A key feature and attraction of alliance contracting for Owners is that all Participants share project risks within the constraints of the Risk or Reward Regime. The Owner usually shortlists Proponents as experts in the management of design and construction risks associated with the development and delivery of the project. Moreover, by creating an alliance that will include the Owner, the alliance will generally manage and be exposed to Owners' responsibilities that it may not normally be party to. The Owner should expect the Proponents to collectively share with it the management and consequence of all risks associated with the project and to do otherwise should be the exception rather than the rule.
It is usually the case that not all information is available throughout the TOC process. This not only identifies issues for inclusion in the risk register but may encourage a 'worst-case' analysis of individual risks, e.g., worst case geotechnical conditions for the basis of design where limited information is available. By doing so, the risk is effectively not shared but is taken by the Owner through a conservative TOC. This is inconsistent with the principle of risk sharing and also the definition of TOC, which is the most likely expected cost at completion.
However, there are various ways in which risk and opportunity contingency values can be estimated in TOC development that are consistent with the principle of risk sharing and the definition of the TOC. Two approaches are:
• Monte Carlo software simulations are simply calculating devices used to generate a probabilistic distribution for the combined cost impact of the risks. Typically, the TOC will include an appropriate contingency selected from this distribution. As the TOC is the expected cost at completion, the risk contingency will generally be the difference between the total estimated cost prior to the risk analysis and the P5013 forecast cost from the model. The P50 is recommended because of the collective share and management of all risks associated with the project and taking into consideration the Risk or Reward regime.
It must be noted that probabilistic software and Monte Carlo analysis are only tools for assisting the assessment and valuation of risk contingency values for a project that depend for their usefulness on the quality of the inputs. They are not a substitute for careful thought and insight into the specific project in question using the experience of Proponents and the Owner in delivering projects of a similar type, to determine the appropriate contingency value for inclusion in TOC.
• Qualitative methods to value project risk based on their own industry experience are often used by Proponents. They use their knowledge of the project and the accuracy of the estimate, in particular, their individual and collective experience, rules of thumb, knowledge of the team, the client and the estimator, and intuition.
Proponents may moderate these intuitive assessments by comparing these with the statistical probabilistic model outcomes. For example, a sound 'guesstimate' may produce a forecast expected outturn cost equivalent to the probabilistic model's P30 or P70. The top-down, intuitive assessments inform the Owner and Proponent in determining the decision on the appropriate contingency sum.
Another factor influencing a contingency value in traditional tendering is the attitude of the Proponent as the business owner, who will view a tender and the project's risk profile as an opportunity to make a business decision in setting the margin on the offer. A Proponent with a full order book and a suite of profitable projects in hand will look at the same project differently (and may assess the same risks and opportunities with different contingency values) to a Proponent without work. Likewise, a contractor with a book of mostly cost-reimbursable projects can be expected to take a different view on its portfolio risk than if it has a book of mostly D&C projects where it substantially carries the construction risk alone.
The Owner should seek to understand the Proponent's position with respect to risk and contingency valuation, although it should not be allowed to cloud the objective assessment of total cost. The Owner should also recognise in negotiating the final figure that it is generally in the interests of the Owner to have a lower TOC and the NOPs to have a higher TOC.
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13 There is a 50% confidence level that the outturn cost will be less than the P50 value, given the risks accounted for in the model.