Blog 023 - All Risk Lump Sum. Certainty or Catastrophe

Most developers will let a contract to a Specialist Contractor on an “All Risk Lump Sum” based agreement. Trade Contractors will sign this nine times out of ten and proceed with the works. But what does this really mean and what do Trade Contractors need to understand about it?

Let’s define the two terms:

1. All Risk – Is a very vague term which is usually intended to cover any risk within the contract that hasn’t been expressly excluded.

2. Lump Sum – This refers to a single price offer by the Contractor for the undertaking of the works. This means there is no element of re-measurement or “target cost”.

So an All Risk Lump Sum contract is a contract whereby the developer / Tier 1 is looking to pass all the risk in the contract down to the Specialist Contractor. This differs from a contract such as some forms of the NEC contract which will use the Risk Register to allocate ownership of risks at tender stage and other mechanisms such as target costs which share the risk of over spend but share the opportunity of savings. From a JCT perspective, a simplistic view of a shared risk contract would be a Standard Building Contract with Approximate Quantities.

Why do developers or Tier 1’s seek to employ their Specialist Contractors using All Risk Lump Sum contracts? It provides a very clear line of responsibility for them, they have sold all the risks. For developers, this may be a condition of their funding so as to provide some cost certainty to the funders seeking to see a return on their investment, for Tier 1’s it may be at the request of Board members or Shareholders seeking to minimise the risks to their investments. Ultimately, the aim is to provide a cost certainty and sell the risk down the supply chain.

So what should Trade Contractors be wary of so as to not sign up to suicide contracts with inequitable risk allocation? Here are a few simple tips:

1. Ensure the contract contains basic provisions for how to deal with common contractual matters such as Force Majeure, extensions of time, inflation (this may form part of all risk, but that’s for you to negotiate), provisional sums etc.

2. Ensure you have a robust scope and listed contract documents section in your contract. Then, using the variations clause if something changes, it doesn’t fall under the all risk. The all risk is in relation to the defined scope. If you have a loosely defined scope, this will increase your risk considerably

3. Look for clauses that expressly place the risk on the Specialist Contractor. Some of the major UK housebuilders use contract wording prohibiting extensions of time under any circumstances as their standard wording. This is an extreme level of all risk and I highly recommend against accepting.

4. Consider the specific risks of your Specialist Trade. Are there some risks that you are not prepared to take? Risks which rely too heavily on information provided by the Employer or the works of others for which you are being asked to take the risk of? This is a common issue in groundworks contracts where the contractor is asked to take the risk of ground conditions. This is then up to the Specialist to analyse the risk and include an amount in his tender offer to cover it, win or lose, that is now his risk.

5. Identify the risks you have bought early in the contract and manage them well. My preferred method is a using a Risk Register with time/cost/quality risk assessment built in. The key is to identify the key risks and allocate ownership of the management of each one to a team member. This will increase your chances of correctly managing a risk.

Remember, once you own the risk, you have to manage it properly, because if it occurs, it’s your time and money on the line. If the risk is simply too much to take, you should agree wording in the contract to expressly remove it from the Specialist Contractor or look to utilise a risk allocation table detailing ownership or risks or risks that are shared and to the extent that they are shared (such as 50/50 etc.)

You will never get away from All Risk Lump Sum contracts, but correct risk identification, pricing and management can actually make for quite successful Specialist Contractors. If you need help agreeing risk allocation or producing risk registers, drop me an email and we can start a conversation.