Risk transfer: a hard lesson to learn

If recent headlines are to be believed, as many as one-in-five PFI projects are proving unprofitable. These statistics, which have been gleaned from a KPMG and Business Services Association survey, may come as no surprise to the construction industry, which has rightly or wrongly earned a reputation as adversarial, litigious and downright difficult.

In industry terms, if a bad bargain is made, then someone, somewhere, will inevitably suffer the consequences. The question is, who?

PFI has had its fair share of controversy over recent years, not least surrounding the use of private money for the provision of public services. With 900 PFI projects, collectively worth £40bn already signed and sealed, the sums and legacy at stake are significant and there is a fine line to tread between protecting the public purse and protecting business's bottom line.

True, PFI projects are entered into in a spirit of partnership and as a sustained arrangement. They are not about quick wins, but rather about long-term gain, both for the public purse and for private business. But should this detract from a clear strategy of risk? The answer is categorically no.

The construction industry is painfully aware of the effect of a bad bargain, and the legal consequences that can result therein. As such, it is crucial that the identification and management of risk needs to be a continuous iterative process that starts with project conception and is completed at project close. The process for identifying such risk is arguably straightforward, the tricky bit is how one manages it.

Sadly, there is no magic wand with which to effectively dissipate risk: simply the ability to transfer, mitigate or avoid it. Risk transfer for a typical construction project can be upstream (to the client) or downstream through the contractor's supply chain. The important point to note is that the risk has not disappeared, it has merely been passed to the organisation best placed to mitigate its potential effect - and this is where the key to successful risk management lies.

Whether it's a one-off project or a 30-year PFI scheme, all parties have a major duty to enter into a contract with their eyes open. Why? Because the ability to mitigate risk is determined by an organisation's willingness to embrace robust contract and commercial management, and I believe that the means by which that contract and commercial management function is applied is a clear indicator of how successful that organisation is.

But particularly in long-term agreements such as PFI, where delivery and resource is critical, good contract and commercial management must not only apply to the direct project team, but also to the procurement of subcontractors.

Over the past 10 years, significant progress has been made in this regard, with industry now applying a more holistic approach to subcontractor procurement. Best practice within this arena begins with the identification of what is required of a subcontractor under the main contract, and continues with a comparative analysis of tender quotes and the identification of risks unpriced by the subcontractor.

The necessity for an ongoing state of contract and risk management, of which all of the project team is a part, is clear. Whatever your view of PFI, it is this same process that will ensure a balance between the needs of the private and public sectors and a positive outcome for all. An awareness of the factors outside a simple remit of 'cost' will ultimately safeguard the project purse.

In the words of John Ruskin: "It's unwise to pay too much, but it's worse to pay too little If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better."

David Blake, chairman, Blake Newport