6.6.4 Risk management

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Risk management is an ongoing process commencing at the stage of drafting and submitting the Project Fiche for funding (see Chapter 1 § "Risk Identification & Assessment"), continues through the tendering procedure and the Project planning and implementation phase (see Chapter 7, §7.4.7 "Development of Risk Management Plan" and §7.5.7 "Risk Management") and finishes upon the completion of the Project with the contract closure.

The concept of Contract Management is indissolubly linked with risk management. The risks that may arise during the execution and management phase of the contract may be due either to inability of the Contractor to fulfill his contractual obligations (e.g., non satisfactory performance, key members of his staff are concurrently engaged in other contracts, his business interest is turned towards another direction or his financial status is deteriorating following the award of the contract) or to inability of the Contracting Authority to effectively manage the contract (e.g., lack or insufficient specialised staff, delays in the payments of the Contractor, lack of experience in the management of similar contracts), or factors beyond the control of the two parties (e.g., conditions of force majeure, significant changes in the legislation or at the political level).

Depending on the type of contract, the distribution of risks between Contracting Authority and Contractor differs accordingly. For example in cases of work contracts implemented through a Public Private Partnership (PPP), the Contractor (private operator) usually assumes the risks associated with the construction, financing, operation, management and ongoing maintenance of the project, while the risks left for the State are, for example, the changes in government policy and in the legislation.

However, even in the case of risks that have been "transferred" to the Contractor, the Project Manager (or the Engineer in the case of public works) is required to monitor and ensure that the Contractor has established and enforces procedures aiming to reduce the likelihood of risk appearance or to limit the impacts in case that these risks arise. Also, the Project Manager (or the Engineer) should collaborate with the Contractor throughout the term of the contract to identify any new risks and define the proper actions to handle them, observing the agreed Risk Management Plan (see Chapter 7, §7.4.7 "Development of Risk Management Plan" and §7.5.7 "Risk Management"). Although it is desirable to have a relationship based on mutual trust, honesty and communication, when the Contracting Authority begins to intervene to a great extent with the internal procedures of the Contractor, it is possible that the Contracting Authority re-assumes the risk that it had "transferred" to the Contractor. The possibility of re-assuming the risk, is directly associated with the capacity of the Contracting Authority, and more specifically the Project Manager (or the Engineer), to realise what the Contractor is capable of handling and what he is not, in order to be able to reach a proper balance between active involvement ("hands-on") and neutral position ("hands-off") in the risk management of the contract.

© 2007 Republic of Cyprus, Treasury of the Republic, Public Procurement Directorate
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