2. The focus here is to have a clear understanding of the full extent of the project risks, how these risks are allocated within the contract and how they are managed throughout the contract term. The objective is that all commercial and financial risks are identified, analysed, allocated and managed in accordance with mandated policy and best practice. Risk analysis should be supported by good historical data and risks should be allocated to the party best placed to manage and cost them in a value for money way.
3. Risk allocation within a project can change during the course of the procurement process and it is very important to track these changes throughout the process, and to maintain clear and auditable record of the changes. For Cat A/B projects it is recommended that a Commercial Risk Allocation Matrix (CRAM) be completed to inform the project risk register. This records details of the contractual allocation of commercial risks between MOD and the contractor and provides an audit trail of any changes to the risk allocation profile throughout the procurement process. The CRAM should be maintained post contract award and will be of particular benefit if a major contract change is being considered.
4. A key issue to guard against is re-circulation of risk. This describes a situation where a risk that the MOD has transferred to the contractor is transferred back to the MOD by some other means. In such circumstances the MOD can end up paying the contractor for the management of a risk but finding itself responsible for the consequences of that risk should it materialise. Re-circulation of risk can occur for a number of reasons but commonly arises due to obligations passed back to the MOD in relation to the performance and/or timely provision of Government Furnished Equipment (GFE) or Services (GFS) or as a consequence of poorly articulated Output Based Specifications.
Relevant Government policy/guidance:5
• MOD PFU Guidance Note - MOD Standard Project Agreement v1 for PFI Projects
• MOD PFU Guidance Note - Allocation & Management of Risk in PFI Projects
• JSP 507
• JSP 525
• AOF guidance on commercial risk allocation
• HM Treasury: Standardisation of PFI contracts (SoPC) Version 4
• HM Treasury: The Orange Book, Management of Risk - Principles and Concepts
• HM Treasury: The Green Book, Appraisal and Evaluation in Central Government
• HMT Application note: interest-rate and inflation risks in PFI contracts
• OGC Achieving Excellence Guide 4 - Risk and Value Management
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5 Note: Bullet point text in BOLD indicates mandatory requirements.