1. Reference to legal advisers playing a key role in developing the risk allocation matrix: The risk allocation matrix must be developed by the financial and commercial members of the team, but legal advisers have an important role to ensure that the contract reflects the intent of the risk allocation matrix, that all risks are being considered and that there are no unintended effects.
2. The basic principle of risk allocation is that both the likelihood of a risk materialising and the management of the consequences should be allocated to the party that is best able to manage them. While this principle is generally accepted in theory, it is not always well understood. The following two examples illustrate its application:
Example: The ground conditions in a tunnelling project represent a considerable risk for the contractor because they cannot be determined fully before tunnelling operations begin. How such a risk is managed when it is encountered can have a significant impact on the costs of the project. The contractor is obviously in the best position to manage such risks and should therefore bear them. Example: The risk that the level of demand for a facility is not forthcoming or declines is the major risk in PPPs. In the case of a prison, the demand for the prison is very much influenced by legislation and therefore by the government's sentencing policy, by the sentencing policy of the courts, by the approach taken by parole boards and by the Department of Corrections' prisoner management policies. Transferring demand risk to the contractor would therefore be an inefficient allocation of risk. Instead, the payment mechanism should be based on some combination of service performance, availability and occupancy rates. |
3. It is frequently assumed that the risk of obtaining resource management consents should be retained by the Crown, especially for large projects, on the grounds that this risk is often influenced by political factors that are better managed by the Crown. However, in the UK the preferred bidder generally takes responsibility for obtaining these consents prior to financial close. The appropriate allocation of this risk should be tested in each instance, in accordance with the basic principle of risk allocation referred to above.