Indemnity and Risk Management
Insurance... Protects who from what kind of risk?
Protects companies (contractor and to some extent owner) from DEFINED risks
Revised language from Article 21 - Limitation of Liability (new clause) [Just read]
Contractor's total liability under this contract, including any defense costs on behalf of the owner, shall not exceed US $1,000,000 in the aggregate
Explain the following step of the Risk Management Structure: Identify Risks (cont.)
+ RISK IDENTIFICATION IS ITERATIVE, and RISK REGISTERS/RBS should be updated as new risks are identified + Several common tools/techniques that are used in the risk identification process include: - Documentation review - Info gathering techniques - Checklists - Assumptions analysis - Diagramming techniques
Explain the following step of the Risk Management Structure: Identify Risks.
- Defined as, "AN ORGANIZED, THOROUGH APPROACH TO FINDING REAL RISKS ASSOCIATED WITH THE PROJECT" - It is NOT the invention of highly improbable scenarios in an effort to conceive of every possibility - The key to good risk identification is CLEAR AND IN-DEPTH DEFINITION (Should address occurrences AND how that occurrence will influence the project) - The risk management plan (including other project documents) form the basis for what should be analyzed and how it should be done - One way to organize is using a Risk Breakdown Structure (RBS) - a hierarchical diagram of risk possibilities
How does state legislation address indemnification?
- Many states have laws stating that indemnification is "AGAINST PUBLIC POLICY" and is therefore void and unenforceable - Varies greatly from state to state (Whether it bars broad form, intermediate form or specific limitations) - 37 states have at least some legislation against indemnity clauses in construction contracts
Explain the following step of the Risk Management Structure: Perform Qualitative Analysis. *(The different tools/techniques are important)*
+ Risk qualification SETS THE STAGE FOR SIGNIFICANT RISKS TO BE QUANTITATIVELY EVALUATED + Risk qualification also lets the project team EVALUATE RISKS THAT MAY NOT EASILY LEND THEMSELVES TO QUANTITATIVE EVALUATION + Common qualitative analysis tools/techniques include: - *BASELINING RISKS* - *RATING SCHEMES AND DEFINITIONS* - *ASSUMPTIONS TESTING* - *RISK MODELING* - *USING ANALOGIES* - *RISK CATEGORIZATION* - *RISK URGENCY ASSESSMENT*
Explain the following step of the Risk Management Structure: Perform Quantitative Analysis.
+ The quantitative analysis process looks to ASSIGN HARD METRIC VALUES TO PREVIOUSLY IDENTIFIED RISKS + Quantitative analysis should be used to: - Examine odds of achieving project goals - Justify contingency reserves - Validate cost/schedule/performance targets - Conduct in-depth "what-if" analyses + In the end, quantitative analysis provides the project team with A SENSE OF THE OVERALL RISK IN A PROJECT AND A VALUE (in terms of cost or duration) + Risk registers/RBS and/or "watch lists" often capture these date to serve as an easy information tracking/analysis tool
Explain the following step of the Risk Management Structure: Monitor and Control Risks.
+ This step is the PROCESS OF IMPLEMENTING the risk plan and risk responses for the project + Two common challenges face the risk monitoring and control activities: 1. Putting the plans into actions and making sure that plans are still valid - As long as the risk plan has been integrated into the overall project plan, the first part above generally takes care of itself - However, making sure the plans are still viable is a much harder duty 2. Generating meaningful documentation to support the process - Closely tracking risks as they change and collecting valuable data and/or lessons learned not only benefits the project team but also increases organizational knowledge and capabilities
Explain the following step of the Risk Management Structure: Plan Risk Responses
+ This step looks to determine what actions (if any) will be taken to address the risks that were identified and analyzed earlier + POSSIBLE REASONS TO IDENTIFIED RISKS INCLUDE: - *Avoid*: Removal of the possibility that a risk event will occur (different execution strategy) - *Transfer*: An effort to shift risk to another party (insurance, subs, customers, etc.) - *Mitigate*: The most common response, this method looks to minimize the probability and/or impact of specific risks - *Accept*: Also known as retention, this is the conscience decision to accept the consequences of a risk; Can be passive (no plans are made to address the risk) or active (contingency plans are made should the risk event occur) - *Share*: Although not listed specifically in the book, risk threats can be shared between companies who decide to contractually share certain consequences
How do we manage contractual risk?
- Indemnity clause - Exculpatory clause - Differing site conditions clause - Insurance - Bonds - Project delivery methods - Commercial terms of the contract
What is an indemnity clause? How does it work?
- One of the MOST HIGH-RISK commercial terms and conditions in a construction contract - They transfer RISK from one party to another (through a contractual agreement)
Indemnity Clause... Protects who from what kind of risk? What might that mean for the contractor?
- Protects OWNER against defined risks - Contractor may have to pay for claims from their own pockets (indemnity is generally not insurable)
What are the three forms of Indemnification?
1. Broad Form - Party A holds party B harmless against suits based on the sole negligence of EITHER party or from the joint negligence of A and B 2. Intermediate Form - Party A holds party B harmless against suits based on A's SOLE negligence or from the joint negligence of A and B 3. Limited Form - Party A holds party B harmless against suits based on A's sole negligence
What are the MAJOR BUSINESS RISKS faced by construction companies?
1. DIFFERENT THAN CONTRACTUAL RISKS - Those assumed in order to complete the physical construction of the project (cost, schedule, etc.) 2. Health and safety of its employees 3. Injury or property to 3rd parties as a result of company activities 4. Damage or loss to construction work-in-place but not yet accepted by owner 5. Loss of or damage to company's vehicles or equipment
What issues must we negotiate to get a fairer contract?
1. Indemnify ONLY THE OWNER and his employees, not a long list of other undefined and unknown individuals and associated companies 2. Eliminate being responsible for CLAIMS ATTRIBUTABLE TO ANY DEGREE OF NEGLIGENCE BY THE OWNER 3. Be responsible only for those CLAIMS ATTRIBUTABLE TO THE CONTRACTOR'S NEGLIGENCE 4. Have the indemnity be applicable ONLY TO CLAIMS FOR PERSONAL INJURY, DEATH, AND EXISTING PROPERTY DAMAGE 5. Limit the events that are covered under the indemnity only to those that TAKE PLACE WHILE THE CONTRACTOR IS PERFORMING HIS WORK AND IS PHYSICALLY PRESENT AT THE OWNER'S JOB SITE 6. Place a FIXED, MAXIMUM LIMIT on the financial liability of the contractor
What are the common risks that the owner wants the contractor to assume responsibility of?
1. Personal injury - Someone injured on the job site and the owner may be, to some degree, negligent in causing the injury 2. Death of a person - Someone killed on the job site and the owner may be, to some degree, negligent in causing the death 3. Property damage - Property is damaged on the job site or off the job site related to the project and the owner may be, to some degree, negligent in causing the damage 4. Owner's defense costs - Legal defense costs that the owner would incur to defend itself against any of the above claims
What is the 6-step process of the Risk Management Structure? (They're interrelated and often iterative)
1. Plan Risk Management 2. Identify Risks 3. Perform Qualitative Analysis 4. Perform Quantitative Analysis 5. Plan Risk Response 6. Monitor and Control Risk
A Primer on Risk and Risk Management
1. Risk - Is "the cumulative effect of the probability of uncertain occurrences that may positively (+) or negatively (-) affect project objectives 2. Risk Management - Is a "method of managing that concentrates on identifying and controlling the areas or events that have a potential of causing unwanted change"
Explain the following step of the Risk Management Structure: Perform Quantitative Analysis (cont.) *[Analysis tools/techniques are important]*
Common quantitative analysis tools/techniques include: - *RISK SEVERITY MATRIX* - EXPERT INTERVIEWS - EXPECTED MONETARY VALUE - DECISION TREE ANALYSIS - PERT - OTHER SIMULATIONS
To indemnify means...
Contractor agrees to accept financial responsibility for a loss suffered by the Owner
To hold harmless means...
Contractor agrees to reimburse the Owner for a loss
Article 20 - Indemnity (Just read)
Contractor shall defend (PAY LEGAL COSTS), indemnify (TAKE RESPONSIBILITY FOR), and save owner harmless (PAY OR REIMBURSE OWNER FOR ANY JUDGMENTS AGAINST THE OWNER) from all claims for injuries to, or death of, any and all persons, and for loss or damage to property (BROAD DEFINITIONS OR RISKS THAT CONTRACTOR IS AGREEING TO ACCEPT RESPONSIBILITY FOR) arising under or by reason of this Contract (ANYTHING THAT CAN BE SOMEHOW RELATED TO THE CONTRACTOR'S WORK), except claims resulting from the sole negligence of Owner (PLACED ONLY BECAUSE OF STATE ANTI-INDEMNIFICATION LAWS), his employees, his subs, agents, or reps
Revised language from Article 20 - Indemnity (Just read)
Contractor shall defend, indemnify, and save Owner harmless ONLY TO THE EXTENT A CLAIM IS CAUSED BY THE NEGLIGENCE OF CONTRACTOR AND ONLY for injuries, or death of, any and all persons, and for loss of or damage to EXISTING property OCCURRING ONLY DURING THE ON-SITE PERFORMANCE OF CONTRACTOR'S WORK UNDER THIS CONTRACT AND ONLY WHILE CONTRACTOR IS PHYSICALLY PRESENT ON THE JOB SITE
The ConsensusDOCS format of the indemnity clause is often referred to as a ____? What does it mean?
Knock-for-knock indemnity - Both parties take responsibility for their own employees
Read back over case UDC - Universal Development, L.P. v. CH2M HILL
Ok
Read example of indemnification clause example #2 from slides.
Ok
What do the following have in common? - Indemnity clause - Exculpatory language - Differing site conditions clause - Insurance - Bonds - Project delivery methods - Commercial terms of the contract
RISK
Explain the following step of the Risk Management Structure: Plan Risk Management. What is the outlined purpose of this step?
The purpose of "Plan Risk Management" is to COMPEL PROJECT MANAGERS TO DEVOTE ORGANIZED, PURPOSEFUL THOUGHT TO PROJECT RISK MANAGEMENT and to provide guidance to: - Determine which risks are worth an investment of time and energy - Isolate and optimize risk - Eliminate negative risk and enhance positive risk - Develop alternative courses of action - Establish time and money reserves - Ensure that organizational cultural risk boundaries are not breached
