PRICING OF WET WEATHER AND ALLOCATION OF ASSOCIATED RISK
The allocation of wet weather risk and the subsequent topic of Value for Money has been a discussion point between the TMR and CCF for some considerable time.
This discussion paper aims to put this topic back on the agenda, by proposing key solutions and recommending the resolution of this matter between TMR and the contracting industry.
This discussion paper builds on already used wet weather compensation clauses used in other jurisdictions. Examples include the RMS-ROC Provisions for Costs for Wet Weather, RMS G2-C2 Contract Clause 43 and 45 RMS G2-C2 General Requirements (Major Contracts).
Understandably, TMR are seeking, as one of their main drivers, Value for Money (VfM) in project delivery. To gain VfM, TMR must accept that one of the main tenets to achieve VfM is the equitable management of risk. In other words, the Organisation that is best able to manage the risk should be the Organisation that carries the risk.
This is extremely important when it comes to setting the risk profile within the General Conditions of Contract. The allocation of risk covers an extensive scope but this paper will deal solely with wet weather risk
Wet weather risk impacts on project duration as well as wet weather / drying out remedial action. It must also be accepted that Contractors have dual responsibilities when fulfilling contracts. Contractors must fulfil their obligations to TMR with respect to their contract as well as fulfil their obligations to their shareholders in ensuring that their organisation is sustainable. In fulfilling these obligations, the Contractors, when subjected to inordinate wet weather conditions, will turn to the finer points of the contract or the Principal’s insurance to ascertain whether alternate revenue streams can be accessed to cover the extra costs of the wet weather outcomes.
This paper argues that this action of seeking out alternate revenue streams to cover costs and risks that Contractors are not able to manage is not giving the best VfM outcome that could be achieved. It is argued that if a more equitable Risk Allocation for Wet Weather costs was invoked then TMR would, in the long term, benefit with far better VfM outcome. The outcome would include lower tender prices, especially in the coastal areas of the state that are subject to unpredictable inclement weather events as well as less insurance claims and hence lower insurance premiums.
To derive a wet weather pricing mechanism which is transparent, allocates risk fairly for both TMR and Contractors and ensures that TMR receive VfM in the long term across its complete portfolio of project delivery?
RECOMMENDATION / CONCLUSION
At present, the TMR General Conditions of Contract allows for an Extension of Time (EOT), without costs, for wet weather. With respect to time, this approach has proven to be very fair and is administered very fairly but it is time to extend this approach to cover costs to equitably share the financial burden of wet weather and the subsequently extensions of time and remedial repair costs.
Our recommended approach would be for TMR to include a separate schedule item into the project schedule with the quantity being the number of wet weather days allocated for the project.
At present, the contractor is required to allow for the cost of risk of wet weather in their rates generally. It is intended that TMR nominate a wet weather period, number of days, in the schedule. The contractor will allocate a day rate and the total cost will extend to the tender price.
This item will be lump sum and represents the allowance expected to be allowed in the rates generally.
Once the approved EOT for wet weather exceeds the amount nominated by TMR the contract will be entitled to compensation at the day rate provide for each additional EOT approved for wet weather.
This achieves three objectives:
1. It draws out of the tendered rates the tenderers allowance for wet weather providing transparency.
2. It ensures that tenderers have equally considered the allowance for wet weather
3. It ensures fairness in rates due to the allowance being assessed in the tendered price
The inclusion of these mechanisms provides containment of all risk associated with wet weather for both TMR and the Contractors and presents a transparent and equitable proposition to both parties. As such, this recommendation aims to provide a fair approach in TMR’s management of wet weather risk. In addition, this approach would negate the requirement to run any form of sensitivity analysis.
This and similar clauses have been used by TMR in the past and by RMS currently.