Jogger