Nick Woodrow | 26 Mar 2015

The risk of confusing risk registers

The modern project manager may not spend his time “managing” projects in the old sense of organising labour, plant and materials to build something.  The role is often focused on managing risk and those risks have several definitions and can appear in several locations on a large programme of works causing consternation, confusion and creating a real risk that appropriate mitigation measures aren’t taken.

The Association for Project Management (APM) defines risk as – “an uncertain event or set of circumstances that, should it occur, will have an effect on achievement of one or more objectives”, and the risk register as “a document listing identified risk events and their corresponding planned responses”.

In the NEC3 ECC contract risk is not a defined term but the Risk Register is – “a register of the risks which are listed in the Contract Data and the risks which the Project Manager or the Contractor has notified as an early warning matter.  It includes a description of the risk and a description of the actions which are to be taken to avoid or reduce the risk.”

Furthermore clause 16.1 tells us the reasons for notifying early warning matters relate to price, cost, time and quality and there is obviously some analogy to the APM definition of risk relating to achievement of objectives.

So where does the confusion occur?

Most portfolios, programmes and projects have risk registers outside the NEC3 contract definition and although they may not be mutually exclusive they will very rarely be identical.  Often they are priced and have estimate schedule impacts included which is not transferable to the NEC3 Risk Register.  Pricing this ‘project’ risk register is prudent, perhaps essential, as doing so informs important budgetary considerations including provision of sensible contingencies for risks allocated to the Employer. 

Remember, the project risk register will usually comprise items that are external to the contract Risk Register.  This is particularly true for things like provisional sums that are not a concept under NEC3.

The NEC3 Risk Register will be a subset or parallel register to the higher level documents and a regular review process should be implemented to translate changes from one to another.

There are common risks in programme level risk registers that in the process of procuring works can be quantified and potentially “bought and sold” through a negotiation between the Employer and the Contractor – 

  • Wet weather risks – many clients include z-clause amendments deleting the compensation event sub-clause relating to wet weather – therefore a proportion of the overall wet weather risk is now better defined and transferred to the Contractor.
  • Ground conditions – as above this is often deleted or amended by z-clause allowing the Employer to take action limiting their overall risk exposure.
  • 3rd party performance and management of stakeholder engagement – another popular transfer of risk from the Employer to the Contractor through the use of z-clauses.
  • Provisional sums for items that are likely or possible to be included within the Works Information at a later date, post contract.

As you can see from the above many risks that populate a high level risk register may be mitigated, or re-allocated as appropriate, through the procurement strategy and contract drafting leading to a transfer of risk.  In this instance the risk descriptions may be similar in the different registers but the project register may also include budgetary provisions that are not considered within the NEC3 Total of the Prices.

It’s very important to note that under NEC3 only ‘additional Employer’s risks’ stated in Contract Data part one or z clause amendments to the contract can change the contractual risk allocation between parties.  Matters included in the Risk Register from Contract Data parts one and two do not change this allocation and should only be written in relation to the provisions of clause 16.1 – think of them as early-early warnings pre contract..

Should early warning notifications be priced?

Following on from the potential confusion surrounding different risk registers there is a common misconception around pricing early warnings, especially as most non NEC3 risk registers a project manager will see in their day to day work are priced with estimate schedule impacts too.

The general consensus from NEC3 practitioners is that early warning notifications should not be priced.  

Early warnings are there as a prompt for positive, collaborative, project management interventions, with all parties, identifying ways to avoid or reduce the potential impact of that risk.  Bringing estimate cost and time implications into the equation at notification may cloud judgements and stifle open dialogue.

It may also be unwise to add an ‘owner’ column in an NEC3 Risk Register.  The Risk Register is a management tool, not a contract document so adding an ownership column would in effect pre-empt the matter as a Contractor’s risk, Employer’s risk and/or compensation event.  Much better to associate early warnings with subsequent notifications and events once they’ve happen.  Agreed risk reduction solutions and actions are however recorded.  Often these actions (e.g. trial holes, surveys, investigations etc.) will in part draw clarity as to which Party the risk sits with.

Actions taken as a result of an early warning event may be compensation events and therefore their impacts will be assessed under clause 60.  Similarly potential actions can be advised through clause 61.2, allowing quotes to be instructed for proposed instructions.

Adding cost and time estimates to early warning notifications is premature, could be interpreted as divisive and most significantly will have very little positive impact on the risk management process.  The practice of pricing early warnings erodes the true benefits of clause 16 by masking the opportunity for mitigation with the perception that (in the case of the Contractor) they are just preparing the way for a compensation event.

This process also leads to strange behaviours e.g. the practice of ‘accepting’ or ‘rejecting’ early warning notifications.  This has absolutely no contractual basis and serves to confuse rather than contribute to the proactive management of risk.

The practice of ‘pricing’ early warning notifications can also lead to a dangerous and incorrect mentality that unless the risk has the prospect of becoming a compensation event, it’s not worth notifying.

In summary - 

  • Early warnings notified, and risks subsequently entered into the Risk Register, may not automatically find their way into the higher level risk registers and vice versa however a review process should be in place to ensure, where appropriate, there is migration of risks between the different registers.
  • Risk Register entries from Contract Data parts one and two do not change the fundamental risk allocation in the contract and should be drafted in relation to clause 16.1.
  • Don’t price early warnings, it’s not appropriate, may hamper positive dialogue and may influence resulting behaviours and actions!

You may benefit from a collaborative management tool - CEMAR boasts a fully compliant, flexible, shared Risk Register – you can see how it works here..

For those project managers that may want to export the risks from the Risk Register into other documents then this is simple and quick to achieve through selecting the appropriate format and exporting from CEMAR..

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