How to manage risk at bidding stage
Collaborative bidding processes are widely used in the sector, largely out of necessity, and it is common for contractors to be cautious about over-stretching themselves by taking on too much risk responsibility. As well as protecting revenues, they need to know that the work they do will come in on budget, deliver a profit and complete within the agreed timeframe. So, how should risk be managed at the bidding stage, to ensure all parties are satisfied?
When preparing bids, there can be a tendency to underestimate risk. In order to secure work in a competitive market, contractors may face pressure to understate risks or take on more risk responsibility than they would like. This could in turn lead bidding partners to agree to a lower contingency budget.
Effectively allocating risk
Tools such as the Government’s Outsourcing Playbook 2019 can help contractors balance risk and reward during the bidding process. For example, the playbook states that risk should be allocated to the party best placed to manage it, rather than being open to interpretation.
The playbook also describes how effective risk management can be used to minimise the impact of disruption due to insolvency. ‘Living wills’ can be used to minimise the risk of disruption by setting out clearly defined steps to transfer contractual responsibilities to a third party.
Managing assumptions
By encouraging bid partners to consider their risk appetite, contractors can avoid overstretching themselves during the bidding process. Even with minimal programme information, it’s possible to pinpoint a range of cost and time limits that reflect levels of stakeholder confidence.
Bid teams should however bear in mind that it becomes increasingly difficult to foresee risks beyond the near to medium term, which increases the likelihood that things might be missed. To help quantify risks throughout the programme and to ensure the contingency budget is adequate, Quantitative Schedule Risk Analysis should be factored in at bidding stage.
Looking forward
With growing investor focus on Environmental, Social and Corporate Governance (ESG) commitments, and a legislative roadmap in place to reach net zero by 2050, contractors can enhance their attractiveness as bid partners by demonstrating their green credentials. For example, they should highlight use of low-carbon construction methods or steps taken to source green building materials.
Having learnt lessons from the past, contractors are also more willing to prioritise risk management during bidding processes. While this could bring additional costs, it also has the potential to bring more projects in on time and on budget.
First published at New Civil Engineer