June 13, 2022
Following the lockdowns, work stoppages, and economic uncertainty of the COVID-19 pandemic, Australia is driving its economic recovery through infrastructure. Having set a course toward record levels of investment over the next decade, it is expected that $300 billion will have been poured into projects across the sector. While the overall spend is increasing, so too are the size of the projects. Over the next ten years, we will see a significant increase in the number of major projects in the pipeline with an overall value of more than $1 billion. Although not always the case, the greater the project size, the greater the chance of risk.
The final part of this series will identify some of the risks likely to be encountered by project participants along the national pipeline and discuss approaches to risk mitigation.
Existing and Emerging Risks
With investment in Australian infrastructure set to grow at an average rate of 33% annually over the next five years, the ability to deliver projects on time and within budget will be critical. Heightened levels of project activity will test market capacity and the ability of industry participants to manage this growth and meet input requirements.
Project participants should be aware of the current and emerging risks for planning and delivery of major projects over the next five years which, collectively, are likely to contribute to a more complex risk environment. These risks, while non-exhaustive, include:
| Existing | Emerging | |
| 1. | Material price increases | Contractor capacity |
| 2. | Latent conditions | Planning approvals |
| 3. | Design changes | Optimism bias in cost estimations |
| 4. | Geotechnical | Insurance capacity and increased premiums |
| 5. | Labour shortages (blue collar and white collar) | Utilities |
| 6. | Project complexity and risk exposure pricing | Cybersecurity |
| 7. | Contaminated land | Decarbonisation costs to construction |
| 8. | Force majeure | Rising competition from other non-major infrastructure projects |
These risks may be prevalent, to varying degrees, across the planning, procurement, and construction phases of a project’s lifecycle. Often, major infrastructure projects involve more complexity and an increased probability of risks becoming a reality. Consequently, this can result in more frequent, and significant, cost overruns and delays.
Mitigating Risk
While not all risks may be capable of being identified, or priced, at the outset of a project, it is critical for project participants to plan for the potential risks that may arise. Parties should comprehensively assess and consider the risks early on in the evaluation and planning phases. A broad understanding of the risks that may lie ahead will assist in preparing accurate cost estimates, determining appropriate allowances for risks, and provide a solid foundation for risk allocation negotiations. A risk register is essential and should provide an in-depth analysis of the qualitative and quantitative risks (the possibility and impacts of a risk event), including a cost and schedule contingency.
Often, when it comes to sharing the risk, the party who is best positioned to control the risk may be considered the most suitable party to assume a risk. A party may also be most suitable where:
- the party can transfer the risk to a third party;
- an economic benefit from controlling the risk falls to the party;
- allocating the risk to the party is in the best interests of planning, incentive, and innovation efficiency; and
- to allocate the risk to the other party would be detrimental to the project or not practicable.
Where the extent of a risk cannot be identified, or in the event a risk arises (which may also cause several other risks to materialise), parties may agree to share the burden of risk, including any subsequent losses. Parties may achieve fair and reasonable outcomes where a collaborative approach is adopted to manage and mitigate unknown risks.
Lamont Project & Construction Lawyers
We have the industry knowledge and experience to assist both Principals and Contractors in all major infrastructure projects, their unique risks, and implementing contractual frameworks which best align with project objectives. If you have any questions about any matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Kristopher London
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