S12 CONS6811 Lara Tookey

Would life not be a better place if….  Things did not go wrong  You knew why things that ‘did not go wrong’ DID – so that you could stop them!!!

Unfortunately….  They DO go wrong  We know they probably will - but not when (or if)  We take a chance  But when we take a chance, we have to assess a risk and manage it so that it is not overwhelming…….

“No construction project is risk free. Risk can be managed, minimised, shared, transferred, or accepted. It cannot be ignored." Risk management - The commercial imperative … Sir Michael Latham 1994

A fundamental maxim of modern project management is: “If you do not know it, you can not measure it; if you can not measure it, you can not control it.” Joe O’Carroll, Risk Manager Parsons Brinckerhoff

What is an Estimate? 1. The act of evaluating or appraising. 2. A tentative evaluation or rough calculation. 3. A statement of the approximate cost of work to be done. 4. A judgement based on one’s impressions  Your opinion

What is an Estimate? 1. The act of evaluating or appraising. 2. A tentative evaluation or rough calculation. 3. A statement of the approximate cost of work to be done. 4. A judgement based on one’s impressions  Your opinion  An estimate is not a precise number but rather “an opinion of cost”.

Risks in Construction Contractor Supplier Project Manager Engineer Architect Client Quantity Survey Inspector` Social Factors Political Factors Economic Factors Environmental Factors

Types of Risk – 10 ‘P’s 1. Premises  where firm located, premises available for use 2. Product  industry sector, product features, fashion trends etc 3. Purchasing  access to supplies, storage, stock control, payment terms 4. People  workers in organisation, skills, employment contracts 5. Procedures  production procedures, record keeping, reporting systems monitoring and review, use of standards, emergency procedures

6. Protection  personal protection for workers / others, vehicle security, insurance cover, information systems 7. Processes  production processes, waste disposal, skills, technology etc 8. Performance  targets set, monitoring, measurement tools, consistency 9. Planning  access to relevant data, management skills, external factors and levels of control, investment options 10. Policy  range of policies supporting strategic plan of firm.

Examples Technical  Incomplete design  Inadequate site investigation  Uncertainty over the source and availability of materials  Appropriateness of specifications Logistical  Availability of resources – particularly … labour Construction  Uncertain productivity of resources  Weather and seasonal implications  Industrial relations pressures KEY Totally outside control Partly within control Totally within control

Examples Financial  Inflation  Delay in payment Political  Insistence on use of local firms KEY Totally outside control Partly within control Totally within control

So, what happens if it is ignored?  Increased costs  Loss or reduction in profit  Damage to brand / reputation; and at worst  Disposal of the business or insolvency

When Construction Goes Wrong How would you explain that all these "structures" passed the quality control and house inspections? Only by the possible fact that controllers and inspectors were drunk too. Or just near-sighted. I really want to believe the latter, but in some countries they are actually neither drunk or blind - but handsomely bribed. See for yourself:

Risk Analysis & Management in Construction  Particularly difficult to apply in construction  Structure of construction industry  Nature of product  Vulnerability to state of economy  Risk analysis involves past, present & future issues.  Dynamic & turbulent times

Probability / Impact Matrix  A probability/impact matrix or chart lists the relative probability of a risk occurring on one side of a matrix or axis on a chart and the relative impact of the risk occurring on the other.

Probability / Impact Matrix  List the risks and then label each one as high, medium, or low in terms of its probability of occurrence and its impact if it did occur.  Can also calculate risk factors:  Numbers that represent the overall risk of specific events based on their probability of occurring and the consequences to the project if they do occur.

Severity of Risk – matrix example Consequence Likelihood 1 Insignificant2 Minor3 Moderate4 Major5 Catastrophic 1 RareLLMHH 2 UnlikelyLLMHE 3 PossibleLMHEE 4 LikelyMHHEE 5 Almost certainHHEEE EExtreme risk - should be brought to the attention of Directors and continuously monitored HHigh risk - requires attention of Managing Director / CEO and General Managers MModerate risk - appropriately monitored by middle management LLow risk - monitored at supervisory level

Recap - Treatment of risk Generic approaches:- 1. Accept the risk. 2. Reduce exposure and/or consequence. 3. Transfer in full or part to another party. 4. Avoid (retain) the risk.

Mini - Workshop Simplified sample risk issues in tendering :- 1. Market conditions. 2. Client’s ability to pay. 3. Scope definition (quality of documentation) 4. Construction timeframes

 Working in your groups consider the risk categories from the previous slide.  Outline how you would carry out the risk assessment on this item for a tender 5 minutes

Workshop review – key issues:-  Identification of associated risk issues  Appropriate analysis & ranking techniques  What “treatment” is appropriate?

 The purpose of the Commerce Act 1986 is to promote competition in markets for the long- term benefit of New Zealand consumers.  It prohibits anti-competitive agreements between businesses such as agreements to fix prices or to carve up markets. It also makes it illegal for companies to abuse a dominant market position.

Collusion by definition is an illegal, secret agreement between two or more parties for a fraudulent or wrongful purpose.

What is illegal?  The type of agreements that are illegal:  two or more businesses colluding (coordinated conduct)  single business or person (unilateral conduct).

Coordinated conduct  includes:  Agreements that substantially lessen competition in a market;  Agreements that exclude or limit dealings with a rival;  Agreements that fix, maintain or control prices (also known as cartels).

Unilateral conduct  includes:  A person or business taking advantage of their dominant position in a market for an anti- competitive purpose  A person or business specifying a minimum price at which its goods or services can be sold by another – this is called resale price maintenance.

Cartles:  Cartels are formed when companies collude with their competitors to:  increase or maintain prices,  divide geographical territories, customers or projects between themselves,  agree to limit production, and/or  engage in bid rigging.  This is usually done in secret.  Bid rigging is a form of cartel conduct, and is prohibited by the Commerce Act 1986.

Price Fixing  Price Fixing is an agreement among competitors to raise, fix, or otherwise maintain the price at which their goods or services are sold.  Examples  Establishing or adhering to price discounts.  Holding prices firm.  Eliminating or reducing discounts.

Examples cont.  Adopting a standard formula for computing prices.  Maintaining a certain price differential between different types, sizes, or quantities of products.  Adhering to a minimum fee or price schedule.  Fixing credit terms.  Not advertising prices

Bid Rigging  Bid rigging, or collusive tendering, occurs when there is an agreement among some or all of the bidders as to which of them should win a bid (with the contract being let through the normal competitive bidding process).  Bid rigging prevents open and effective competition and can lead to increased prices and reductions in choice, innovation and quality.  As a result, procurers (purchasers) are unlikely to achieve best value for money.

 Bid Rigging typically is one of 4 forms.  Bid Suppression.  Complementary Bidding.  Bid Rotation.  Subcontracting.

Bid Suppression  When one or more contractors, who typically would be expected to bid, agree to refrain from bidding or withdraw a previously submitted bid so that another contractors bid will be accepted.

Complementary Bidding  This is a form of bidding, where similar to Bid Suppression there is a predetermined winning contractor, but in this case, the competing contractors submit bids that are too high or where they violate special terms of the contract and are therefore not accepted.

Bid Rotation  All conspirators take turns being the winning bidder. The terms of the rotation may vary depending on agreement.  “Defies the law of chance”

Subcontracting  This occurs when one party gets awarded a contract and then awards subcontracts to the conspiracy members in exchange for not submitting a winning bid.

Market Division  When competitors allocate certain customers, products, or territories amongst themselves.  X, can sell to Y, as long as they don’t sell to Z

Detecting Collusion  Collusion is difficult to detect as it is done in secrecy.  Indicators of collusion:  Suspicious bidding patterns.  Suspicious pricing patterns.  Suspicious statements or behaviors.

Suspicious Bids  The same competitor always wins the contract, especially when there are the same competitors placing bids.  The same competitors submit bids and they seem to take turns winning.  Some bids are unnecessarily higher.  Fewer than normal number of competitive bids.

Suspicious Bids  A company appears to bid substantially higher on some bids than others, with no apparent reason.  Bid prices drop when a new or infrequent bidder submits a bid.  Successful bidder subcontracts work, to competitors that submitted unsuccessful bids.

Suspicious Prices  Identical prices may indicate a price-fixing conspiracy, when:  Prices stay identical for long periods of time.  Prices previously were different.  Price increases do not appear to be relative to increased costs.

Suspicious Prices  When discounts are eliminated, especially when they historically were given.  Vendors charge higher prices to local customers than to distant customers.  This indicates possible local price fixing.

Suspicious Statements/Behaviors  Irregularities in bids indicate that both parties combined efforts on bids.  Similar handwriting, type, or stationary.  Bid documents contain last minute price alterations.  White out or physical alterations.  One person submits bid for two parties.  Submitting a bid when they are incapable of performing the contract.

Suspicious Statements/Behaviors  A company brings multiple bids to an opening and submits a particular bid based on who else is submitting bids.  A bidder, or person, makes a suspicious statement indicating some acknowledgement of a conspiracy.

Suspicious Statements/Behaviors  While these are indicators of possible collusion, they are not proof of collusion. They may choose to do certain things for their own business use, and only does it become illegal if and when an agreement is made between competitors.

What can be done?  Computer system to detect collusion.  Strengthen estimating techniques or continue to find improved methods of cost estimation.  Estimate must remain confidential.  Bidders list must be confidential on project by project basis.

What can be done?  Know and understand the dynamics of the markets in which you make purchases.  Ask questions:  If the bids or prices don’t make sense, ask why this is. You may find a reasonable explanation or your suspicions may be increased.

What can be done?  The most important part of a fraud investigation is documentation. It is vital that you are proactive.  Information should be collected on an on-going basis and should be dynamic in nature.  The day that a contractor is suspected of collusive activity is not the day to begin gathering information.

Risk relating to corruption  Risks for corruption are often linked to lack of transparency.  leads to inconsistent distribution of information to bidders, unclear evaluation criteria.  TEC may not be adequately trained and thus lack necessary professionalism.  This can lead to planning, budgeting and risk management below standard. Furthermore, insufficient accountability and control mechanisms may translate into mismanagement.